Thinking of investing in cryptocurrencies like Bitcoin? There are two things you need to familiarize yourself with: HODL and crypto wallets.
What Does HODL Mean?
This acronym is used by cryptocurrency investors and it means "Hold On For Dear Life."
These people are not spending their Bitcoins as a digital currency to pay for things. They're buying them and sitting on them as a long-term investment.
But you can't buy and hold crypto without a cryptocurrency wallet.
Why Cryptocurrency Wallets Matter
Crypto wallets are pieces of software designed to function as a secure virtual container for your cryptocurrency—much like a traditional wallet holds your cash—and each version operates in a different way, with different levels of security.
It's 100% necessary to have some form of cryptocurrency wallet to safely manage your crypto coins (whether you're using them for transactions or storing them long-term).
Plus, you can't buy and hold crypto without a cryptocurrency wallet.
We've developed the most extensive and detailed guide on cryptocurrency wallets to help you select the perfect wallet for safeguarding your crypto.
What is a Cryptocurrency Wallet?
Think of it as a bank account (without the bank)
The first step to using cryptocurrencies like Bitcoin is to get yourself a cryptocurrency wallet.
A cryptocurrency wallet is a lot like having a bank account.
Physical money or cryptocurrency isn't actually stored in your bank account or crypto wallet, but both are used as an interface for transactions.
In a lot of ways, the digital crypto wallet is a lot like your online banking portal since both let you receive, store, and spend your currency as you please.
Virtual money lives in a database. A cryptocurrency wallet stores private keys used to access Bitcoin or other crypto stored on a massive, shared database.
These are essentially secret codes people are given when they purchase cryptocurrency, giving them control over the quantity of currency they bought.
The wallet stores the private keys, and ideally no one else gets access to them since access to the keys equals access to the cryptocurrency.
How Does a Cryptocurrency Wallet Work?
Everything is based on records of transactions
Here's something I've had to help a lot of people wrap their heads around: Bitcoin and other cryptocurrencies don't exist as any kind of actual "coin" or hard currency. You can't hold one in your hand or slip one into a birthday card.
The currency only exists in the form of complex data, comprised of both private and public keys.
The data the keys unlock is spread out in bits and pieces (or "blocks") in a huge database shared among millions of different computers, called a "blockchain."
Every time a cryptocurrency transaction takes place, the entire blockchain associated with that particular form of crypto gets a record of the transaction.
Updates to the blockchain network are stored in your cryptocurrency wallet, which means it is receiving information on all transactions (not just your own).
An Example of How Bitcoin Blockchain WorksThe best way to explain how cryptocurrency wallets work is to follow a Bitcoin through an actual transaction.
Let's say you arrange to sell something to someone for one Bitcoin. The buyer will use their Bitcoin wallet to send a private key to your own wallet's address.
By sending this key, the owner of the original wallet is signing off ownership on the one Bitcoin they previously controlled.
When the new private key stored in your wallet matches the public key attached to that Bitcoin, it is unlocked, and you are able to use it as you please.
The available balance in your digital wallet will increase by 1 Bitcoin, and the balance of the sender's wallet will go down by 1 Bitcoin.
The entire blockchain will be adjusted to include the record of this transaction.
No actual coins or currency physically changed hands, but the blockchain transaction record and the change in the buyer's and seller's Bitcoin wallet balance will prove the exchange took place.
Is a Cryptocurrency Wallet Absolutely Necessary?
Rather than getting a cryptocurrency wallet, some people ask why they can't just store their crypto in the account they set up on the exchange. The story of a former Bitcoin exchange, known as Mt. Gox, is why.
The Cautionary Tale of Mt. Gox
Mt. Gox was, in fact, the single largest Bitcoin exchange in operation in 2013.
By 2014 it was handling 70% of all Bitcoin transactions worldwide.
Then, in February of 2014, the Mt. Gox exchange suddenly shut down completely and filed for bankruptcy protection.
The Japanese company announced it had lost approximately 850,000 Bitcoins (worth more than $450 million at that time and which would be worth $6.3 billion today).
It was determined the missing Bitcoins had been stolen directly out of the Mt. Gox exchange's cryptocurrency wallet.
The exchange's wallet was stored online, which left it vulnerable to hackers and thieves.
