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What Is a Digital Wallet? A Crash Course on Cryptocurrency Wallets

Published
February 19, 2019
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    In the beginning we bartered—humans traded surplus goods for the things they lacked. In 600 BC, King Alyattes of Lydia, now part of Turkey, minted the first known currency—trade across the mediterranean accelerated. In 1661, the first known banknotes were printed in Sweden—paper money was significantly lighter than coins, streamlining transactions. And in 1946, John Biggins invented the “Charg-It” card, the first credit card. [caption id="attachment_214" align="aligncenter" width="524"]

    3d rendering of Bitcoin word for computer screen[/caption]Today, we have contactless payment cards, mobile banking and digital wallets. A surprising amount of the human condition has been about quantifying value and streamlining transactions. In this post, we’re going to dive into the latest technology on the monetary evolutionary tree: the cryptocurrency wallet. What is a digital wallet?Take out your wallet and open it up—what will you find inside? If you’re like most people, you probably have some dollar bills, loose change, and a stack of debit/credit and rewards cards. But when you really think about it, all these physical objects really only represent one thing: information on the amount of value you have at your disposal for the trade of goods and services. A digital wallet is simply any software that helps you manage that information so that you can make electronic transactions. It is made up of two components:

    1. A means of storing information on credit cards, bank accounts, and other information needed to facilitate an electronic transaction.
    2. A secure API for facilitating that electronic transaction.

    Sometimes that software takes the form of an online service, such as PayPal, that makes it easier to make payments online. More recently, the game changer has been mobile wallets such as Apple Pay or Android Pay, which store information on your bank accounts, rewards programs, and credit cards, and use NFC (near field communication) to make in-store contactless payments with your smartphone. In tech hubs from Silicon Valley to Tokyo, the only wallet you need to make a transaction both in physical stores and digital marketplaces is the smartphone in your pocket or the smart watch on your wrist. In many ways, money was always a physical representation of our attempts to quantify value, and digital wallets are just the next natural manifestation of such a system. What is a cryptocurrency wallet? [caption id="attachment_215" align="aligncenter" width="395"]

    Conceptual cryptocurrency bitcoin with wallet on wooden table[/caption]A cryptocurrency wallet is special type of digital wallet that stores the public and private keys necessary to interact with the blockchains of various cryptocurrencies. If you want to use Bitcoin or any other cryptocurrency for anything other than trading, you’ll need a cryptocurrency wallet. How does a cryptocurrency wallet work? The blockchain is an immutable, distributed, ledger that secures transactions through the power of cryptography. But how does it really work? To understand what’s going on inside your cryptocurrency wallet, you need to understand the “crypto” part of cryptocurrencies. At the heart of cryptographic transactions lies the public and private key pair. They’re so long, they’re usually represented in a cryptocurrency wallet with a string of letters and numbers called a WIF (wallet import format). Both public and private keys are large integer numbers that are cryptographically related to one another, such that the public key is mathematically derived from the private key. The cryptographic algorithm is designed to make it easy to generate the public key from the private key, but computationally infeasible to reverse the process. This is the secret behind the security of the blockchain. When you spend Bitcoins or any other cryptocurrency, what you’re really doing is signing off on the transfer of ownership of those coins to a third party using your private key. This digital signature is much stronger than a real world signature, because it is unique to each transaction. It is impossible to forge a cryptographic digital signature because it is a unique output of your private key and the details of the transaction. This is why it’s important that you never lose or share your private key.When you receive cryptocurrency from a third party, they send it to your address, which is a hash of your public key and additional information. The cryptocurrency wallet abstracts away all the complexities of managing public and private keys, making it easy to perform cryptographically secure transactions through the blockchain. Crypto currencies also have tax system like the hard money and there many Crypto tax service like Zenledger that can also calculate Bitcoin taxes so it’s a goto app for crypto trader and hodler to calculate their Crypto Taxes and Accounting.How do I choose a cryptocurrency wallet? When shopping for a new cryptocurrency wallet, the first thing you’ll want to decide is whether you’re looking for a hot wallet or a cold wallet. Hot means “connected to the internet.” It implies your keys are stored in the cloud or on a device that is constantly connected to the web. Cold is code for “off the grid.” It implies your keys are stored offline, making them inherently more secure. Beyond hot and cold, there are three main types of cryptocurrency wallet: software, hardware, and paper.Software cryptocurrency wallets are the most diverse category, including desktop applications, online cloud-based services, and mobile apps. While this is the most convenient option, your private keys are only as secure as the cybersecurity practices of the software you choose to use. Desktop applications are generally the most secure, often designed only to work on the computer they were originally installed on. With cloud based services, you’re at the mercy of a centralized third party which can be hacked, or compromised user sessions on insecure devices. Hardware cryptocurrency wallets take security to the next level, by giving you a convenient way to store your keys offline. Private keys are stored on a physical device such as a USB drive. Because your key is kept offline, it’s inherently more secure than conventional software solutions. However, you may still be vulnerable when your device interfaces with online services to make a transaction. Some even support additional security measures such as biometrics. Paper cryptocurrency wallets place security directly into your own hands. A program randomly generates your public and private keys offline as QR codes that are then printed on paper which can physically be stored in a secure place such as a safe. You won’t find a more cost effective security measure than good old fashioned paper. As you can see, selecting a cryptocurrency wallet is about optimizing your desired level of convenience with your preferred level of security. Other common considerations include:

