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Crypto Wallets

Secure your coins.

What is a crypto wallet?

When you send or receive any cryptocurrency, you’ll do so from a wallet. Your crypto wallet can be considered your “address” on the blockchain network that a cryptocurrency operates on. Cryptocurrency wallet addresses exist in the digital realm and are accessed through cryptocurrency wallet software or hardware. Cryptocurrency wallets hosted by exchanges are functionally similar to a bank account. An online crypto exchange wallet doesn’t provide you with full control over your cryptocurrency, but makes accessing and sending or receiving cryptocurrency simple.


Cryptocurrency wallet software is normally installed on a smartphone or computer that provides users with access to their private keys and therefore gives full control over a cryptocurrency wallet and the crypto it contains. Cryptocurrency wallet hardware is functionally similar to software wallets in that users retain full control over their cryptocurrency, but with an added benefit — crypto wallet hardware is completely offline and is considered to be the most secure means of storing crypto.

How do Crypto Wallets work?

A cryptocurrency wallet in its simplest form consists of two elements: a private key, and a public key. 

The private key associated with a wallet is the “password” used to access it, and consists of a long, complex combination of letters and numbers. A public key is the public address of a cryptocurrency wallet and is used to receive or send cryptocurrency.Private keys should be stored in a highly secure manner. Anybody with access to the private key associated with a wallet can access the cryptocurrency it stores, so it’s very important to take private key security seriously.

Cryptocurrency wallets typically allow users to interact with a blockchain using a private/public key pair. Crypto wallets that are “hosted” by exchanges such as Binance or Coinbase won’t provide access to your private key. They will store them on your behalf. Cryptocurrency allows users to retain full control over their capital, but also makes security the responsibility of the user. While private and public key pairs may sound confusing, the practical use of most cryptocurrency wallets is relatively straightforward. Here’s how the various types of cryptocurrency wallets work:

Exchange (Online) Wallets

Exchange or online wallets are typically accessed through cryptocurrency exchange accounts. Online wallets are easy to access and use, but don’t provide full control over user funds and are at risk of hacking.

Software Wallets

Software wallets are installed on a smartphone or a PC, and store private keys on behalf of the user. Software wallets require a few extra steps to set up, but once configured are as easy to use as exchange wallets — with an added layer of security and control.

Hardware Wallets

Hardware wallets are dedicated hardware devices, similar to USB drives, that offer the highest level of security. Users connect a hardware wallet to a PC in order to access their cryptocurrency — when the wallet is not connected to a PC, it’s completely inert and virtually unhackable.

What to Consider When Choosing a Crypto Wallet

When choosing the right cryptocurrency wallet for your needs, the most important factor to consider is security. While online wallets may be easy to access, it’s important to remember that any online wallet is much less secure than an offline wallet. In simple terms, if you don’t control your private keys, you don’t control your cryptocurrency.

Setting up a simple software wallet is a relatively simple process. A strong cryptocurrency storage methodology involves establishing a software or hardware wallet for long-term storage and using it in combination with online wallets, sending and receiving cryptocurrency for each individual trade or purchase.

Factors to consider when choosing a crypto wallet include:

Security

How secure is your exchange wallet? There are many different exchange wallets to choose from. For more information on choosing an exchange, see the CryptoTrader.Tax.

Device Storage

Which device will you store your crypto on? The wallet software you use to store your crypto varies depending on whether you are using macOS, Windows, Android, or iOS.

Trading Frequency

How often will you trade? If you’re a frequent trader, you’ll find yourself frequently making transactions from a secure offline or hardware wallet to your exchange wallet in order to trade. It’s important to select a wallet that makes this process simple.

Tax-Tracking Capabilities

Do you need to track your transactions? Depending on your tax reporting requirements, you may need to track every individual cryptocurrency trade made from your wallet. Crypto tax reporting software such as CryptoTrader.Tax automates this process and allows you to generate your necessary crypto tax reports based on your wallet transaction history with the click of a button.

