This is the first step. You need a crypto wallet to buy, sell and store cryptocurrencies (Bitcoin, Ethereum, etc.). Read this guide to understand different types of wallets available which one is best basis your requirements. This article is a complete guide to Crypto Wallets-definition, types, hardware wallets and software or hot wallets examples and crypto risks.
If there is one thing that I want you to learn from this article, then it will be the below highlighted lines.
|“Never store your Bitcoin in the Exchange from where you have purchased it. It is prone to hacking, which has cost millions of dollars to people in the past. Also other errors are encountered when you store your Bitcoins in the Exchange. Always store your Bitcoins in a wallet (physical or application or website)”|
Table of Contents
Crypto Wallets: Definition
A wallet is an electronic device or an application or a website which stores your cryptocurrency like Bitcoins.
Note: We will be using ‘Bitcoins’ in general in this article to quote cryptocurrencies. Although cryptocurrency is a bigger class and Bitcoin is just a type of cryptocurrency.
Types of Wallets
Broadly there are two categories of wallets.
- Hardware Wallets
- Software Wallets of Hot Wallets
Hardware wallets are more secure than Hot Wallets. Period. But depending on the usage and the your degree of investment, you can choose between the two categories. For instance, for the novice investor having a few dollars of investment, Hot or Software wallets are advisable. Let us see all these in details in the following sections.
Hot or Software Wallets
Hot wallets are applications or websites which can store your Bitcoin or cryptocash. Being lesser secure than Hardware wallets, Hot wallets are advisable to store only small values of Bitcoins or cryptocash.
Hot wallets are analogous to your pocket wallet which you carry with yourself for storing some cash to be spent frequently. It is not used for storing your life savings. You need a Bank account (Hardware wallets in this case). Similarly hot wallets are used when you want to store few Bitcoins and spend them frequently. However you will need a Hardware wallet in order to store your life savings of Bitcoins.
Pros (Hot Wallets):
- Easiest way to store crypto
- Free of cost (mostly)
- Convenient; spending and receiving payments is easy and fast
- Some hot wallets allow access to funds across multiple devices
Cons (Hot Wallets):
Not safe and vulnerable to web attacks (since the wallets store cryptos on the web). Hence not recommended for storing large amounts of bitcoins or cryptocash.
The table below lists the names of some of the best desktop and phone wallets.
|Type||Hot Wallets in the Market|
|Desktop Wallet||Electrum (compatible with Mac, Linux and Windows)|
|iOS and iPhone Wallets||BRD, Edge|
|Android Wallets||BRD, Samourai, Mycelium, Edge, Blockstream Green, Bitcoin Wallet|
Hardware Wallet or Cold Storage
A hardware wallet is a physical electronic device or a hardware which is developed for the sole purpose of storing your Bitcoins (or cryptocurrencies). It can be plugged in to a computer, laptop, tablet or mobile to perform any Bitcoin Transaction of buy or sell.
Reiterating a Hardware wallet is the most secure wallet to store your Bitcoins or cryptocash. We know that if someone gets access to our Private Keys means he/she will have access to the Bitcoins and perform transactions.
In a Hardware wallet the Private Keys are generated and stored offline. Unlike hot wallets where your Private Keys are generated online and hence vulnerable to the Hackers. Even if someone steals your Hardware Wallet you can secure it by generating a PIN, which will be required as soon as the thief will try and connect your Hardware Wallet with a computer, laptop, mobile or tablet.
What happens to your crypto if your Hardware Wallet is stolen or destroyed?
Relax, nothing will happen to your cryptocash as long as you have access to your recovery mnemonic code or phrase. When you initially configure your Hardware wallet, you are prompted to set up a 12 or 18 or 24 word mnemonic or recovery phrase. You can punch in your recovery phrase in another hardware of software wallet to recover your Bitcoins. In case someone steals your hardware wallet, he/she will need to enter your recovery phrase in order to access your Bitcoins. With wallets like Trezor and Ledger, there is minimal chance of a hacker to extract your recovery phrase from the micro chip of the wallet.
Let us examine the Pros and Cons of using a Hardawre Wallet.
- Ultra secure for storing, sending and receiving your Bitcoins or cryptocurrency.
- Easy to backup and store
- Prevention from physical damage. For example, Ledger Nano S is made up of highly durable material which is wrapped in stainless steel.
