Guide to Cryptocurrency Wallets
Table of Contents
Cryptocurrency, like other currencies, is a medium of exchange that is used to buy and sell goods and services. Before we had currency, goods and services were bought and sold by a cumbersome barter system that cannot sustain a complex and urban economy.
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Under a barter system, it was difficult to determine for sure that there was a value-for-value exchange. For example, suppose “A’s Lawn Mowing Services” mows B’s lawn and “B Apples Grower” pays for the mowing services with a bushel of apples. How many apples should B pay? What if A does not want apples?
The introduction of a currency solves the problem because both A and B have a currency that has an identifiable value (e.g. US Dollars). If A is paid in a currency he can use that currency to buy apples or some other commodity that he wants.
Currencies themselves have intrinsic values. For example, suppose A the lawn-mower trades in Euros but his customer B apple grower trades in US dollars. B must somehow acquire Euros so he can pay for the mowing. He has to use his US dollars to buy Euros. That’s when ‘exchange rates’ come into play. B the apple man must go to a currency exchange and buy Euros with his US dollars.
Currencies then become a “commodity”, that is, a fungible item that is interchangeable with another item of the same kind. The term is usually associated with raw materials, agricultural products (e.g. wheat, sugar), and mining products (gold, silver). Currencies are interchangeable commodities as one currency is interchangeable with others (e.g. US Dollars for Euros).
Cryptocurrencies are just as much a commodity as other currencies. They can be traded for other currencies or used to buy goods and services. Our apple man (B) could have used a cryptocurrency to pay A the lawn-mower, who could then use it to buy apples, buy other goods and services, or buy Euros.
However, cryptocurrencies differ from other currencies in two respects. First, traditional currencies are issued by central banks of the country whose currency is traded. The US Dollar (USD) is issued by the United States Federal Reserve Bank. Other countries also have their central banks that issue the respective currencies of those countries.
Second, the central banks that issue the currencies control the supply and demand for their currencies through their monetary policies.
Cryptocurrencies are not issued by a governmental central bank and their supply and demand are not controlled by central bank monetary policies. They are issued in initial currency offerings (ICO) by private companies much like shares of stock or bonds. There are now thousands of companies that have issued cryptocurrencies that are publicly traded on the internet.
An investor/owner of cryptocurrencies has an account much like a stock investor might have a brokerage account holding the various securities they own. They can trade (buy and sell) securities within their account without ever withdrawing an actual security paper.
A cryptocurrency account consists of a ledger of activities maintained as a computerized database. Unlike central bank currencies, cryptocurrencies are not represented in a physical form like a dollar bill. Cryptocurrencies are represented by a decentralized blockchain which is the basic element of a cryptocurrency system. Transactions are recorded as blocks on a blockchain.
What is a Cryptocurrency Wallet?
A crypto wallet as the name suggests is a place where cryptocurrencies are stored. A wallet also records transactions made with blockchains e.g. send and receive (i.e. sell and buy) cryptocurrencies. Some wallets are set up to store just one cryptocurrency. For example, Bitcoin sponsors a crypto wallet that stores and trades only Bitcoins. Other wallets store and trade multiple cryptocurrencies.
Cryptocurrency wallets are sometimes set up and managed by exchanges online. They can also be installed as a software program on your smartphone or computer. A wallet can also be installed on a separate hardware device to be connected to your computer when you need to use it. When it is not plugged in there is no access to the wallet and therefore is the most secure.
A wallet consists of a private key and a public key. A private key is like a password or pin required to access the wallet. A public key is like a password to access and interact with a blockchain. Transactions are similar to paying bills or sending money by Zelle or a similar system. The sender needs a password (private key) to access their account and authorize the payment and the payee needs to be registered (with a public key) on the system to receive it.
Wallets are designated as “hot” and “cold” wallets. Hot wallets are very popular. They are always connected to the internet. Cold wallets are not. Hot wallets are convenient and the transactions are faster. However, both private and public keys are stored online so they are vulnerable to hacking.
A cold wallet is distinguished from hot wallets principally by the fact that the private and public keys are kept offline. A cold wallet is connected to the internet only when an internet transaction is taking place. This is why hardware wallets (e.g. flash drives) are more secure.
However, since a cold wallet is not connected to the internet, accessing and trading crypto in and out of a cold wallet is slower. Furthermore, since your crypto data is held on a hard drive, flash drive, or similar device, don’t lose it. Backups should always be used and updated frequently, even daily.
Many holders use a combination of cold and hot wallets, moving just enough cryptos from their cold wallet to their hot wallet before making the desired short-term trades.
Given the vulnerabilities of hot wallets, there are security measures that a holder should implement to protect their wallets. When entering a crowded place you might shift your real wallet from your back pocket to a place hard to reach by pick-pockets. So it is for your crypto wallets.
Regardless of the type of wallet you use, you should implement security measures that are equally important for your other financial interests.
- Never disclose your private keys to anyone. Keep those private keys in a safe deposit box or other safe-keeping.
- Check out the party you are buying coins from.
- Move your cryptos that you are not using for short-term purposes from your hot wallet to a cold wallet.
- There are countless ways that hackers use to invade your computers. These hackers can compromise all of your data, not just your crypto account information. Make sure you implement all of the recommended measures against such hacking.
o Do not disclose private information over the phone, email, or internet.
o Watch out for anyone posing as a legitimate business to get your private information, including offers too good to be true.
o Install anti-malware, which is normally included with anti-virus software on your computer.
o Be careful about storing on your computer or saving in your browser passwords, email addresses, etc.
o Be careful about opening or clicking on links in emails, texts, or phone calls that are suspicious or you can’t identify first.
o If a link is not preceded by “https” or a padlock icon it means whatever you send can be heard by anyone hacking you.
o Be careful about browsing while connected to unsecured public wifi hotspots.
o Enable 2-factor Authorization (2FA) on all apps that manage your financial transaction. Always use a recovery phrase.
o Choose extra-strong passwords or keys.
Best Cryptocurrency Wallets
There are many “best wallet” evaluations available online. The following are wallets that regularly show up on those evaluations.
- Ledger Nano
This is not an exhaustive list. Before choosing a wallet you should extensively research the features that it offers. Online evaluations often include among the features of each wallet a judgment as to each wallet’s suitability for different levels of expertise.
Cryptocurrencies are evolving. They were originally employed simply as a medium of exchange that can be traded like a commodity. But thousands of merchants are accepting cryptocurrencies to pay for goods and services like any other currency, and those numbers are continuing to increase. Crypto Debit cards, such as ClubSwan, are now available to make use of cryptos as well as other currencies for routine purchases of merchandise.
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