Keep your private keys private. If you simply left the public and private keys to the cryptocurrency you own in your exchange-hosted wallet, you wouldn't have control of them.
When you have control of your keys, you have control of your coins, so there is no need to put all of your trust in a third-party exchange to keep them safe.
Although it would be nice to trust exchanges the way we trust banks or Paypal, Mt. Gox and other examples have shown us the real risk of exchanges getting hacked or shut down.
Other factors, like the relative newness of the cryptocurrency industry, and the lack of regulations on exchanges or cryptocurrencies, are more reasons to control your coins.
The only way you can have absolute control is by having your own crypto wallet.
You need a cryptocurrency wallet for transactions. In addition to giving you the highest possible security, a wallet is also used for managing cryptocurrency and making transactions.
Each wallet has an address assigned to it, which means senders and receivers don't have direct access to each other's wallets, they just send the key data to the address.
Cryptocurrency keys can be sent to a wallet address by anyone, but only the person who has the private key can access the cryptocurrency once the keys are sent.
Backups are super-important. Creating secure backup files containing copies of all your private key data is an essential safety precaution.
You can protect a backup of your wallet by saving it as an encrypted database file.
You can then store on a memory stick or other storage device.
Or you can create a mnemonic sentence (a password composed of multiple words) to generate a root key for accessing all the private keys (just remember to write it down and keep it secure!)
Every private key comes in the form of a long series of letters and numbers, which you can also store as text in a backup.
Lose your key, lose your money. If you lose access to the private keys in your wallet and your backup, you permanently lose access to your cryptocurrency.
Extra-cautious crypto owners have even been known to scratch their mnemonic sentence or private keys into metal to make them almost indestructible.
Types of Cryptocurrency Wallets
There are two main categories of cryptocurrency wallets: hot and cold.
Keep your coins cold for highest security. The cold storage versions of cryptocurrency wallets exist offline, usually in the form of hardware storage devices resembling flash drives.
Each cold storage device has its own microprocessor, which means it operates independently of your computer (and can't be hacked through its network).
Since cold crypto wallets aren't connected to the internet, there is no way a hacker could find a way to access the data stored on them.
Another ‘pro' associated with cold wallets is their ability to store large amounts of cryptocurrency.
You can get a storage device with as much capacity as you need to store all your key data without having to worry about limited space.
Cold storage is slow and inconvenient for transactions. The main drawback associated with cold wallets is that, since they're offline, it's a bit inconvenient if you need access to them in a hurry.
Before you can make any transactions, you need to find your private keys in the offline storage and bring them back online.
This can be time-consuming and tedious, but it's the price you pay for keeping your crypto as safe as possible.
Hot storage is connected to the internet. Hot cryptocurrency wallets store data using connected software and are used to interact with online transaction platforms.
The advantage to hot storage is the ease and convenience of storing and moving around small amounts of cryptocurrency.
Spending and receiving payments is very easy and fast with a hot wallet on the network, especially compared to the more time-consuming cold wallet process.
Another convenient feature of hot wallets is the ability for the user to log into them from multiple devices (e.g. via your desktop, tablet, and phone).
Vulnerable to cyber attack. The main drawback of hot wallets is their exposure to hacks.
Since they exist online, skilled hackers can infiltrate them by stealing passwords or infecting computers and taking their data.
A mix of hot and cold is recommended. Cold wallets with offline storage are safest, so put the majority of your cryptocurrency in them.
Keep a small amount of your crypto in a hot wallet for regular transactions, and if you know you'll be needing a larger amount of crypto for a certain transaction soon, move the amount you need from your cold wallet over to the hot wallet beforehand.
Three more categories of crypto wallets
Use a software wallet on your computer, another computer, or your phone. A software wallet is a computer program or app that can be used on a desktop, mobile phone, or accessed online.
Desktop software wallets don't travel. A desktop software wallet is a program you download or install on your PC or laptop.
The only computer the wallet can be accessed through is the computer the software has been installed on (usually the one used for downloading it).
These wallets are considered among the safest of all the hot cryptocurrency wallets, but as long as the computer is connected to the internet, we cannot say with 100% certainty that they're invulnerable to attacks.
If your computer gets hacked or attacked by a virus, you could lose all your data (and all the money you earned or invested!)
Online wallets live in the cloud. Some software-based cryptocurrency wallets exist entirely "on the cloud"(which means all data is stored on a website rather than locally).
