Article Overview: This is a comprehensive guide to cryptocurrency wallets that everyone should know. We've compiled a list of the different types of crypto wallets and explain the need for you to have one.
The main purpose of the creation of Bitcoin as a decentralized currency was to give the masses the power to control and manage their own money. You might ask yourself:
“Well, do I not have full control of my money?”
Since the money you deposit in the bank is usually used to lend it out to others, you technically do not have full control over it.
What you own is simply an IOU, or a promise by the bank to pay you. It might seem crazy, but our current monetary system has many fundamental flaws that elude most of us.
Bitcoin - and cryptocurrencies - offer you the power to have absolute and total control over your money.
And given the fact that Bitcoin and other cryptocurrencies have been increasing in value, it is vital to have your own cryptocurrency wallet to store and manage your coins.
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What is a Crypto Wallet?
Simplified Definition: It’s a software program that stores your coins
Technical Definition: It’s a software program that stores your private and public keys (they come in pairs), enabling you to send and receive coins through the blockchain, as well as monitoring your balance.
How Does It Work?
First off, digital wallets are quite different as compared to your physical wallet. Instead of storing money, digital wallets store private and public keys.
Private keys are like your PIN number to access your bank account, while public keys are similar to your bank account number. When you send Bitcoin, you’re sending VALUE in the form of a transaction, transferring the ownership of your coin to the recipient.
In order for the recipient to spend the newly-transferred Bitcoin, his private keys must match the public address that you sent the Bitcoins to. (Read also: Guide to Forks: Everything You Need to Know About Forks, Hard Fork and Soft Fork)
Ownership of your private keys gives you total control over the funds associated with your corresponding public keys. That’s why it is vital to make sure you keep your private keys secretly hidden so that ONLY YOU know your private keys.
If any other person gets hold of your private keys, they will have control over your coins. It is also equally important to have a back-up of your private keys, so as to protect yourself from accidental loss.
You'd also lose your funds if you cannot recover your lost private keys.
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Can I Just Keep Them on an Exchange to Avoid the Complexities?
You could, but you wouldn’t want to. Although you would automatically have a wallet when you open a cryptocurrency exchange account (exchange-hosted wallet), you do not have control of the private and public keys.
Having control of your keys means having control of your coins. Exchanges work like a bank; it is a third-party service provider that you trust to keep your coins safe.
However, there is always a probability of the exchange shutting down or being hacked, resulting in a loss of coins (case in point: Mount Gox Exchange).
Given the lack of regulatory frameworks on exchanges and cryptocurrencies as a whole, as well as the infancy of the industry, the best way to keep your coins safe is to have total control of your coins. You can only have absolute control by having your own wallet.
In addition, participating in ICOs require you to have your own private wallets, from which to invest from. You cannot invest in ICO's through your exchange account.
Let’s Get Started!
It can be intimidating choosing the right wallet, but do not worry! We’ve compiled the various types of wallets for different coins according to their price, level of security and mobility for your convenience.
Disclaimer: For the purpose of simplicity, this guide does not list full client wallets such as Bitcoin core, Mist or Parity since downloading the entire blockchain may not be a user-friendly experience, even though we admit that it’s the safest way of storing your coins.
If you want to get started opening a free Ether (and ERC20-compliant) online wallet, please read this Guide to Cryptocurrency Wallets: Opening a MyEtherWallet (MEW).
Alternatively, if you want to open a free Bitcoin online wallet, please have a look at this Guide to Cryptocurrency Wallets: Opening a Bitcoin Wallet.