We have already discussed in our previous blog the various Dos and Don’ts when it comes to crypto, with a special focus on security and privacy. This brings us to our next topic – crypto wallets, and how to set them up. A crypto wallet is a secure medium for storing public and private keys for cryptocurrency transactions. In this article, we will explore how to set up different types of crypto wallets and begin transacting right away!
But first, let us talk about the basics.
What You Should Know About Your Crypto Wallet
No matter how many types of crypto wallets exist, they all have some binding characteristics – every wallet possesses a private key, a public key, and a platform for identifying vital information such as transaction history, fund balance, security options, and more. The wallets differ from each usually in terms of the security and liquidity involved – the more liquid (easily convertible to cash) your crypto, the less secure it is.
However, one point to note is that crypto wallets are not like physical wallets that we use in real life to store fiat currency. Instead, crypto wallets are a medium allowing you to engage directly with the blockchain. In fact, you have various options when it comes to how you want to use a crypto wallet. Depending on your investment strategy and short- or long-term needs, you might either want to store cryptocurrencies on an exchange, a hardware wallet, a software wallet, or a cold wallet.
By far the most liquid option, allowing you to convert cryptos into cash anytime you want, are crypto exchanges. With the benefits of extreme user-friendliness and simplicity, the increasing competitiveness over quality among crypto exchanges has also made them quite secure, yet more prone to hacking than other options.
Whenever you use exchange platforms like Coinbase and Gemini for crypto trading, the exchange automatically creates a dedicated wallet managed by a third party (the exchange), just like banks manage your money in their accounts. With a steadily growing number of options with different degrees of security, ease of use, and regulatory compliances to offer, crypto users have more choice and can opt for a platform they trust.
Setting up a wallet on crypto exchanges is quite simple – all you have to do is create an account on the exchange, inputting your personal information and choosing a secure password. You might even want to set up 2-step verification (2FA) for an added layer of protection in case of hacks.
While crypto exchanges are simple and convenient, there have been reports of large-scale hacking and “losing” of cryptos in the near past. On this note, hardware wallets come across as one of the most secure options to store your precious cryptos on. These wallets have lesser room for liquidity and demand a deeper understanding of the wallet’s operation by its users.
Hardware wallets are exactly what they sound like – physical devices that one must purchase for the same objective of interacting with the blockchain. The difference is that the hardware wallet is exclusively in your possession, unlike crypto exchanges which are handled by third parties. Private keys on hardware wallets cannot be transferred out of the device as simply, and neither can be harmed with software viruses to extract sensitive information. The open-source software allows wallet users to validate the device’s operation, giving them greater control and security.
Steps for setting up a hardware wallet are not as simple as those on a crypto exchange, yet not too complex. First, you must purchase a hardware wallet from a trusted source. You can then plug in a USB cable to an internet-enabled computer. This will prompt a set of instructions on your screen to complete the setup process.
Begin by choosing whether you want a new wallet or want to import an existing wallet on this hardware alternative. Users are prompted to choose a PIN code that they will have to enter every time they want to access the wallet, along with a recovery phrase in case they forget the password. Hardware wallets can be operated using software applications that only your device will have access to.
Commonly used as alternatives to the more tedious hardware wallets, software wallets rely only on the software and no physical devices to store your cryptos. However, this also makes them more prone to attacks by malware, viruses, and keyloggers, though the security levels generally depend on the quality of software wallets you use.
Software wallets can be operated across desktops, mobiles, and on the internet, and setting them up is different over each of the three mediums. Desktop wallets would require you to download a dedicated application for creating your wallet and decrypt it with a private key.
Online wallets involve visiting a website to interact directly with the blockchain by decrypting your private keys using various available options. The Chrome extension Metamask allows accessing online wallets with enhanced security and a more user-friendly interface.
Mobile wallets are nothing but a dedicated application on your smartphone that allows you to send and receive cryptos directly from your device. Sometimes, these applications work in sync with hardware wallets and serve to provide a window of access to the same. Setting up mobile wallets is a breeze, given they come with clear stepwise instructions to help you.
Another highly secure alternative to crypto exchanges or software wallets is cold wallets. However, they might not come across as the most user-friendly option in the list, because they need backup options, can be destroyed easily or stolen intentionally or unintentionally.
Cold wallets are basically private keys stored in a safe offline environment, such as paper wallets. You can keep them in a safe, just like paper notes, but they are always prone to theft, or sometimes, even misplacement, in which case it will be impossible to recover them without a backup. Setting up a cold wallet is easy – a printout from digital wallets is all you need.
There are several different types of crypto wallets to choose from, just like there are different types of bank accounts to store your assets securely in. What you choose will depend on what your priorities are – profitable investments, greater liquidity, highest levels of security, or complete control, and so on.