Use this guide to learn about crypto wallets. This is the longest and most detailed guide on the internet and we update it regularly as technology changes. If you just want to know which crypto wallet is best for you then open the guide and scroll to the end.
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Cryptocurrencies are like Bank Deposits Not Cash
There are many different cryptocurrencies and the best known is Bitcoin.
Cryptocurrencies are different from cash like a US dollar bill because we can’t physically give them to someone to pay for goods or services. They might seem less “real” than currencies that have coins and bank notes but there is nothing new about having dematerialised money. Cryptocurrencies are just a real as the money in our bank account.
Most of us have bank accounts and to pay someone we just use an app to ask the bank to make a payment. Cryptocurrencies work the same way and the app that we use to make payments is called a Cryptocurrency Wallet.
How Banks Work
When you log into your bank’s app and tell them to make a payment several things happen,
- Your bank debits your account
- Your bank sends a signed transaction to the payee’s bank
- The payee’s bank credits their account
Banks have been working this way for hundreds of years and they used to write the accounts in a big books called ledgers. Each bank had a ledger and there was page for each customer. Signed transactions would be sent between banks on horseback and by sea.
Roll forward a couple of hundred years and nothing much has changed. Each bank still has a ledger for its customers and sends messages to other banks. Now they use databases to store the accounts and electronic networks to send the signed transactions but the basic principles are the same as they were 400 years ago. Nothing much had changed in Finance.
Bitcoin is a Distributed Ledger
Bitcoin lets you send and receive money without using a bank as a middleman. Instead of having lots of banks with their own ledgers and people on horses, ships, telephones, faxes, and private networks moving signed transactions between them it has a one ledger for everyone.
The Bitcoin ledger is published on the internet and everyone can read it and have copy. To reduce the risk of fraud only some computers called “miners” can update the ledger. Bitcoin uses a type of ledger called a “Blockchain”.
This distributed ledger technology (DLT) is much simpler, cheaper and quicker than today’s banking system.
A Crypto Wallet Stores Your Private Key
When you login to your bank account you have to provide a password and it is the same with cryptocurrencies like Bitcoin. Your password is called your “Private Key” and it is used to access your account in the distributed ledger. Your private key is typically a 256-digit binary number. Since most of us don’t want to type in a password like,
01000110 00111001 01000101 01000100 00111000 01000100 01000101 00110010 01000110 00110011 01000010 01000110 01000010 00111001 01000100 01000110 00110100 01000100 00110110 00110111 01000010 00111000 00110101 01000010 00110110 00110111 00110101 01000101 00110111
Every time we want to buy something, we store our private key in an app called a “crypto wallet”.
This private key is used to sign transactions before they are sent to the Bitcoin network. This is the same as signing a cheque before giving it to the bank.
Your Private Key is used to Sign transactions
If it stores a “Private Key” why is it called a “wallet”?
The early users of cryptocurrencies needed to find a way to explain this new technology to users. They could have chosen to talk about “private keys” that let you “unlock” your accounts on the blockchain. Instead they chose to talk about “wallets” that allow you to spend and store money.
I think it was a bad choice but it too late to change it now.
What are the Key Features of a Crypto Wallet?
Must Have Feature
A cryptocurrency wallet must store your private key securely.
- If you lose your private key you lose all access to your money.
- If some else knows or guesses your private key they can steal all your money
There is no bank manager or system administrator for crypto.
If you lose your private key you lose your money for ever.
Almost every crypto wallet will allow you to,
- Generate or enter a private key
- View your account balances
- Send money to other users by signing transactions
- Receive money from other users
- Sign messages
- Calculate transaction fees
Additional features may include,
- Supporting more than one coin – for example, Bitcoin and Ethereum
- Allowing “instant” exchange between two currencies
- Methods to back-up and restore the private key
- Acting as a two-factor authentication token (2FA)
Your private key is what unlocks your account on the blockchain and it is important that is generated securely. This is because anyone who knows your private key has access to your money.
There are lots of bad ways to generate your private key,
- Ask all your mates in the pub to give you a word each
- Download an app you found on the internet
- Borrow a mate’s computer
Each of these methods has a big risk that your key will be leaked and all your money stolen. A crypto wallet will help you generate a key in a secure way. The best solution is a hardware wallet and this is discussed in the next section.
Crypto Wallets for Self-Sovereign Users
The goal of founders of the cryptocurrency movement was to give ordinary people the ability to store their own money and make payments without a using a bank. These “self-sovereign” users must manage their private key very carefully. Wallets that give you sole-control of your own private key are called “non-custodial wallets”.
There are many different types of non-custodial crypto wallets because different types of transactions have different security needs. I need to take more care when storing a private key that gives access to $10m than when storing one that gives access to $100.
The most important distinction is between “hardware wallets” and “software wallets”. Hardware wallets are physical devices that are designed to ensure that your private key is never connected to the internet. Because the internet is risky or “hot” we say that private keys in these wallet are in “cold storage”.
Hardware Cryptocurrency Wallets
Hardware wallets are gadgets that contain a small chip that stores your private key. They often look a bit like a USB thumb drive with a small LCD screen.
- You use them the same way you use your bank card when you visit an ATM.
