If you trade Cryptocurrencies, you should know about “Cryptocurrency Wallet” to store the currencies. If your Cryptocurrencies flow out, it will result in a large loss. In order to minimize the risk, let’s learn how the Wallet works and judge which Wallet to use.
What is a Cryptocurrency Wallet?
In the first place, a Wallet is like “my account” with the bank. However, unlike banknotes, Cryptocurrency is a currency that exists on the internet, and it has no entity. Therefore, instead of putting the currency directly into the Wallet, you transfer a “Secret Key”, which is like a PIN number, to your Wallet.
In other words, you can prevent the risk of hacking by keeping your Secret Key（≒PIN）in your own Wallet, not keeping it in the Crypto Exchanges.
There are 4 types of Cryptocurrency Wallets.
- Web Wallet
- Software Wallet
- Hardware Wallet
- Paper Wallet
I will explain one by one. The bottom one has the strongest security of the four.
What is a Web Wallet?
A Web Wallet is also called “Online Wallet”, which can store your Cryptocurrencies on the internet. Many of you are using internet browsers such as Google Chrome and Internet Explorer, and it is to manage your own Cryptocurrencies on those web services.
Web Wallets have 2 categories.
- Crypto Exchange
- Online Wallet
You can use both of them by registering ID and Password, which is easy and for free. But they have the highest risk of leakage among the Wallets.
A Crypto Exchange is a Cryptocurrency Exchange such as Zaif and Coincheck. Most users purchase Cryptocurrencies at Crypto Exchanges and leave it there. This means you keep your Secret Key in Exchanges and you are taking extremely high risk.
Actually, a massive amount of NEM (altcoin) were hacked from Coincheck in Japan because most users kept their Secret Keys in Coincheck. They had their Secret Keys stolen by Coincheck Hack, so conversely, if they had transferred their Secret Keys to their private Wallets, it might not have been stolen.
The following Wallets I introduce are private Wallets, and you need to transfer Cryptocurrencies after you purchase them in Crypto Exchanges. In that sense, there definitely is a moment that you keep your Cryptocurrency in the Wallet of Crypto Exchange.
An Online Wallet is “your own” Wallet which is created on the internet. The “Exchange’s Wallet” mentioned above is managed by a Crypto Exchange, and in some cases, it may be offline rather than online. If it is offline, there is no risk to be hacked.
On the other hand, an Online Wallet is always online, but it can lessen the risk to be hacked than Crypto Exchanges since it is individual private Wallet. It is because hackers would rather target Crypto Exchanges that keep a lot of Secret Keys to hack and steal more Cryptocurrencies.
They might target Online Wallets as well, but it is difficult for them to steal a large amount of Cryptocurrencies as they can only hack “individual” Secret Keys. Nonetheless, it is a disadvantage that there is always a hacking risk by being online. There are various Online Wallets, and coinbase is a famous one.
What is a Software Wallet?
A Software Wallet is also called a “Desktop Wallet”, which is created (downloaded) on your terminal such as desktop. Although the former ones are Wallets on the internet, Software Wallets are basically used in the local environment as it is on a terminal. Same as Web Wallets, Software Wallets are free of charge.
To put it simply, it is like having a wallet function on your computer and managing it within offline environment. There are also 2 types of Software Wallet, complete type and simple type.
A complete type of Software Wallet like Bitcoin Core is to download the whole Blockchain. On the other hand, a simple type of Software Wallet like MyEtherWallet will not download the whole Blockchain.
I recommend the simple type than the complete type as you need less capacity of your PC. Rather, the only advantage of the complete type Wallet is “convenient when mining”, so the simple type Wallet is sufficient for non-professional investors who just deal with Cryptocurrencies.
However, you should be aware that you still have risks to be hacked or infected by viruses, even with Software Wallets.
What is a Hardware Wallet?
A Hardware Wallet is a Wallet that can keep Cryptocurrencies without being connected to the internet. The most famous Hardware Wallet is “Ledger NanoS”, which is shaped like a USB. You can make your own Wallet in this USB-like Ledger NanoS.
You can set passphrase with the Hardware Wallet so that you can restore your Cryptocurrency when your Hardware Wallet is lost or broken. Basically, since it is managed offline, the risk of leakage of Cryptocurrency can be extremely low.
However, the Hardware Wallet is a product of more than several thousands to ten thousand yen (dozens to hundreds USD), the initial cost can be a disadvantage.
What is a Paper Wallet?
The last one is a Paper Wallet, which can be managed completely offline by writing down the Secret Key of your Cryptocurrency on paper. The use of a Paper Wallet is as follows:
- Access Paper Wallet creation service such as bitaddress.org
- Disconnect the internet and open the page
- Generate a Wallet
- Write down the passphrase on paper
- Transfer Cryptocurrency from Crypto Exchange to Paper Wallet
- Keep the paper securely
As mentioned above, it is a way to create a Wallet locally and keep the Secret Key on paper, without keeping it in a Hardware Wallet. Therefore, the Secret Key that is used to transfer your own Cryptocurrency cannot leak out unless the paper is stolen. However, if you lose the paper, you can never withdraw your Cryptocurrency, so be careful to handle the paper.
As I explained above, there are 4 types of Cryptocurrency Wallet and each of them has its own characteristics. Paper Wallets and Hardware Wallets are more secure, but they are troublesome and have storage risks.
For that reason, I recommend you to use Web Wallets or Software Wallets for small amount, and Hardware Wallets or Paper Wallets for larger amount of Cryptocurrencies.