Custodial versus Non-Custodial Crypto Wallets

In modern finance, it's standard practice for service providers like banks to retain custody of your assets. This means that when you want to make a withdrawal from your bank account for example, while you may have a legal claim to the money, the reality is that you're asking for permission from your bank. Banks can and regularly do deny such permission, and their reasons for doing so do not always align with the best interests of individual customers. Further, even when service providers uphold the custody rights of their customers in good faith, factors outside of their control may force them to deny you access to your money. For example, a government may force banks to restrict withdrawals in an attempt to stop runaway inflation, as happened in Greece in 2015. Another, perhaps more insidious example, is Operation Choke Point, where the US government pressured banks to deny service to people involved in a variety of (legal) industries it had identified as morally corrupt.

With the advent of blockchain-supported decentralized systems - of which Bitcoin is the primary example - it became possible, for the first time, to provide non-custodial financial services at a large scale. In the non-custodial model, the customer retains full custody (possession) of their assets at all times, using the service provider merely as an interface for conveniently managing their assets.

When you install a non-custodial Bitcoin wallet (like the Bitcoin.com Wallet), first of all, you don't need to ask for permission to use the service. There's no account approval process, meaning anyone in the world can download the app and start using it immediately. Secondly, only you have access to your funds. This makes it nearly impossible for the service provider (in our case Bitcoin.com), a government, or anyone else to prevent you from using your funds exactly as you wish.


Of course, with great power comes great responsibility! Since you're the only one with access to your funds, you need to manage your wallet carefully. This includes backing up your wallet and adhering to password management best practices.

Are all Bitcoin wallets non-custodial?

Absolutely not. Centralized cryptocurrency exchanges like Coinbase, Binance, and the Bitcon.com Exchange provide custodial Bitcoin wallets (sometimes known as 'web wallets'). While such exchanges are useful for buying, selling, and trading bitcoin into a wide variety of other digital assets, when you use these exchanges, your bitcoin is held in trust by the exchange.

What are the risks associated with custodial Bitcoin wallets?

The risks are similar to (and in many cases greater than) those associated with holding your money at a bank or using a payment app like PayPal. The risks stem from the fact that, fundamentally, you're not in full control of your funds.


Firstly, since taking custody of financial assets is a regulated activity, centralized cryptocurrency exchanges are subject to the whims of regulators in the jurisdiction they are domiciled. Since cryptocurrency regulations are in a state of flux in most regions, this means there's always the possibility that you'll wake up to find you are unable to access your bitcoin. Secondly, the exchange may charge extra fees for withdrawals (which is common), slow down your withdrawal process (also common), or prevent you from withdrawing altogether (rare but not impossible). Finally, there's always the risk that the exchange will go bankrupt, get hacked, or intentionially dissolve - and since cryptocurrency exchanges generally aren't insured and are often registered offshore, it's likely you'll lose your bitcoin and have no recourse to action.

How do I know if I'm using a non-custodial Bitcoin wallet?

All non-custodial Bitcoin wallets enable you (and only you) to possess the private key associated with your public Bitcoin address. This typically takes the form of either a file or a 'mnemonic phrase' that consists of 12-24 randomly generated words. If your Bitcoin wallet doesn't have this option, it's custodial (meaning you're not in full control of your bitcoin).


The Bitcoin.com Wallet, which is fully non-custodial, also offers a cloud backup service (in addition to giving you the option to store the private key for each of your wallets as a mnemonic phrase). With the cloud backup service, you create a single custom password that decrypts a file stored in your Google Drive or Apple iCloud account. If you lose access to your device, simply reinstall the Wallet app on a new device, enter your password, and you'll again have access to all of your bitcoin (and all other digital assets in your wallet). Further, whenever you add more wallets within your Bitcoin.com Wallet, your backup file will automatically sync. This means you never have to worry about creating or managing a new backup for each new wallet you create!


Source = Bitcoin.com

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