Crypto Wallets explained
If you are a bit lost in the countless storage options for your crypto, have no fear. This article will explain everything you need to know about wallets.
A crypto wallet is just software that allows you to send and receive your coins. These days the wallets can do a lot more than we could ever imagine just a few years ago. Modern crypto wallets can even allow you to exchange one coin for another and even to stake your coins, all in one app. It literally allows you to have a complete BANK with infinite accounts just sitting on your pc or phone. It’s simply staggering when we stop and think about it! This wasn’t the case just a few years ago and we have come a long way to get to this point. Let’s find out what different wallets there are living out there in the wild and how we can use the damn things to our fullest advantage. Also remember that the biggest risk in crypto comes from ignorance, negligence and lack of discipline. Don’t worry, we will cover these risks as well and help you to become a strong, savvy and hairy chested crypto investor. Let’s dive right in!
Sacred Private Keys
Remember the bald kid from The Matrix? His prophetic phrase “There is no spoon” is very true in the crypto space. Let’s take Bitcoin for example. It may come as a bit of shock, but there are actually no “coins” in Bitcoin. What we have are just digital entries in a long string of data called the blockchain. The balance you see on your screen is just a summary of the information that you private key controls. That’s it. Sorry for bursting your crypto bubble.
The private key is simply a long string of numbers and letters. From this private key you can derive an almost infinite number of public addresses ( you know that other long string of numbers that you use to send some Bitcoin to your grandma ) and this private key is what eventually “signs” your transaction so that it can be broadcasted to the network and go from place A to place B. In our case from you to your crypto savvy grandma.
Pretty much every coin that’s out there has a private key and this sacred data needs a warm, safe and cozy home to live in. This is exactly what a wallet does. It stores your private key and it scans the blockchain searching for traces of your in- and outgoing transactions that will eventually be displayed as a total balance. Pretty simple to understand, isn’t it?
However if you don’t know the concept of the private key, you will have a hard time understanding the importance of safe storage of your crypto assets. Needless to say, this is why so many newcomers in this space fall victim to scammers and attackers. Have no fear, after this article you will never fall in this trap. Now we understand that the private key is so damn important, let’s see where this magic beast can live in safety and senerinty. Let’s analyse all crypto wallets starting from the safest options. Always keep in mind that just like cars, wallets are very different and have different purposes. When you know all of them, you can make the right decision a lot easier.
A paper wallet is by far the most primitive means of storing your coins. For the sake of simplicity we will be using Bitcoin as a demonstration. A paper wallet is a physical piece of paper that holds your private key and your public address. Usually there is a handy QR code in order to make your coins “spendable”.
The process of making a paper wallet is usually very simple. We “generate” a private key and derive your public address. After this is done, we can safely print out our paper wallet and send some coins to the public address. Now these coins are forever stored on this wallet and you can safely pack your bags and go on that round-world trip you always wanted to go. Your paper Bitcoin can later be “redeemed” by importing your private key into any type of hot wallet ( explained later on ) and transferred to any address you like. For example to an exchange in order to be sold for fiat currency or any asset of your choice. Who uses a paper wallet these days? Usually very paranoid people who have endless patience and an iron discipline. They know where their paper wallets are stored at all times and you bet your ass that they have multiple copies stashed away, “just in case”.
Of course there are risks associated with this prehistoric storage method. The piece of paper can be lost, your pc or wifi printer can be hacked and the attacker can gain access to your private key. Lot’s of things can go wrong in this equation. Perhaps the greatest risk would be the human factor. Nobody can prevent your toddler from throwing your paper wallet into the recycle bin, washing machine or going nuts with permanent markers all over your sacred data. Your mom can simply throw the damn thing away or you can simply forget where you put it. So you see, this option is by far not the best one around. Let’s look at cold storage instead, shall we?
Cold Storage Wallets
You do still remember that the private key is everything, right? Good! Now let’s focus on perhaps the safest storage option out there; the cold storage wallet. These physical devices come in many shapes and sizes ( examples are: Ledger and Trezor wallets ), but they all do just one thing and one thing very well. They store your private keys inside their memory and they NEVER let those private keys communicate with the dangerous virus ridden internet. Remember how the private key can sign your transactions?