This means you can access your wallet from any connected computer anywhere in the world.
Although that kind of accessibility is a great feature, the downside is it means the data is not very secure.
Your private keys are being stored online by a third party, which makes them highly vulnerable to theft or hacking attacks.
There's an app for that. There are also software cryptocurrency wallets you can install as an app on your smartphone.
These are really convenient, especially if you like to spend your crypto at the growing number of retails stores where it's accepted.
They are also convenient for those who are making some money through online sales and want to accept crypto payments from customers.
Since a phone is a much more compact device compared to a desktop computer, mobile wallets are generally smaller and simpler.
Hardware wallets store your private key data offline. Instead of storing your private keys online where they are vulnerable to hackers, you can store them on a hardware device.
Often these come in the form of an encrypted USB-style storage device.
Most hardware cryptocurrency wallets have screens on them for confirming transactions and their own little operating system.
Many of the hardware wallets on the market today have a secret PIN code that lets you restore all your coins in a new wallet (and prevent thieves from accessing them) if yours is stolen.
Use hardware wallets for transactions. Many hardware wallets are compatible with several web exchanges and interfaces and support multiple different cryptocurrencies.
Some hardware wallets are managed through online software or apps designed to securely transfer the data from the storage device when transactions take place.
This makes hardware wallets a great choice for keeping your money offline and away from danger while also making the data accessible when you need it.
Paper wallets are safe and simple. The final form of cryptocurrency wallets is known as paper wallets.
As their name suggests, the private and public keys to your wallet are usually printed on paper in the form of a physical copy.
To transfer money into a paper wallet, you give the wallet's public address on the printout to the sender, who transfers money from a software wallet.
For withdrawing or spending, the reverse process happens, where money is transferred from the paper wallet to a software wallet's address.
The manual management of a paper wallet is called "sweeping" and can be done by entering private keys or by scanning a QR code on the printout.
Best Crypto Wallets for Each Category
The best hardware wallets all have screen displays
Hardware wallets all have their own layer of security and encryption, which makes them a very secure method for storing cryptocurrency like Bitcoin.
Each of these has its own display allowing you to interface with the secure device without having to do it through your computer's vulnerable operating system.
Ledger Nano S is cost-effective and reliable. At $95, the Ledger Nano S is the cheapest of the three popular hardware wallets we're recommending here.
Ledger is one of the best-known companies offering Bitcoin and other cryptocurrency security.
The Nano S is it's most recent device, released in 2016, and it works with Ledger's online platform to securely transfer funds between the cold hardware wallet and a hot software wallet.
TREZOR was a pioneer. Back in August 2014, a device called TREZOR was launched as the first secure Bitcoin storage unit that included the convenience of spending via a hot wallet.
TREZOR is a small, thumb-sized device with its own layers of security, which means it can be used safely even on a computer that's not secure.
The device is used for substantial amounts of Bitcoin or other crypto to be stored and accessed in small amounts when needed via its mobile wallet.
KeepKey has a larger screen with extra security. Among the three hardware wallets listed here, KeepKey has the largest screen, which means it can offer additional security features.
A passphrase security feature is added on top of a PIN and a microcontroller with the highest possible level of protection against outside reading.
If a hacker was going to steal your data, they'd have to get around a super-secure operating system, steal your PIN, and somehow also know your personal passphrase.
The hottest software wallets are convenient and easy to use
Storing all of your Bitcoins according to the Hold On for Dear Life rule works fine with a hardware wallet, but if you plan to do many transactions, you'll need a software version.
Mycelium Wallet is one of the most popular products in the crypto market. Way, way back in 2008 a team of engineers created a company to meet the growing needs of Bitcoin users.
Today the company's Mycelium Wallet is a mobile wallet for people to store, send, or trade Bitcoin (and only Bitcoin).
Although the Mycelium Wallet is free to download, individual transactions are subject to fees based on the size of the transaction.
Backing up the Mycelium wallet is simple, with clear setup and backup instructions offered by the company.
Breadwallet wins for user-friendliness. Breadwallet is a mobile software wallet so basic and straightforward even a child could probably use it.
User control over private keys, an easy-to-use interface, and passcode support are all nice features.
It's recommended for people just getting into Bitcoin (and, like Mycelium, it only works with Bitcoin).
