As more people become interested in cryptocurrencies, it's important that they understand their options for how to store, send, and receive them. There's a wide variety of wallets, and choosing the best one for you depends on your concerns about security, ease of use, and support for multiple currencies. While there are important differences between cryptocurrencies, the overview below will apply to Bitcoin, Ethereum, and all the most popular currencies available as of spring 2018.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet stores the combination of a user's public and private keys. Many wallets also generate the keys. Keys are used to create addresses to send or receive cryptocurrency; thus, if these keys are lost, then so is all of the user's currency.
Wallets often store many pairs of keys, and some can store a wide variety of different cryptocurrencies. Storing different currencies in the same wallet is usually just a matter of storing different types of keys that can adhere to those currencies’ rules. Wallets can be implemented many different ways, as long as they create valid keys that conform to the cryptocurrency's protocol.
Hardware wallets are small peripheral devices that typically plug into a computer's USB port. Since they store private keys offline, they are one of the most secure options for storing cryptocurrencies; the only way to steal or destroy a user's funds it to manipulate the hardware wallet itself. Hardware wallets can add additional security by requiring users to create a PIN to access the keys, or even using fingerprint scanning. Buyers should note that hardware wallets are typically the only type that costs money; some of the most popular models cost over $100.
Software wallets were the first type created, and they remain a popular choice. Wallets are available for all operating systems, and range from minimalist to highly developed. They are easy to integrate with online exchanges, and users with powerful equipment can even run “full clients” that include their own copy of the entire blockchain to verify their own transactions or earn income as a miner. Users who store their private keys on a hard drive should have no trouble creating backup copies, but they must be careful to use encryption and firewalls to prevent anyone from stealing them.
Mobile wallets are also widely available, and are likely the most popular variety as of 2018. Since smartphones break or get stolen more often than most desktops, mobile wallets can be relatively insecure if they're not thoroughly backed up and protected by strong passwords.
Paper wallets simply print out the user's keys. Paper wallets are extremely secure, so long as the paper isn't lost or destroyed, but they can be difficult to use since they require users to enter their private key into a computer for each transaction. The use of machine-readable QR codes can make paper wallets easier to use.
Many types of wallets offer a paper wallet option as a backup. One common alternative to printing a user's entire private key is to generate a long series of words that can be used to regenerate the private key. So long as it's run through the same algorithm, the phrase will always produce the same key.
Online wallets are often maintained by exchange services, such as Coinbase or Kraken. Even exchanges not primarily functioning as wallets will often include a wallet feature for traders' convenience. While online wallets are the easiest to use, usually requiring only a username and password, they are by far the least secure since users trust the service to manage their private keys for them.
With their private keys stored on the company's servers, customers have to trust that no hacker or rogue employee will steal their funds. While many online wallets have very strong security records with no documented breaches, others have suffered high-profile failures and lost huge sums of their customers' money; the most notable collapses of online wallet services were Mt. Gox and Bitfinex.