5 min read
Cryptocurrency Wallet Basics
Welcome to part two of our Bitcoin and cryptocurrency wallets series. In this section we will cover some of the important features and qualities to consider when choosing your next cryptocurrency wallet.
This series is a companian resource to our Wallet Finder Tool.
Besides holding and spending cryptocurrencies, different wallets have different features and ways to interact with your assets on the blockchain. Some wallets are great for holding many types of assets, some are great for tracking purchases, others are focused using a few assets in advanced ways, and others are focused on being as user simple as possible in lieu of advanced features.
It's common to use different wallets for different purposes - such as a secure offline wallet for storing coins long terms, one on the phone or computed for daily spending, and another for using advanced featured of your favourite coin, such as SLP support or privacy feature. It can be hard to know which factors to consider when choosing a wallet, so here are some of the features we find important to consider to make that choice easier.
High level factors to consider when evaluating which wallet to use next.
Personal information should never be required to use a cryptocurrency wallet. Be wary of any wallet which asks and gathers excess information about you.
Exceptions to this are exchange wallets. Exchange wallets need to follow strict regulations to allow trading between fiat currencies and cryptocurrencies. This additional information requirement is known as Know Your Customer (KYC).
Terminology: Know Your Customer (KYC)
Very important to use and enable for all exchange wallets. 2FA adds a second layer of security which requires your phone to be physically with you to login and move assets on an exchange. This is a security measure used to mitigate the vulnerabilities of standard password security.
2FA is usually found on exchange and web wallets; we recommend always enabling 2FA on exchange accounts. Terminology: 2FA
Open source wallets allow anyone to read, access and audit the code. This transparency enables everyone to independently verify the security and privacy of the wallet, and that the private keys are handled securely. If a wallet is not open source, then it's impossible to verify security of the wallet and any private keys it manages for you.
This isn't necessarily a deal-breaker, but it's definitely a bonus if the wallet software is open source and has a strong reputation in the community wallets which have been reviewed and vetted by the community.
Different wallets have different levels of privacy, and it's a very important topic to consider when choosing a wallet. The level of privacy a wallet provides determines how easy it is for other people to track your funds, find out how much crypto you have, how you spend your money, etc.
Some common privacy features to look for...
HD Support enables wallets to always use a new address when receiving funds. This makes it much harder to simply trace funds and find out how much money a person owns. HD wallets also enable more advanced privacy features such as CashFusion.
These are a set of specific features which are commonly found in which may or may not be important for you. This is only a small subset of features found in wallets. If your favorite feature is missing, let us know.
Multi-sig wallets require multiple private keys (signatures) to access and move the assets. These can come in many forms and variations - providing and requiring different amounts of private keys to access the funds. For example, a wallet can require 3 out of 3 private keys to access; Another can require 2 out of 3 private keys to use, and another 7 our of 20, etc. They can also be setup such that a certain amount of keys are required, or a single key with elevated privileges, such as for a lawyer overseeing a business.
This are useful to divide the ownership and responsibility of the asset amongst a group of people.
HD wallets are a way of generating an endless amount of public keys from a single private key. This is done with advanced math, but wallets which provide this feature have much greater privacy as the addresses are constantly changing.
This is a great feature to look for as it enhances ones privacy without any effort.
Wallets which store many types of coins. These wallets are generally good for holding your whole portfolio for long term storage, and are great at the core workflows - receiving and sending funds -, but they often lack the more advanced, coin-specific features.
Most ETH wallets are multi-coin wallets, since as long as they support tokens, then any coin which is built as an Ethereum token will be compatible with the wallet.
As tokenization comes to various blockchain, having a wallet which supports them can be extremely beneficial. On Ethereum these may be wallets which support the ERC-20 standard, and on Bitcoin Cash (BCH) these may be wallets which support the SLP token protocol.
Tokens on Ethereum. These are assets which exist on the Ethereum network, and can be traded and used for nearly any purpose. A large amount of the cryptocurrencies we hear about are ERC-20 tokens and not their own blockchain.
Unique tokens on the Ethereum blockchain. These tokens are each unique, where every token represents a unique asset which can be traded. These can be used for ownership, collectibles, or many other things
A new exciting token protocol on the Bitcoin Cash (BCH) network. These are similar to ERC20 tokens in that a single SLP aware wallet is able to store and spend any number of these. SLP tokens will likely have a large stake in future bull-runs as they are enabling many new use-cases with tokens which are cheap, reliable, and fast to create and send.
Wallets which track and visualize your portfolio value over time. These are often found in multi-coin desktop wallets and are a great way to track how your portfolio is doing over multiple weeks, months and years.
There are a whole bunch of different privacy features and methodologies wallets use, but some of the most exciting ones to look out for are CashShuffle and CashFusion.
These are proving to be some of the best privacy features, and each year more and more wallets are using them.
Wallets which rely on application servers to function. These wallets receive their information through API's ran by various companies to interact with the blockchain. The advantage of this is that the application can be very lightweight and fast as the majority of computation is done on the server. The disadvantage is if the company shuts down the servers the wallet can become unusable, forcing you to move the private keys to another wallet.
Simple Payment Verification. Method to verify transactions on the blockchain without downloading entire blocks. Allows wallets to communicate directly with the blockchain and staying minimal enough to work on resource limited devices - like phones - without a dependency on third-party servers. Since the wallet communicates with the blockchain directly, these wallets can take awhile to start (1-15 minutes). Since these wallets don't rely on a server they are always usable and shouldn't experience downtime.
A wallet which downloads and verifies the complete blockchain, usually from the very first block (genesis block). These wallets depend only on the blockchain to use and are the most reliable, secure, and least least convenient wallet type to use.
Full nodes give the most control over your funds, and are typically used to power services which interact with the blockchain. For most everyday users these are overkill.
That's all for part 2.
In part 3 we'll cover how to keep your funds safe and secure.
Cryptocurrency Wallet Basics