If you have decided to buy cryptocurrency or need a secure place to store your Bitcoins, you need to set up a crypto wallet. Here you will find detailed instructions on how to build it up.
Private and public keys
Crypto wallets help the user to connect with others and monitor personal savings. Probably the most important thing to understand about crypto wallets is that they are a type of software. They do not physically store cryptocurrency. What they do store is public and private keys, as well as information about the availability of user’s coins. Private and public keys are actually sequences of numbers and letters. They are used to create code and afterward to decrypt the code. The owner of the crypto wallet needs them to conduct the transactions.
Public keys are shared within the crypto community when transactions are happening, they identify wallet addresses.
Private keys are used to confirm transactions. Thus private keys open access directly to funds. This is the reason why they must be kept securely. Nobody should ask you to share the information about your private key which serves as your secret information to access crypto.
One of the ways to keep this information in a safe place is to generate a “paper” wallet. The paper wallet is a type of offline wallets (aka cold storage wallets which we’ll describe below). Basically, you get your alphanumeric code printed on a piece of paper.
You can also store your private keys on the PC or the cell phone, but the risks are higher. Computers and smartphones are not immune to malware.
Now you know that every cryptocurrency wallet includes public and private keys that should be kept safe and properly. Let’s move from theory to practice.
How to create a crypto wallet
There is no one universal instruction on how to create a crypto wallet, everything is individual for different wallets, but usually you need to go through several steps:
- choose a type of wallet that best suits your needs
- create a password
- get public and private keys
Luckily each resource has its instructions on how to set up a new wallet that makes it simple to create your own crypto wallet.
Every cryptocurrency normally has its official wallet or a list of recommended wallets. When the wallet is chosen, a person just needs to follow its instructions which usually start from offering the “create a new wallet” option. The next step is to make a strong password for the entry field. The password is an important thing that requires storage. Some people write it down in parts and store each part in its own place. However, you can also use a password manager. It is a program that stores passwords in an encrypted way. It is much safer than writing it on paper.
After setting a password, a person gets a private key. Most often users need to create passwords, but they receive ready to use private keys generated for them by the wallet. Both the password and the private key are important and should be kept safely.
Some wallets support a mnemonic phrase option and provide a person with it. In case there is a need to restore the address, something happens with the user’s computer or its hard drive, there is a way to restore the exact wallet and not to lose assets. This way is called a mnemonic phrase. This phrase consists of a list of words that have all the information needed for wallet recovery. Usually wallets generate the phrase by themselves and then give instructions to the user to write it down and store it in a safe place. This part is extremely important, because anyone who has the phrase has access to the wallet. To make the process of recovery even safer there is a two-factor mnemonic phrase. In this case, besides the phrase itself, there is a password.
Now you see that the proper storage of wallet related information is really significant. However, a reliable wallet is also a necessary and very important part of keeping coins safe. Let’s look at different types of crypto wallets and their main pros and cons.
Types of wallets
There are different types of wallets. To make your experience with the cryptocurrency wallet more successful it is important to choose the type of crypto wallet that suits your personal goals.
Full node wallet
Any computer that is connected to the network and has a special software (e.g. Bitcoin network) is called a node. Full node wallet has a built-in blockchain copy, so it has an opportunity to verify transactions all by itself. Running a full node has a number of advantages:
- you do not have to rely on other nodes to make a transaction
- if something goes wrong, the node will stop a transaction by itself
- you get to choose where to go during a hard fork
- your transactions do not involve any third party, what makes a peer-to-peer network experience more complete
It is also important to consider some disadvantages. The main concern here is that running a full node requires a lot of space on PC, because running a full node means that a person is downloading GB of information monthly.
Some people believe that light crypto wallets are the most comfortable to use. Let’s take a look at some pros and cons here.
- does not download tons of information daily
- does not require that much space
- downloads only the block headers, it is necessary to validate transactions
- easier to run
- does not give absolute independence
- send addresses to a trusted third party
The easiest type of crypto wallet to manage is a hosted one. They operate pretty much like a usual bank. They store private keys, so actually users don’t possess them. You can have access to your assets whenever you want, but you do not need to worry about their safety all the time. However, it is important to understand that trusting your assets to a third party is not very safe. This means that all the time someone else has full access to your savings. Moreover, this contradicts all the main principles of cryptocurrency, which are no third party and anonymity.
The only obvious advantage of hosted wallets is that users can receive access to their savings even if they have forgotten a password and a mnemonic phrase. Other wallets do not provide such an opportunity.
Depending on their working mechanisms, crypto wallets may also be defined as hot or cold wallets. Hot wallets have a connection to the Internet, cold wallets — don’t. We would like to tell you a couple of words about cold wallets because some people believe them to be the safest to hold crypto.
Cold storage (or offline wallet) is one of the best and most used options, because these wallets are inaccessible via the internet. That makes it impossible for hackers to get access to them. On the other hand, there is a risk to lose private keys or passwords, and thus lose access to the funds.
Hardware wallet is one type of cold wallet. It is considered to be one of the best and safest. It looks like a memory stick, so it is an external device that can be taken anywhere. Hardware wallets do not hold any personal data and provide anonymity. To access savings users have to input a password.
Although, please, keep in mind that a hardware wallet is a physical device that can be lost. In this case, you will lose access to your wallet and, thus, the savings.
As you can see, there are a lot of options on how to make a secure crypto wallet. The best way to find the most suitable wallet is to try different types. We hope that this article helped you to understand the basics. Thank you for your attention.
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Originally published at https://simpleswap.io on September 9, 2020.