The objective of this blog post is to treat readers as beginner users and provide them useful information on the various types and characteristics of crypto wallets.
A cryptocurrency user should be able to:
- Learn how to buy/sell Bitcoins and other cryptocurrencies through crypto exchanges.
- Understand the capabilities of the various types of crypto wallets and be able to choose the best suitable for them. The storage of funds within a centralized exchange is not always secure.
- Use encryption and additional security features.
Usage Statistics
- More than 75 million Bitcoin wallets exist compared to 53 million a year ago according to Statista.
- Coinbase announced 56 million verified users by early 2021.
- According to NASDAQ, there are approximately 46 million Americans holding at least a fraction of Bitcoin active cryptocurrency users, which translates to about 17% of the adult populaiton.
- A lot of data from emerging markets are missing.
- Bitcoin market capitalization is approximately $940B, with the total crypto market cap laying above $2T.
- Poor user management often leads to loss of private keys, passwords and consequently the loss of billions of USD in crypto funds.
Even though cryptocurrency users in numbers are currently a fraction of the amount of users engaged with conventional payment mechanisms such as Visa, PayPal and Mastercard (each one of them has hundreds of millions of users), crypto awareness and adoption is emerging. Therefore, this article is a useful tool for new users to understand the capabilities of several types of crypto wallets and choose the ideal for their needs.
Cryptocurrency Exchanges
New users shall carefully select the cryptocurrency exchanges they register for. Thousands of them exist, but there are some certain features to examine before joining any one of them:
Fees: Deposit, transaction and withdraw fees vary between exchanges. Most of them favor larger transactions. Check each exchange’s website for detailed information.
Cryptocurrencies supported: Choose an exchange which allows you to trade on a variety of cryptocurrencies beyond Bitcoin (e.g. ETHER, AVAX, DOT, ADA, ALGO, HOLO, SWAP etc.)
Reputation: User reviews from people within Bitcoin communities is a great tool to access important tips, as this group of people is active and willing to help. Reddit, Telegram and Twitter are some good sources.
Verification Requirements: ID and address verification is required by most centralized exchanges in order to deposit and withdraw. Consider staying awaay from centralized exchanges which allow complete anonymity, as they are the most vulnerable to money laundering and scams.
Payment Methods: Choose an exchange which allows you to deposit/withdraw with a variety of methods (e.g. crypto, credit card, debit card, wire transfer, PayPal, AstroPay etc.)
Exchange Rate: The exchange rate varies among different exchanges. Advanced users usually register to at least 2-3 exchanges in order to benefit from arbitrage opportunities.
Geographical Restrictions: Certain exchanges do not offer full functionality in some parts of the world.
Users nowadays tend to use decentralized exchanges (DEXs) instead of centralized ones, due to the low barriers of entry in terms of participation requirements, absensce of withdrawal/deposit limits and elimination of middlemen. We will examine the ecosystem of DEXs further, in a future blog post.
Crypto Wallets
Exchanges may not be the optimal way for storing crypto funds, as several hacks in the past took place by malicious parties. There are some third-party risks when using crypto exchanges. Storing funds in an insecure exchange refers to trusting the safekeeping of your funds to a third party.
Third-party risks include:
- Fraud (the exchange may not be a legit counterpart)
- Security (numerous attacks and exchange hacks in the past)
- Financial health (if the exchange fails fiancially, your wealth may be lost too)
Users shall be able to choose secure-proven exchanges for trading and deposit/withdraw purposes and enable 2-factor authentication from the security settings.
Web Wallets
Web client is the least secure choice, after exchanges.
Examples: BitGo, Green Address, Circle, Blockchain
Web wallets store your private keys (i.e. password) for you on their servers. May come by a mobile application or using your browser on a personal computer.
+ Easy access to your coins from multiple devices
+ Third party takes the responsibility of funds for new users
− You are trusting a company not to steal/mismanage your funds
− You are trusting a company to keep your funds safe from attacks
Desktop Wallets – Full Nodes
Full nodes (such as Bitcoin Core) is software downloaded and installed on a PC or laptop and keeps the history of the whole blockchain on your computer.
+ Contribute to the maintenance of the Bitcoin or another cryptocurrency network
+ Full control and protection, especially if private keys are encrypted with passphrases and regularly backed up
+ Attacking each full node to perform a network attack is complex, as well as time and cost consuming for malicious parties
− Can be vulnerable to internet attacks such as spying or computer malfunctions
− Most blockchain networks take days to download and synchronize
Disk space requirements make this option not recommended for average users.
Mobile Wallets
Come on a mobile device (examples: Mycelium, Coinomi) – usually operate as a lightweight client or a web client.
A lightweight client downloads only a part of the blockchain network (saving time and space) and refer to full nodes in order to verify transactions.
+ Portable, easy and comfortable – The smartphone’s camera scans the QR code of the receiver/merchant and transfers the coins
+ Best for daily transactions
+ If the mobile device is lost or stolen the funds are not gone, backups are required by most wallets in order to retrieve coins. A 12 or 24-word mnemonic phrase is required to be created upon installment
− Mobile wallets usually require a PIN, so the mobile device should not be compromised
− Make sure you download mobile wallets from original stores, in order to avoid scams that might want to steal your funds
Paper Wallets
Mostly applicable to Bitcoin; pieces of papaer that contain public and private keys. Users must store paper wallets on a safe place and keep multiple copies
+ Protection from online attacks and hardware failures. Can be generated offline with some technical knowledge
+ Ideal for long term holding of funds and provision of gifts
− Vulnerable to loss, theft and destruction
− Users must import paper wallets to software in order to transfer coins. This is not the case with hardware wallets
− Must specify the “change” address when spending a part of the funds or else you risk losing the remaining balance, because of the way Bitcoin treats change in transactions. Tip: always check your balances online before storing or destroying a paper wallet
Hardware Wallets
The safest option, satisfying maximum security procedures (examples: Trezor, Ledger).
+ Maximum security (not connected online and therefore cannot be compromised easily)
+ Generation and storing of private keys within the device
+ Users access wallet with a PIN. Transactions signed within a PIN protected external device
+ Backups are essential by hardware wallets, similarly to mobile wallets. The only way to lose funds, is to lose both the hardware device and the backup phrase
− Less convenient than mobile wallets for daily transactions
− Users should buy hardware wallets from original stores in order to avoid scams
Both beginner and experienced users should consider the maximum security of their wallets. Proper measures of protection require significant investments in further research.
Tips
New users looking to find a way to buy their frist cryptocurrencies should select an exchange which suits their needs in terms of coins supported. The exhange should provenly enhance security mechanisms.
Wallet selection also depends on the needs and preferences of each user. At least a hardware wallet is essential if users own a significant amount of cryptocurrencies.
Encryption is provided as standard in most wallets and must be used at all times. Encrypting basically means choosing a strong password that provides access to your funds and keeping the backup phrase secret.
For experienced users, web-based lightweight clients (which can also come in mobile applications) like Metamask are useful as they can offer decent security as well as access to a variety of ERC-20 tokens and collectibles.
Safest Option: Hardware Wallet
More blockchain educational material coming soon on The Crypto App blog.