- Not free of cost (as are the Hot wallets or software wallets). These wallets have prices in the starting $50-$60. Hence in the beginning start with a Hot wallet which is free of cost (can be downloaded in your mobile or laptops) and eventually as you accumulate large amounts of cryptocash, move to a Hardware wallet.
|Pro tip: Buy a Hardware Wallet with a screen (ex: Ledger Nano) which displays the details of the Bitcoins contained in the wallet. This helps in authenticating (by matching) the data that is displayed in a computer or laptop, when the hardware wallet is connected to one.|
Should we buy a Hardware or a Hot Wallet.
Start with Hot Wallets and then eventually move to a Hardware Wallet.
Hardware wallets have prices starting $50-$60. Hence in the beginning start with a Hot wallet which are free of cost (can be downloaded in your mobile phone or laptops or desktops or tablets) and eventually as you accumulate large amounts of Bitcoins, move to a Hardware wallet which will keep them more secure.
Hardware Wallets’ Examples
Ledger Nano S
It is one of the most popular and recommended crypto wallets in the world. The image below were taken at the time of writing this article.
- Super Secure. As you set up your Ledger Nano S, you will be required to set a four digit pin. After that a 24 word recovery phrase is asked for. In cases where you somehow forget your pin you can provide your recovery phrase and reset your pin. As discussed earlier anyone who gets access to your Ledger will need to punch in the 24 word recovery phrase to access your cryptocash.
- Supports more than 1500 coins. This includes the popular ones like Bitcoin, Ethereum, Ripple, Litecoin and Bitcoin Cash as well as the lesser popular coins like Ubiq, Hcash and Stratis.
- Protection against physical damage. Ledger Nano S has a body made up of highly durable materials, with an additional protection layer of stainless steel. It is highly unlikely to be destroyed in case you happen to drop it also from a height.
- Relatively expensive. Software wallets are free. Whereas at the time of writing this article the cost of buying a Ledger Nano S straight from the Ledger Nano website starts from INR 5,515.70.
- Setting it up requires some time. One needs to plug in the Ledger Nano to his/her PC or mobile device and refer the provided manual in order to set it up on his/her desktop or phone.
You can buy Ledger Nano S in India from here. Buying from Amazon and other web stores is not recommended as this involves the risk of getting a malware or a fraud product.
Setting up your Ledger Wallet
Let us now go step by step to setting up your Ledger Wallet (this is basis the current device settings at the time of writing this article).
- Step 1: Insert the Ledger Nano S into your device (desktop, mobile or laptop) USB port.
- Step 2: As you see the message ” Configure as new device?” on the screen of the Ledger Nano S, press the right button (for Yes), as shown in the figure below. This will now install the required drivers in your laptop or mobile.
- Step 3: Once the message ” Choose a PIN Code” appears press both the buttons (figure below) to start the process of choosing a PIN. You can choose any PIN of 4 to 8 digits long. Choose a random and difficult to guess PIN. Refrain from using PINs like 1234, 9999, 0987, as these can be easily guessed by anyone.
- Step 4: After entering the PIN, you will again be prompted to enter it again, to avoid any mistakes.
- Step 5: After the PIN is confirmed, you will be prompted to enter a 24 word backup and recovery phrase. Please keep this backup phrase safe with you by writing it down in a piece of paper of saving it at some offline word document (refrain from writing and saving it in an online file as it will again pose a threat from hackers). Remember this phrase is the last resort for you in case you forget your PIN.
Step 6: Once the PIN and recovery phrase are finalized your Ledger Nano S is ready to be used.
Another popular hardware crypto wallet is Trezor One. It can store, send and receive your cryptocurrencies. It was released in 2014 by an organization called SatoshiLabs, located in Czech Republic. to give you an idea as to how popular it is, SatoshiLabs has sold over approx. one million devices (at the time of writing this article)! The latest wallet of theirs is the Trezor T (Trezor 2).
You can buy one here.
- High in security. You will set a PIN that will be required each time you login to the Trezor wallet. As in Ledger Nano, you will also be given a backup phrase, for resetting your PIN in case you forget it.
- Constant firmware updates that keeps it ready to surpass any new malwares.
- Supports a huge number of cryptocurrencies. Till July 2020 it supported almost 1400 different cryptocurrencies. Check out their official website for regular updates and the new additions to the list of cryptocurrencies supported by them.
- Relatively costlier than the software wallets.
- Has been subject to unauthorized accesses before.
Security features offered
Now we need to take a deeper look at the security features offered by Trezor One wallet. Let’s consider the below scenarios, which are also common FAQs by users.
- What will happen if my device (laptop, computer) is infected by Virus and I connect my Trezor with it? Nothing will happen to your cryptocurrency. Its just like connecting your mouse to your infected computer. Nothing happens to the mouse. Similarly, your cryptocurrency will be completely safe (at least till now) when you connect your Trezor with an infected device.
