In order to buy, sell, own, or mine cryptocurrency, it is necessary to have a public key that ties your cryptocurrency to you on the blockchain.
Each public key is generated based upon a private key, which is used to sign transactions. Since only you know your private key, only you can sign a transaction with it. A public key is widely known and can easily be used to verify a signature made with the corresponding private key, allowing anyone to easily verify that you approve transactions made in your name on the blockchain.
These private and public keys are large numbers, which would be difficult to memorize (especially if you have multiple different types of cryptocurrency). A cryptocurrency wallet or crypto wallet is something designed to remember the private keys for each of your cryptocurrencies. There are five common types of cryptocurrency wallets: desktop, online, mobile, hardware, and paper.
A desktop wallet is an application installed on a computer that stores the information necessary to buy and sell cryptocurrency (private and public keys, current balance, etc.). Its centralized nature gives it more security than some other types of wallets, but if the computer dies or is infected by malware, all cryptocurrency may be lost.
An online wallet is a cryptocurrency wallet managed in the cloud by a third party. This form of wallet has more convenience but less security than a desktop wallet. This type of wallet is accessible anywhere but keys are under the control of a third party.
A mobile wallet is essentially a stripped-down version of a desktop wallet designed to run on a smartphone. Its portability makes it more convenient than a desktop wallet but it commonly has fewer features due to limited processing power and screen space on a mobile device.
A hardware wallet is the most secure technology-based type of cryptocurrency wallet. Hardware wallets are USB devices that store the wallet’s private keys. Hardware wallets commonly interact with web interfaces, allowing cryptocurrency transactions to be performed by plugging in the wallet, entering a code, and making the appropriate selections in the web interface.
Paper wallets completely remove private keys from technology. A paper wallet can be simple (a handwritten copy of the appropriate private key) or sophisticated (a printout including a barcode or QR code to scan to make transactions). By removing private keys from technology, paper wallets are unhackable and base security on physical protection.
This article is mainly applicable to Desktop and Mobile wallets, which allow users to control their own cryptocurrency wallets without purchasing additional hardware.
What users should demand in their crypto wallet
A cryptocurrency wallet is just like your regular wallet: it holds your money and (if you are active in the cryptocurrency space) you will be using it frequently. If you will be using something so often, it’s reasonable to demand that it provide a certain minimum set of features. Some examples include convenience, security, and flexibility.
You definitely want your cryptocurrency wallet to be convenient. A good cryptocurrency wallet has several features to make coin ownership and trading convenient:
- A cryptocurrency wallet should have support for multiple cryptocurrencies. You shouldn’t have to install and use a different wallet for each coin
- A good wallet should have secure, automatic backup functionality. It should not be necessary to manually backup your own data to prevent losses
- Your cryptocurrency wallet shouldn’t require super-long passphrases for authentication. Look for a cryptocurrency wallet that provides simpler, secure options for authentication.
Security is an extremely important feature of a cryptocurrency wallet. Cryptocurrency has no physical assets and your cryptocurrency is completely under the control of anyone with access to your private key. Any cryptocurrency wallet that stores your data on a central server in a usable form is vulnerable to data breaches.
You should only trust an organization to store your private key and personal information in a form where only you can access it in a usable form. A cryptocurrency wallet should provide the option for client-side encryption, where data is stored on a central server only in an encrypted form where you hold the only copy of the decryption keys. Authentication should be performed via a zero-knowledge security architecture where you prove your identity by proving knowledge of certain information without revealing the information.
This removes the risk of a security breach by rendering any of your personal data that is stored on a centralized server useless to an attacker.
The cryptocurrency market is volatile, with large fluctuations in the relative values of different coins. Cryptocurrency traders take advantage of these fluctuations by entering into cryptocurrencies currently on the rise and exiting ones falling in value. A good cryptocurrency wallet not only allows you to store multiple cryptocurrencies but also enables exchanges between them in a secure and intuitive way. A wallet that supports multiple currencies but forbids exchanges between them is little better than a separate wallet for each coin.