A cryptocurrency wallet is a software that enables to send and receive cryptocurrencies such as Bitcoin, Ethereum etc. It stores the record of transactions and also public and private keys which are used to perform transactions.
A public key is similar to an account number. If A wants to send some money to B using BitCoin, then A send the public key address to B. Anyone can send BitCoin using the public key. A private key is similar to an account password. Only account holder know the private key. The private key is used to send money. Public-Private keys are always present in pairs.
Now, what is the difference between a traditional wallet and a cryptocurrency wallet? A traditional wallet stores the currency. While a cryptocurrency wallet never stores any cryptocurrencies. It contains the record of transactions performed by the users. It also stores the public and private keys of the user.
Methods of storing cryptocurrencies
Hot Storage: Hot storage refers to the type of storage which is connected to the Internet. Hot storage, being connected to the Internet, allows the user easy and quick access to funds. It is helpful in daily transactions. But, it also has some disadvantages. It is more vulnerable to hacking and cybercrime. If the private key is lost then no longer to access coins. Also, if the private key is stolen by someone then it causes to lose coins.
The different types of hot storage wallets are: Online(Cloud), Desktop and Mobile wallets.
- Online(Cloud) Wallets: These types of wallets are the most convenient but at the same time, least secure. It is used to store the private keys and transaction record online (on another server). This makes keys vulnerable to hacking as they are being stored by a third party. Online wallets should be used to store less amount of money which is going to be used for short-term storage i.e. daily transactions in exchange services. Examples: Exchanges like Bittrex or QuadrigaCX, and Online wallets like Coins.ph and GreenAddress.
- Desktop Wallets: Desktop wallets provide a better level of security than online wallets as they are downloaded and installed on a single computer. The funds related to an account can only be accessed through that device which makes it a bit secure at the cost of convenience. However, it also vulnerable to hacking if the computer gets compromised. Examples: Exodus, Multibit, Armory, and Bitcoin Core.
- Mobile Wallets: Mobile wallets are similar to desktop wallets in terms of providing better security than online wallets at the cost of convenience. However, it is the bit easier to use than desktop wallets as they are used by installing an app on a mobile phone which is smaller and simpler than desktop wallets. But, if the phone will damage then it will not be able to access funds, as in desktop wallets. Examples: Jaxx, BreadWallet, Mycelium and CoPay.
Cold Storage: Cold storage refers to the type of storage which is not connected to the Internet. It is also known as offline storage. Cold storage provides a higher level of security than hot storage. It is useful for long-term storage, unlike hot wallets. However, the higher level of security is provided at the cost of convenience. It is not ideal for daily transactions. Although it is secure, it is vulnerable to external damage and loss.
The different types of cold storage wallets are Hardware wallets and Paper wallets.
- Hardware Wallets: Hardware wallets are used to store coins/funds on a hardware device. The private keys are stored in an offline device, unlike hot wallets, but transactions do require the Internet connection to execute. It provides the higher level of security than the hot wallets as they are stored offline in a physical device. However, the problem with these wallets is to trust the company from which buy the devices. It can log private keys and compromise account. Also, one should take extra care of not using second-hand hardware wallets. Examples: Ledger, Trezor and KeepKey.
- Paper Wallets: Paper wallets provide the highest level of security than all the other types of wallets. The private keys are stored on paper and then kept in a secure location which is known only by the people that are trusted. Paper wallets are well protected against any type of hacking and malware. However, things to consider when using paper wallets are that paper can be worn out with time. If they are printed, the printer ink can leak in case of contact with water or increased temperature. Examples: BitAddress.org and Bitcoin Armory allows you to print your paper wallet.
Multi-signature wallet: Multi-signature wallets are those wallets that require more than one private key to execute a transaction. The number of private keys required depends upon the initial configuration of that wallet. It can either be 2-of-3 keys, or 3-of-5 keys. It contains two main advantages:
- It provides more security and prevents any single point of failure. In 2-of-3, even if the hacker gets hold of one private key, It cannot do anything malicious. A hacker needs to hack more than one account simultaneously.
- Also, it provides decentralization. Suppose an organization has 5 board members and each of them holds a private key to the organization’s account. 3 private keys are required to perform a transaction. No one is in majority and decisions can be made democratically. Even if one member loses interest in the project, other members can still work for the profit of their organization. Example: BitGo
Multi-currency wallet: Multi-currency wallets, as the name suggests, are those types of wallets that allow the user to store more than one cryptocurrency in the same wallet. This means that it can perform transactions which require Bitcoin, Ethereum etc. using the same wallet. Also, an additional feature that allows to converting one cryptocurrency to another is desirable and can be achieved through ShapeShift integration in your wallet. Example: Exodus
How to decide which cryptocurrency wallet should use?
It depends on the preference and usage type. There is the tradeoff between convenience and security. Convenient wallets are less secure while secure wallets not as convenient to use. If the funds are used for the shorter time and easily accessible for day to day transaction then choose hot wallets while cold wallets will be helpful if considering to store funds for a longer period of time.