Anyone buying bitcoin or any of the other 2000+ cryptos in existence would invariably need to use a wallet, for storage. Simply put, a crypto wallet stores data that proves the existence of your cryptocurrency. The wallet can be used to send and receive crypto.
All wallets share a common element; KEYS. For security, a wallet usually comes with a private, and a public key. A crypto wallet is the program that stores your public address and private key. The keys are used to make transactions on the blockchain or to transfer funds to another account.
Wallets can be broadly divided into two categories, hot and cold wallets. Hot wallets basically mean the wallet is connected to the internet and while it’s quite easy to make transactions with them, they’re very prone to attacks. Cold wallet, on the other hand, means a wallet is not connected to the internet and as such, safe from cyber attacks.
However, the big question that remains among a vast population of crypto users, is how to create a crypto wallet and more importantly, choosing the right wallet as per custody of private keys.
Crypto wallets are divided into two classes according to the way they work: Custodial and the Non-custodial wallet. While there are tons of applications that offer crypto storage in wallets, it is important for a user to first decide if they want to keep their funds on a custodial exchange, or on the contrary, non-custodial exchange. We would be uncovering the basics, as well as the pros and cons of both wallet categories.
A custodial wallet is one where a third party entity offers to protect a user’s assets within their system, taking full control over the funds while a user only has to give permission to send or receive payments when the need arises. The third-party entity (usually a crypto exchange) manages all the funds with one requirement— users won’t be able to perform any transaction without their involvement.
Some very popular examples are Blockchain wallet, Coinbase, Trust Wallet and FreeWallet.
A non-custodial wallet is mostly a piece of software on your device or computer for crypto storage. Here, the blockchain allows you to be your own bank. Only the user has access to the private keys associated with their account, thereby, giving such a user total control of their crypto holdings. Example include: Guarda wallet.
Custodial vs non-custodial wallets
Control over funds: “If you don’t possess your private keys, you don’t own bitcoin”. If you are familiar with crypto Twitter, you must have come across the quote.
In bitcoin, the idea is to give users complete control over their money. However, with custodial wallets, the whole point of the idea is lost with the exchanges taking full control of the funds on behalf of the user.
Since all details associated with a wallet relies on the user, users have total control of their non-custodial wallets and do not need to look up to any third party to manage their funds. In the case of custodial wallets, the third party entity has the freedom to take actions on users’ funds which could include freezing stored amounts. Funds stored in non-custodial wallets cannot be seized by a third party such as the government or financial institutions.
Security: The level of security is low in custodial wallets and they’re often more prone to cyber hacks than with non-custodial wallets. In the case of non-custodial wallets, the whole information including the sensitive ones remains with the user, and this reduces the risks of a user’s data getting stolen. Exchanges are usually bigger targets for hackers.
Backup possibility :Custodial wallets usually can get backup facilities from the central authority that manages the wallet. So, in the case of data loss, a user can easily request for a backup. It’s the contrary with non-custodial wallets. Being in charge of your security comes with great responsibilities. A user needs to take care not to lose any sensitive information that might deny them access to their wallets.
Accessibility: Exchanges that provide custodial wallets, strictly recommend a KYC (Know Your Customer) for users. This implies that a user cannot gain access without proving their identity. This alone, somewhat negates the basic principle of cryptocurrency “anonymity”. Non-custodial wallets do not require the confirmation of a third party to perform transactions which makes it easier to enjoy instant transactions.
Types of cryptocurrency wallet
Choosing a storage solution won’t be so difficult having understood the difference between a custodial and non-custodial wallet. There are lots of applications that offer crypto storage in wallets. Your options include keeping your funds on a hardware wallet, software wallet or a paper wallet.
A hardware wallet is a unique type of Bitcoin wallet that stores the user’s private keys in a secure physical device that acts like a flash drive to store your private keys. It is considered to be one of the safest and convenient options and a very great option for users not so well versed in coding.
In hardware wallets, cryptocurrency are kept offline yet, are always readily available when needed. Whenever you need to send your crypto, you simply connect the wallet to any device, enter your PIN-code and send funds. You can disconnect and keep the hardware in a safe place again as soon as the transaction is complete. Even during transactions, hardware wallets don’t reveal private keys. For safety, the transaction is usually completed with a digital signature signed by the user. One popular example of a hardware wallet is Ledger Nano S.
