A Crypto Wallet is similar to a traditional wallet you may carry in your pocket. The difference? Instead of storing cash and cards, a crypto wallet stores a collection of private keys. Typically a wallet is encrypted with a password or otherwise protected from unauthorized access.
You can store your crypto in a wallet or on an online exchange. A crypto wallet is controlled only by its owner (it's not distributed and shared like the blockchain). The security of the device will depend upon how safe it is, and there's no way to know for sure if someone else has access without knowing what type of personal information was stored with them when they created their account - so keep that password strong.
Types of Wallets
There are many different bitcoin wallets to choose from, each providing a unique feature set. All of these wallet providers must conform to an established protocol so they can all communicate with one another regardless of their specific implementation details or functionalities— this is similar in nature to email where you have several choices for mail services but they're still able to send messages amongst themselves because each speaks “the same language."
There are several main categories of crypto wallets:
Web wallets allow you to send, receive and store bitcoin all through your web browser. They are typically hosted by a provider that manages the security of private keys associated with an account; however, some types provide ways for users to control their own funds in addition Web Wallets offer several advantages over other forms of crypto-currency storage methods such as mobile apps or desktop wallet software installed on personal computers which can be complicated when using multiple machines simultaneously - not mentioning expensive if data isn't backed up regularly! Furthermore, these online services give instant access (no more waiting days/weeks) while protecting assets from unintentionally deleted wallets.
Web wallets are convenient, but you should know that they aren't the most secure option. Web providers control your private keys and can make transactions for themselves or sell them to hackers if something goes wrong with their service; this means security must be taken seriously by users of these types of accounts just like any other online account would need precautions against hacks. Like any other online account, it's also important for customers to take some security precautions.
There are technologies available that allow users to retain full control of their funds yet take advantage of the convenience of web wallets such as MyBlockX’s multisig vault.
It's also possible to install wallet software directly on your computer. This allows an individual to have full control (and responsibility) over their wallet.
Desktop wallets are a great way to store bitcoins. They work on your computer, so the private keys are stored there too and it's only possible for you or people who have access to this specific device (like family members)to get at them using their own personal machine. Desktop wallet files can become corrupted with no backup available--this is why we recommend making regular backups of any such file in order to keep your money safe from malicious individuals.
Desktop wallets fall into two main categories known as "full nodes" or "light" clients. Full nodes host a full copy of the blockchain (about 31 GB as of January 2015) while light clients provide only bitcoin storage capabilities while depending on an external source to read the blockchain. More information and examples of wallets can be found here.
Mobile wallets are simply bitcoin wallets designed for mobile devices. This means they can easily scan QR codes, are easy to navigate with a touch screen, and are accessible while on the move. Mobile wallets for iOS and Android allows you to access your account to send, receive, buy, and sell bitcoin.
Mobile wallets are almost always "light" clients in that they do not store a full copy of the blockchain.
Hardware Wallet (Cold Wallet)
These are encrypted USB sticks where you would keep your coins safe from online attacks. They keep track as a ledger, but also keep your investments safe from online attacks. If an exchange is ever breached, your investments would be unaffected because they are not on the exchange. They're in your hands. They come with their own risks however such as losing the USB, forgetting the password, or losing the seed phrase that lets you get into these USBs. So keep your wallet and your password and seed phrase in a safe place.
Paper wallets are a way to embody bitcoins in a physical medium such as paper or metal. Like a printed banknote, if a paper wallet is lost or destroyed, then the bitcoin stored on it is gone forever.
A brain wallet is a Bitcoin wallet that can be generated from an extremely secure phrase. If you lose the password, then all of your stored bitcoins are gone forever! However, there's one major downside: using such a long and difficult passphrase makes it very hard for anyone else but yourself.
Recommended Practice When Using Wallets
- As soon as you are done trading online, take your crypto off the exchange or server and put it into your cold wallet
- Keep your cold wallet in a fire/water proof area such as a safe.
- Never give anyone else your cold wallet to hold on to for you
- Never give anyone your keys and allow them to "trade on your behalf"
- Write down your password and seed phrase on a piece of paper and laminate it (making water proof).
- Have multiple copies located in multiple locations, incase you lose one, you have backups (perhaps at friends or family members home whom you trust... just the password/seed phrase, never the wallet itself)
- Keep these in areas where they are free of fire/water damage
- Do not keep these items online (password, seed phrase, etc.), as they can be hacked from there as well
This sounds like a lot... but consider your crypto investments as a multimillion dollar investment that you physically hold in your hand. You no longer have the bank's vaults protecting your money. It's literally in your hands now. Treat your USB as you would if it were 1M cash. Because one day, they might be worth that much.