- The case of Keyloggers. Keylogger is a virus which allows the hacker to get a copy of the keys you are typing in your keyboard. In that case the hacker can analyze and get to know the PIN that you type, each time you login to your Trezor wallet. However this doesn’t happen. Each time you login into your Trezor the order of the digits change (it is designed in such a manner). See below.
- Firmware updates. The firm SatoshiLabs releases regular firmware updates to keep the wallet ready to any new threats in the market. The only thing is that these will not automatically be updated to your wallet. You need to update them yourself whenever they are released. The instructions on how to update the wallet as released by SatoshiLabs can be viewed here.
Setting up your Trezor wallet.
Let us now see how to set up a Trezor Model T wallet.
Step 1: Connecting and Initializing the Trezor wallet
Plug in your Trezor wallet to the USB port of your device (laptop, desktop or smartphone).
Once you do so, the screen will show an icon for a lock and prompt a website to visit.
For your convenience this is the website. Go to this website and on the Start Page choose Trezor Model T as your device.
For Firefox users, please install Trezor Bridge as requested.Firefox Users and Windows 7/8 users
If you are using Windows 7/8, please refer to the FAQs section.
Step 2: Install the firmware for your device
The next step is to install the firmware.
Firmware is a software program or set of instructions programmed on a hardware device. It provides the necessary instructions for how the device communicates with the other computer hardware. Please refer to this website for more details.What is a firmware
Once the Trezor Wallet recognizes your device, it will automatically prompt you to install the firmware required for the wallet. Click on “Install Firmware” and wait until the installation is done. Within a minute or so, your device (laptop, desktop or smartphone) will reboot to load the new firmware. Congrats your firmware is loaded in your device now.
Step 3: Create your wallet
After you reboot and the firmware is installed in your device, the next step is to create your wallet.
Trezor will give you two options-to create a new wallet or to recover and use an old existing wallet. See below.
If you do have an old wallet for which you do have the recovery seed, then you can recover that wallet in the Trezor Model T by clicking on “Recover Wallet”. Trezor Model T supports all BIP39 seeds to restore an old wallet.
However, if you do not have an old wallet (in most of cases), you can generate a new wallet by clicking on “Create New”. This is anyways recommended to generate a new wallet in Trezor Model T for security purposes.
Once you click on “Create New” the Trezor will start preparing your wallet.
Finally you will get the message that your Trezor is ready. See below.
Step 4: Secure your wallet
Although your wallet is generated and ready to be used in Step 3, I will recommend you to follow few more steps to onboard and secure your wallet.
The Trezor Screen will prompt you to backup your recovery seed.
The Recovery seed is a 12 word (random words) phrase which is needed every time you log in to your wallet from a different device. This recovery seed will also be needed when you try to recover your lost or stolen wallet. Please understand that anyone who will have access to your recovery seed can access your wallet and hence your Bitcoin or other cryptocurrencies you have kept in the wallet. Hence keep your recovery seed as secured as possible. Also hard copy of the recovery seed is strongly suggested as it cannot be hacked at any time. Use a permanent marker to write and save your recovery seed in a piece of paper.Secure your Recovery Seed
Also, do not disconnect your device during this process. If you do, you will not be able to view your recovery seed again and will have to start over again by wiping the device.
Step 5: Name your wallet
The next thing you can do is to name your wallet. This is suggested more when you have two or more Trezor wallets and you want an easy differentiation among them.
Step 6: Choose a PIN
Now choose a difficult PIN for your wallet. Choose some difficult combination of different numbers. Do not choose easily guessed combinations like your Date of Birth.
The PIN protects your wallet from unauthorized access.
The most vital thing you need to understand in secure keeping of Bitcoins is that it is the Private Key which makes you the owner of the Bitcoins. If the Private Key is stolen then the person who has the control of your Private Key will be controlling your Bitcoins and can hence perform transactions. Hence the thumb rule is to secure your Private Key. Let us see how.
- Generate your private keys in a secure, offline environment. (Except if using trivial amounts, in which cases keys may be created in a hot wallet in online mode).
- Create backups of your private keys. This helps to protect against the loss of your bitcoins due to hard drive failure or some other problem or accident. Ideally you should have a duplicate set of backups kept off-site to protect against the possibility of fire, robbery, etc.
- Encrypt wallets to provide additional security. This helps prevent the physical theft of your funds in the event that your device or hardware wallet is stolen.
Hence we now conclude this guide by saying that Bitcoin and other cryptocurrencies are good investments but at the same time you need to secure your digital funds by following the rules given in this guide. Do write to me in case you have any doubts.