Now, imagine you want to send your granny some more coins for her birthday ( Goddamn it, that woman sure loves her crypto! ). You open up your wallet app, you type in her public address and the amount of coins you like to send. From the moment you hit “send”, your cold storage wallet ( usually a physical device that looks like a flash drive or a small phone ) will very politely ask your private key; “Dude, sorry to bother you, but could you please authorise this transaction?”. The private key will say, “Sure!”. And just like magic, the coins will leave your wallet and will end up in your cyber-granny’s wallet after just a few seconds. All of this will happen WITHOUT your private key having to make any connection with the internet. This is exactly where the magic happens. If you thought self isolation for the quarantine was a good idea, your private keys actually never even step outside to breathe in the fresh air of the internet. That’s how a cold storage wallet works.
Even if you lend out your pc to your younger brother and he ends up giving your device digital AIDS and leaving backdoors wide open to attackers, they will NEVER have access to your sacred private keys. Now who can benefit the most from owning cold storage wallets?
The answer to this is; Everyone! it’s inexcusable NOT to own a cold storage wallet if you are dabbling in the crypto space. It will literally be the best 50 to 100 usd purchase you ever make. You may be a long term hodler or a lightning fast trader with fire in your ass, a cold storage wallet is a must have item that will save you from losing your coins. Take it very seriously and spend time on learning how to use them properly. Luckily there are amazing free courses on these wallets scattered all over the internet and even Youtube. Cold storage wallets are like a fortified castle. They are safe and secure. But what if you want to do more with your coins? Here’s where Hot wallets come in. Let’s check them out.
Hot / Multicoin Wallets
What makes a wallet “Hot”? Well if you still remember the private keys, then it’s easy to understand. A hot wallet stores your private keys on your pc or phone. That’s it! Yes they are encrypted and password protected, but at the end of the day there is still risk of a hacking attack that can happen. The natural question is; why would people use hot wallets then?
Hot wallets allow you to do so much more than what cold storage wallets just can’t do ( yet ). A hot wallet is an armored personnel carrier. Fast and mobile, it can go onto any mission, carrying an enormous amount of many different coins. Best examples of easy to use hot multi-coin wallets are Exodus and Atomic wallet. When people only start out with crypto, a hot wallet like Exodus is ideal to use. It’s sleek, intuitive and it even has a built in exchange in order to quickly jump from one coin to another. Yes you do pay for this one stop shopping experience, but if you don’t want to spend much time on your crypto needs, it’s an ok solution that will fit most casual crypto users.
Atomic wallet on the other hand even allows you to stake coins like Vechain, Zilliqa, ICX, Band, Carnadno and many others all from the comfort of one app. It’s extremely convenient for an avid crypto investor who has collected too many “Pokémon” along the way and just wants to give all these coins a short term home. Hot wallets are also ideal for adding ERC20 tokens that are usually not immediately available in other wallets by default. If you like to add the TYC token to the Atomic wallet, it’s a breeze. Just add the ERC20 token contract ( 0x3A82D3111aB5faF39d847D46023d9090261A658F ), hit “add” and you’re done. There’s nothing difficult in this equation. Even your granny will figure it out in 5 minutes time.
Now that you have your paper wallets printed out, your cold storage physical devices dangling from your keychain and your hot multi-coin wallets running on your pc and phone, the next logical question is; Can I do even more with a wallet? Glad you’ve asked! Let’s take a look at the next evolution of wallets, shall we?
Web 3.0 Wallets
In case you haven’t been paying attention to decentralized finance, this industry has been leapfrogging exponentially for the past 2 years. This DEFI space is a collection of financial Lego blocks that can interact with each other and supercharge the crypto space beyond recognition. In order to navigate the seas of DEFI, your wallet needs to be a true Swiss Army knife with limitless capabilities. It has to be able to work with the most common DEFI networks such as: Ethereum, Polkadot, Cosmos, Matic, Zilliqa, Binance Smart Chain and many more.