To make a payment, you first plug your hardware wallet in your USB port on your computer and then run the app that comes with it. You then enter your pin to unlock your hardware crypto wallet (just like in an ATM). After you type the transaction details into your computer the app sends the transaction to your hardware wallet to be signed. After you have signed the transaction your computer will send it to the Bitcoin network.
Your private key is never on the internet
The great advantage of hardware crypto wallets is that you don’t have trust your computer. The great disadvantage of hardware crypto wallets is that if you lose your private key you lose all your money. In the next section we tell you how to back up your private key.
You need to make a backup of your private key and the simplest way to do this is to write it down. If your hardware wallet is lost or stolen then you can buy another device and after you have typed in your private key you will have regained access to your money.
Your private key is actually a 256-digit binary number and this would be difficult to write down accurately. Most hardware and software wallets will give you the option to write down a “seed phrase” which can be used to regenerate your private key in any compatible device. Here is an example of a BIP39 seed phrase,
“morning shoot sister tower inject hobby issue donkey spare sign drill insane”
How to store your paper wallet,
- Do write it down with a permanent marker pen so it does not fade with time or become illegible due to water damage.
- Don’t take a picture of it with your mobile phone in case your phone uploads it to the internet
- Don’t store your paper wallet with your hardware wallet because if you have a fire you will lose both.
Other software, particularly that used with mobile wallets will allow you to print a paper wallet with a QR code as shown in the image above. Printers are connected to the internet therefore don’t do this if you are using a hardware wallet.
Software wallets are apps that you run on your desktop computer or mobile phone.
If you are going to use a software wallet you should make sure that you download it from a trusted source and run it on a trusted computer system. In theory, this is a huge problem because most users don’t have the skills or equipment to do this. In practice most users seem to get away with it.
All coins developers have an “official” wallet that they publish on their website and they may also recommend other wallets that are trusted by their community. The Bitcoin website identifies three types of software wallet: desktop wallet, mobile wallet and web wallet.
- Consider using the official wallet
- Never store money in software wallet that you can’t afford to lose. Treat it like the wallet you take to the shops, not like a bank account.
- If you have several computers in your household use one for banking and crypto work and don’t let the kids on it.
- Update your phone or computer regularly
Full Node Wallet
Some businesses and crypto-enthusiasts might want to run a full node wallet. This is hosted on a computer that is permanently connected to the internet and keeps a full copy of the ledger. Hosting a full node allows you validate beyond doubt that you have received funds. Most non-business users are content to use one of the many blockchain explorer websites or the screens provided by their own wallet software. It is technically possible to run a full-node with the primary key held in a hardware wallet.
Wallets for Users Who Don’t Want to Manage Their Own Keys
There are some people who want to be financially self-sovereign and be responsible for securing their own keys. There are other people who just want to own some crypto because it might go up in value.
“Custodial Wallets” are the solution for these non-technical users. You can simply open an account with a cryptocurrency exchange and buy cryptocurrency. The cryptocurrency is held in your account and you can access it with your username and password in the normal way.
- Use an exchange in your own jurisdiction
- Make sure it regulated and compliant
- Always set up two-factor authentication on your account
- Don’t use your exchange account for day-to-day transactions. Put a few dollars in a mobile wallet instead.
Warning: Some users have lost money when using poorly regulated exchanges. Do your own research.
As crypto become more mainstream more custodial wallet and banking solutions will enter the market and many of these will use multisig wallets which should be safer than exchange wallets.
What is a Multisig Wallet?
If you have a business bank account you will know that often a cheque must be signed by two people. This helps reduce honest mistakes and reduces the risk of fraud. A multisig wallet works in the same way. A payment can only be made when two or more people have signed it with their private keys.
This can be used to add an additional layer of security because one of the authorised signatories can actually be a business offering a wallet service rather than a human being. You open an account with that business and decide on the payment rules. For example, you might set up rule that says you can only spend $100 per day. If you lose your private key your attacker can only steal $100 a day which give you times to recover your funds using a pre-agreed process.
Multisig wallets offer many of the advantages of Self Sovereign Crypto and traditional banking without their drawbacks.
Are Cryptocurrency Wallets Anonymous?
When you open a bank account you must supply your name, address and identity documents so that the bank can fulfil is legal obligations (KYC/AML) and help prevent money laundering.
You can open an account on a blockchain simply by getting a wallet and creating a private key and the account will be anonymous. However, it is very difficult to operate an account in a way that means that you cannot be identified.
Good operational security requires,
- Using a privacy coin (not Bitcoin)
- Using a different account for every transaction
- Not touching legitimate accounts with “black accounts”
- Not associating with known black accounts
- Using a coin tumbler to disguise transactions
- Not using a coin tumbler to disguise transactions
- Not reusing IP addresses
If you think this sounds like a lot a work to buy an ounce of wacky-baccy safely then you are right. However, in practice the authorities are looking for large scale money launderers and political dissidents not user’s private vices and Monero and Tor should be good enough for most users.
Which Wallet is Best for Me?
Crypto Wallet for Businesses
If you want to take payment for goods and services then check out
If you need to securely manage cryptocurrencies then check out
Crypto Wallets for Individuals
We list all the top providers of crypto wallets below.
If you want to store large amounts of crypto for the long term then check out
- Hardware crypto wallets
If you want to spend small amounts of crypto
- Software Wallets
If you would like a sophisticated solution
- Multisig Wallets