    • Transaction fees
    • Multi-currency vs. single currency
    • Everyday purchases vs. investment platforms

    Meet the top cryptocurrency wallets of 2018Now that you know what to look for in a cryptocurrency wallet, let’s take a look at some of the more popular wallets that are out there. Coinbase Wallet[caption id="attachment_218" align="aligncenter" width="474"]

    MONTREAL, CANADA - DECEMBER 23, 2017 : Coinbase cryptocurrency exchange website under magnifying glass[/caption]As one of the most popular exchanges for trading cryptocurrencies, it should not be surprising that the Coinbase Wallet (formerly Toshi) tops many lists. It’s a separate free software from the Coinbase exchange platform that anyone can download. It is widely considered one of the easiest and most secure to use. KP edit - Features include:

    • Desktop and mobile support.
    • 2FA (Two Factor Authentication), Multi-Signature
    • ETH, ETC, BTC, BCH, LTC

    ExodusExodus is one of the most popular, desktop-only, open-source cryptocurrency wallets out there. It’s known for supporting a whopping 90 different digital assets, from popular cryptocoins such as Bitcoin and Etherum, to altcoins such as Aragon and Golem. It has one of the sleekest UI/UX designs out there with impressive data visualization and charting capabilities. JaxxA veteran in the cryptocurrency and digital asset wallet game, Jaxx is a comprehensive desktop solution that was among the first to go mobile. It supports a long list of cryptocurrencies and built-in support for ShapeShift, a popular cryptocurrency exchange. It’s data visualization and charting capabilities are on par with Exodus. What sets it apart is the ability to pay lower fees by opting for slower transaction speeds. TrezorTrezor is the world’s first hardware wallet. It’s widely considered to be one of the most secure ways to store your cryptocurrencies and supports over 600 coins and tokens as of October 2018. It supports cold storage of your private key (always offline), and even guards against connections to infected devices with a limited USB connection. It also prevents keylogging by changing the order of the numbers on its number grid when you’re asked for your pin. Nano Ledger SA USB drive sized hardware wallet that sports a sleek design and supports over 30 cryptocurrencies including Bitcoin, Ethereum, and XRP. The Nano Ledger S does not need a computer to be used, with two small buttons and an LCD screen that can be used to make transactions. MyEtherWalletMyEtherWallet is a website you can go to and randomly generate a public and private key that you can turn into a wallet. It’s a simple client-side interface for Ethereum that makes it incredibly easy to set up a paper wallet or download a password encrypted file containing your new private key. The site itself stores no information on you or your wallet, but you can download the software on GitHub and run it offline if you don’t trust the internet. This list is just a sampling of the different cryptocurrency wallets that are out there and is by no means exhaustive. Now that you know what to look for in a cryptocurrency wallet, you can do your due diligence and find the right balance of security and convenience for your needs.

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