A mobile wallet is a convenient on-the-go solution for bitcoin storage. The wallet runs on an app on the users’ device and stores the private keys directly on the app. This type of wallet is best for those actively using Bitcoin daily paying for goods in shops.
Mobile wallets allow users to make purchases from their mobile devices and can facilitate payments in physical stores via a near field communication(NFC) which usually involves scanning of a QR code.
Although it’s considerably secure and its feature involves convenience and easy accessibility, it could be dangerous in case of a user losing their device to thieves.
Desktop wallets function very similarly to mobile wallets, only with one big difference. They tend to be more advanced, as they come with more technically complicated features that allow for more flexibility.
However, it is more dangerous setting up a desktop wallet, especially for beginners. New users are more susceptible to accidentally installing a fraudulent version of the legitimate software wallet. Examples of a desktop wallet are MultiBit, BitcoinCore, and Electrum.
Online wallets allow a user to visit a website where they can interact with the blockchain by decrypting their private keys through a variety of options. They usually have a very simple installation process, quite easy to use, and more secure than an exchange. However, users’ private keys are also located in the system which makes funds vulnerable to theft.
Paper wallet is basically an offline mechanism for storing Bitcoin. It’s a primitive but very secure crypto wallet type. It’s usually a document that contains a user’s public and private keys often printed in QR code. You can scan and then add the keys to a software wallet to make transactions. Paper wallets can be generated using services like BitAddress. Its biggest advantage is that keys are stored offline which is expected to provide 100% protection against cyber attacks.
However, necessary precautions must be taken that there are no risks of spyware monitoring activities. Apart from this, a user needs to take extra care with the papers as they are delicate and very prone to damage. Loss of the papers or any form of damage could lead to lack of access.
Steps to creating an ethereum wallet
After you must have chosen which type of crypto wallet is suitable for you and you know if you want to manage your coins using your phone device, a computer, or a physical hardware device, you can proceed to set up your wallet on any crypto wallet of your choice.
We’ll be giving an example on how to set up an Ethereum wallet on one of the most widely used mobile wallets, TrustWallet, a multi-wallet crypto wallet. All you need to do is to install the app and go through the setup steps on the app.
- Download TrustWallet from an official source.
- Launch the app. You’ll see options on whether to open a new wallet or import from an existing one. Since you’re setting up a wallet for the first time, you should go ahead and click on the “create a new wallet”
- You would need to accept the terms of usage. Click on the tickbox right after the terms and condition and click “continue”
- You would be given the key to your wallet, that’s the recovery seed phrases which you would have to keep very safe.
- The next step is to verify the security phrases. You would need to select the words in the correct order to complete the verification process
- After you must have completed all these steps, you can be assured that your wallet is ready. You will be redirected to the main wallet screen.
This process can be repeated for Bitcoin and every other coin supported by the wallet.
Coinomi is another popular multi chain crypto wallet with millions of users. We’ll be discussing the steps to creating a bitcoin wallet on the mobile/desktop wallet.
Steps to creating a bitcoin wallet
- Download Guarda wallet from the app store and install it
- We’re using Guarda because it’s a non custodial wallet and have a very good support system.
- Once installed, open the wallet, click on the option to “Create a new wallet”
- Select and copy the recovery seed. If you want copy your bitcoin wallet specifically, you can do that you have created the wallet.
- Make sure to save the recovery seed you just copied in a notepad on your phone or desktop, as that would be your security code and your only way to recover your wallet.
- Create a strong password comprising of alphanumeric characters (alphabets – upper and lower case, special characters and numbers)
- Confirm that you have kept your recovery phrase safe by ticking the box “I have safely stored my recovery phrase”
- Select the coin you want to add to the wallet, Bitcoin in this case
- Accept the terms of service to proceed.
- After you must have completed these steps, you have successfully created a Bitcoin wallet on Coinomi.
A quality wallet is crucial to keeping your crypto assets safe. However, the best approach largely depends on how a user prefers to store their cryptocurrencies. Nevertheless, once properly informed, you’ll be able to make the right choices.