Wallets, the things we hold money in. In the analogue world, they’re as commonplace as keys and a phone, forming the holy trinity of essentials. Online, it’s a little different. Sure, you’ve got your digital cards on an app wallet, but a wallet for your cryptocurrency is a slightly different kettle of fish.
Unlike an IRL wallet, a crypto wallet stores your private keys as opposed to the currency itself, which is stored in the blockchain. Private keys are passwords that give you access to your cryptocurrencies, therefore allowing you to send or receive currency. Technically, the wallet is more like a set of keys that opens different vaults, but when you use a crypto wallet you can see your balances, so it feels more like a banking app, just with all of the different currencies and tokens in one place.
Like a normal wallet, they’re generally pretty portable and you keep them private. You take money out of them to buy something rather than using it for the purchase, in the same way that you don’t hand your wallet over to the bartender when buying a pint. But be warned: the most common scams involving crypto wallets are when people accidentally hand over the entire thing.
Go on then. How do crypto wallets work?
When you set up a wallet, you are given a private key and a public key. They’re linked. The public key is like your sort code and account number on a debit card, and is what you use to send and receive things. The private key is kept secret. This is essentially your ID check to gain access to the account.
OK, but do I really need one?
If you want to have cryptocurrency in some form, yes, as this will hold your unique private key in order to access your currency. The keys prove your ownership and allow you to make transactions. It’s all very secure – maybe even too secure for some. If you lose your private keys or your login for the wallet, you’ll lose access to your money forever. Currently, around 20 per cent of all existing Bitcoin has been lost, worth approximately £100 billion. A notable example is the guy from Newport who threw away a couple hundred million by accident. Ouch.
So you need a crypto wallet, but you also need to keep those logins safe. Same goes for if you ever make a typo when typing in the public key of the wallet you want to send something to. Usually, there’s a copy and paste option, so stick to that whenever possible.
Fair enough. Does it matter which crypto wallet I choose?
The two main forms of crypto wallet are a hardware wallet and an online wallet. There’s also Coinbase, which just handles all the private key business for you, but its features are very limited, only allowing users to buy, sell or exchange currencies. An online wallet functions a little like online banking: you log in, see your balances and do whatever needs doing. Generally, there’ll be a small flat-fee when making transactions. Sometimes, you’ll pay a percentage of your balance (usually below 4 per cent) instead.
The hardware option looks like a USB stick and usually costs around £50-£150. Their benefit is that they tend to support more cryptocurrencies and are more secure.
Within both of those categories, there are tonnes of providers that all have different pros and cons. Generally, as a beginner, you’re looking to strike a balance between security and usability. The hyper-secure ones can sometimes feel like you’re trying to hack NASA, which is fine if you know what you’re doing. But if you can’t figure it out, then there’s no point, is there? You can also use certain hardware wallets with online wallets if you’re the kind of person that likes a combo deal.
Gotcha. So which one do I need?
You can get away with Coinbase if you’re just looking to #hodl coins, but if you want to store tokens, spend your money or do anything else more complex, actually, you’ll need a proper wallet. For most people, an online one (maybe even mobile-based) will be absolutely fine. Exodus for desktop and Mycelium for mobile are good options. Want a hardware wallet that feels more tangible? Check out Trezor and Ledger.
Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.