The fact that multimillion-dollar sums are traded on a daily basis on cryptocurrency exchange platforms is enough proof of the real value that cryptocurrencies maintain in the world of finance. Of course, banks and financial state institutions are still reluctant to accept cryptocurrencies like Bitcoin (BTC), let alone other, less popular altcoins, but numerous companies and startups are already using cryptocurrencies as an integral part of their financial portfolio.
Since cryptocurrencies can’t be stored in a bank (as banks still don’t accept cryptos as a legitimate payment method and store of value), some other way of keeping them safe had to be invented. Because cryptocurrencies don’t physically exist, they can’t be stored in your physical wallet either.
This is why crypto wallets were invented—to keep your cryptocurrencies safe and at your disposal at all times.
Let’s take a look at what is actually stored in crypto wallets, what type of wallets exist, and how to create a paper wallet if you choose to.
Cryptocurrencies use blockchain technology to facilitate transactions between users and each cryptocurrency uses its own blockchain network. These digital currencies don’t really exist beyond their blockchains and users don’t exactly put their funds in their crypto wallets. Instead, public keys and private keys are generated by wallets, letting users transfer funds as they please, while keeping these keys safe in their wallets.
So, you don’t literally put some BTC as a chunk of data in your crypto wallet but rather the keys to your funds on the Bitcoin blockchain in your crypto storage.
Public keys or public addresses allow users to receive cryptocurrency. When someone wants to transfer you some crypto, you need to provide them with your public key so that they can facilitate a transfer through the Bitcoin blockchain. If you don’t give the other party your public key, they can’t send you the funds.
Not all cryptocurrencies have the same public keys even though you are using the same crypto wallet. If someone wants to send you some BTC and some Litecoin (LTC), you need to provide them with a specific BTC public key and another one generated by your wallet that’s specific for LTC. This is because these two currencies use different blockchains and, logically, the funds that are sent through these networks need different destination addresses.
While public keys are used as a destination address for receiving cryptocurrencies, private keys are used as a way of verifying ownership of cryptos. Your private keys are basically the passwords that let you legitimately do as you please with your digital assets. Each private key is a string of letters and numbers that use advanced cryptographic methods to let people access their funds.
When private keys were first introduced on the Bitcoin blockchain as a means of accessing funds, they were an innovative way to make sure that only the person who owns the assets can access them. The same method was later adopted by Ethereum and all other altcoins. These private keys became the most valued aspect of cryptocurrencies since they are the only way for a person to use their assets and move them (transfer them) through the blockchain.
Where to Store Bitcoin and Other Cryptocurrency
In order to safely store private keys and public keys, cryptocurrency wallets were invented. However, there are different types of crypto wallets available on the market, offering different features that cater to the various needs of users. Some people tend to store modest amounts of cryptos in their wallets, using them for small payments and daily transactions, while others trade large volumes of assets and want to keep large sums of cryptocurrency safe. There are also startups and companies which keep increased amounts of BTC or ETH as a store of value.
All of these different needs for crypto storage have produced various wallets with different levels of security and practical use. Let’s take a look at the main wallet types you can choose from when creating a new wallet and how they work.
Hot storage or hot wallets are all crypto wallets that are connected to the internet. The term “hot” refers to the constant internet connection required for these wallets to operate. All crypto wallets are considered safe, but the degree of safety and possibility of your wallet getting compromised can vary between different types of wallets. These wallets are also referred to as software wallets.
Web wallets are a type of hot crypto storage that is accessed only using a web browser. The wallet program is located on a specific web platform and users access their web wallets by creating accounts on these platforms. Some of the most popular crypto exchange platforms such as Binance and Coinbase have their web wallets connected to the exchange accounts and serve as handy wallets for storing cryptos traded on these platforms.
The private keys to your cryptos are usually stored on the web wallet servers which are protected by your password and seed phrase that protects your wallet account as a backup security layer.
Desktop wallets are downloadable programs that are installed on your PC or laptop and accessed from your desktop. These wallets usually store your public and private keys on your device, rather than keeping them on the wallet’s native server.
This is regarded as a more secure approach than classic web wallets, but you can add an extra layer of security if you keep your keys on a separate USB device independently of your PC or laptop, preferably in the form of an encrypted ZIP file. This way, even if your computer gets hacked, no malicious individual can get your private keys and compromise your funds.
Mobile wallets or wallet apps are crypto wallet applications that can be downloaded and used on your smartphones and tablet devices. These mobile wallet apps are usually available for both iOS and Android operating systems. Mobile wallets are very user-friendly with easy-to-use interfaces that make your digital assets accessible in just a few clicks.
You should be careful however with your passwords and passphrases when using mobile wallets. Don’t store them on the same device you are using to access your wallet. Instead, keep your passwords and passphrases on a separate usb device, hard drive, or written on a piece of paper.
Cold storage, cold wallets, or offline wallets as they are often referred to, are crypto wallets that aren’t connected to the internet. This is why they are called “cold” because they lack an internet connection. This feature is actually a key security characteristic that makes cold wallets an ideal option for storing large amounts of cryptocurrency safely. There are two types of cold wallets—hardware wallets and paper wallets; both are highly secure options for storing your cryptos.
Hardware wallets are a type of specialized USB device with top-notch encryption and security features such as several layers of passwords and the possibility of backing up your private keys. This backup option means that even if you lose your hardware wallet or it gets stolen, you won’t lose access to your funds.
The top-quality encryption of hardware wallets means that in the event that someone steals your device they won’t be able to access your funds. Hardware wallets are also a great way to protect your private keys from malware since they aren’t connected to the internet.
The leading hardware wallets on the market are Trezor and Ledger Nano S, which boast the most reliable services and unparalleled security. Another highly popular characteristic of hardware wallets is that they are compatible with most of the popular hot wallets, which means that you can connect your hardware device with your online wallet in order to have easy access to your funds while still keeping your private keys safely stored on the hardware wallet.
Paper wallets are the other type of cold wallets available for storing cryptos. A paper wallet is basically a piece of paper with printed private keys and public keys to your assets, along with printed QR codes that represent these keys and can easily be scanned and accessed using a mobile device with a QR code scanner.
This type of wallet is a completely secure way for storing cryptos in regard to cyber-attacks and hacking since it doesn’t have an internet connection and it is in paper form. Paper wallets are regarded as one of the safest ways for storing cryptos. However, there are some risks associated with paper wallets.
If you choose to create such a wallet you should keep it hidden away in a safe place, only known to you so it doesn’t get compromised, because if someone finds your paper wallet, they would be able to access your funds – that is, unless your paper wallet uses a BIP38 protocol. This protocol means that even with the data from the paper wallet, an additional password is required to access the funds. You should keep this password separately from your wallet.
You should also pay attention to the physical condition of your paper wallet and be careful not to tear it up or spill liquid over it because the QR codes will become useless and your funds will be inaccessible.
Creating a Bitcoin Paper Wallet
Creating a BTC paper wallet is rather easy. There are specialized paper wallet generator sites that can create a paper wallet in a matter of minutes. All you have to do once the wallet is generated is to print it out and start sending funds to your new Bitcoin address.
A Few Words Before You Go…
Cryptocurrencies can be stored in various ways according to the individual needs of people and companies that use cryptos as a financial tool. Hot wallets are more suitable for smaller and moderate amounts of cryptos, while cold wallets are more secure for storing large volumes of digital currency. These are the basics of crypto storage with an emphasis on how paper wallets work and how to create one.