Enter Web 3.0 wallet. For the sake of simplicity we will focus on Metamask and Polkadot JS wallets. These wallets are actually nothing more than browser extensions that live inside your Chrome or Brave browser. They allow you to seamlessly connect to DEFI applications that live in cyberspace. You want to exchange your ETH to TYC token on Uniswap without having to go through a long grueling KYC process? Done! You want to provide liquidity to ETH / TYC pair and earn trading fees from it? Done! You want to purchase a non fungible token of your favourite athlete or movie star? Why the hell not! You want to bet if it’s going to rain in Tanzania on the 25th of March 2023? Let’s do it! The possibilities of DEFI are truly endless and this space is biting at the heels of the big financial institutions as we speak.
This is why it helps to spend as much time as possible to get to know the DEFI space ( and the wallets that work with it ) a bit better. Yes it’s slow, clunky and absolutely not user friendly, but this is where the most opportunities lie. When the space of decentralized finance will be as simple as the one button order system from Amazon, it will be too late. So don’t waste any time and get cracking with self study and discovery. Cancel Netflix, donate your TV to your friends and get to work studying. You won’t regret it.
One important thing to keep in mind about Web 3.0 wallets, is that many native projects are also using their own web based wallets that the investors can use. Examples are Theta, Tycoon and Persistence projects. Yes these are hot wallets, but from the standpoint of safety, they are pretty damn good, because of multiple layers of security. That leads us towards the most important point about wallets. What’s the biggest risk?
Biggest danger when using wallets
Short answer: The Human Factor. Yes, no matter how bulletproof the software and how “space age” the hardware can be, the biggest risk of using crypto wallets is plain old ignorance, negligence and lack of discipline. Let’s take the time to address these issues in order to transform you into a battle hardened crypto OG with a long white wizard’s beard. No doubt your non-coiner friends will be impressed with your knowledge!
Always keep your passwords as bullet proof as possible. Use different combinations of words, numbers, special signs and other difficult to guess characters. Never use the same password twice and please for the love of god grab multiple notebooks and scribble the passwords there with a pen or pencil and never keep them in a digital format. Attackers love to snoop around your devices looking for password storage files. Don’t give them that satisfaction.
Your wallet seed phrase ( usually 12 or 24 random words ) is literally THE ONLY WAY you can recover all of your coins in case you blow up your pc or bathe your phone in a toilet bowl. Same logic applies here. Take the damn notebooks, write them down in multiple formats and keep these in several locations. If you are extra paranoid, you can also write down your private keys and keep them safe just in case. The mnemonic seed phrase and your private key is the only proof that you physically own your crypto. Treat it with the utmost care and respect. Just like your bank account password or that pile of cash that you keep aside for the rainy day.
The .json wallet backup file ( you usually can download it when using web based wallets ) should only live on a flash drive that is permanently detached from your pc and internet. You can even encrypt it for good measure. Never store these sensitive files on your physical device, since an attack can come out of nowhere.
Wallet updates usually happen from within the wallet app itself. Nobody will ever send you any emails or links for “updating your wallet”. That just doesn’t happen. So be very careful with any email you receive prompting you into hasty action. Take a deep breath, a sip of hot coffee and do your research properly. Chances are that you are dealing with scammers.
The scammers and attackers usually try to bait you into giving up your private keys, mnemonic seed phrases or your wallet recovery files. Luckily, we have already covered most common crypto scams ( here: https://tycoon.io/blog/cryptocurrency-scams-explained/ ). After reading this article you won’t ever fall victim to one.
There are many precautions that one must use when dealing with crypto currency. And why the hell not? After all, you are 100% responsible for your own finances here. You LITERALLY have a Swiss BANK on your pc or phone with as many bank accounts as you care to create. Being aware of this will help you to always keep your mental radar scanning for potential threats. With time there will be many more wallets and storage options available, so it helps to point your nose towards the wind of innovation and keep your mind in tune with the latest trends. Just make sure you always use your logic and common sense when you venture through the crypto space. After all, only the paranoid survive.
Risk Note: Trading cryptocurrencies is subject to high risks and may result in the loss of your capital. Please make sure you fully understand the risks associated with trading cryptocurrencies and only invest as much as you can afford to lose. Be clear about your investment objectives and experience, and seek advice from an independent financial advisor if necessary. It is your responsibility to determine whether you are permitted to use Tycoons’s services under the laws of your country of residence. Investments in cryptocurrencies are not protected by a Financial Services Compensation Scheme.