Formerly available exclusively to iPhone users, Breadwallet is now also available as an Android app.
Copay can be used on multiple platforms. Whether you're on your desktop, phone, laptop, tablet, or someone else's device, you can always access your Copay wallet.
Copay also allows more than one person (for example, other family members or business partners) to access a shared wallet.
Experienced users are impressed by Copay's advanced features while new users find it is still simple enough for non-geeks to use.
GreenAddress can work with hardware wallets. GreenAddress is another software wallet you can access from your phone, computer, or any other device with online capability.
One of its advantages is its ability to interact with the TREZOR and Ledger Nano S hardware wallets, giving you both security and functionality.
Jaxx can be used to store multiple forms of cryptocurrency. Jaxx is a wallet compatible with multiple forms of cryptocurrency, including Bitcoin, Ether (the cryptocurrency traded on the Ethereum platform), Litecoin, Zcash, and dozens more.
If you plan on diversifying your investments by buying multiple different forms of cryptocurrency, Jaxx offers a user-friendly platform for doing so via any device.
Jaxx is free to download but also charges transaction fees based on the size of the transaction being made.
Choose your favorite type of printer paper for a paper wallet
Paper wallets are just pieces of paper you print your keys on and store in a secure place.
It's incredibly important you find a highly safe place to store the paper, which also means a place where it won't be vulnerable to water, smoke, or fire damage.
If you lose the paper, you lose everything.
Services like BitcoinPaperWallet.com help you to create a highly secure, tamper-proof offline paper wallet using QR code technology.
Choosing Your Cryptocurrency Wallet
With all of these options, it can seem difficult to choose the right crypto wallet.
You need to ask yourself what you value most when it comes to using the crypto you earn or buy.
Factor #1: How much security do you want?
As we've learned, different forms of cryptocurrency wallets have different levels of security.
A software wallet existing on a web server is intrinsically riskier than an offline storage option like a hardware or paper wallet.
Since they don't connect with online networks or rely on third-party security, hardware wallets are the most secure.
But regardless if you choose a hardware or an online software wallet there are some practices you should follow to keep your data secure and safe.
Back up your wallet. Routinely back your wallet up by saving data as a separate encrypted file or printout, then store it offline.
Update software. Many software updates are enhancements for security, so make sure you're getting your wallet software updated automatically.
Add extra security layers. When your wallet gives you the opportunity to add a PIN or a passphrase for extra protection, take advantage of it.
Frequently change of address. It is possible to use a different public wallet address for every transaction you perform.
Multiple signatures add protection. Many wallets are "multi-sig" which means multiple private keys need to be entered to prevent breaches.
Restrict access to your devices. Don't let unsupervised people use your phone or your computer and set a strong password you change regularly.
Factor #2: How will you be using your cryptocurrency?
Frequent users need a software wallet. There are two types of users who perform crypto transactions frequently.
The first are people who are buying as much cryptocurrency as they can before the price goes up.
While the second are the people who use the currency for online transactions, either as a buyer or a seller.
If you fall into either of these categories, you can benefit from the ease and flexibility of using a software wallet.
HODL requires a hardware wallet. If, on the other hand, your approach to cryptocurrency is to buy a large quantity and hold on to it for as long as possible, a hardware or paper wallet is a better pick.
Factor #3: Are you buying one type of cryptocurrency or several?
Some of the wallets we've listed here (like Mycelium and Breadwallet) were designed specifically for Bitcoin as the one and only currency for users to manage.
Others, like Jaxx and Ledger Nano S, offer the opportunity to use the same wallet to manage multiple sub-wallets, each containing its own form of currency.
If you're only interested in Bitcoin, go for one of the specialized single-use wallet options.
Otherwise, set up a wallet with multi-currency-capability to manage multiple currencies from the same platform.
Cryptocurrency is only a good investment if you know how to keep it safe
Buying cryptocurrencies like Bitcoin and planning to sit on them for a really, really long time is an appealing investment choice.
As the example of the Mt. Gox Bitcoin exchange taught us, you can't leave your cryptocurrency in control of a third party and feel 100% safe.
When people ask me about whether or not Bitcoin and other crypto are secure investments, I tell them the best way to ensure safety is to pick the right wallet.
By knowing their cryptocurrency data can't be stolen by hackers, people are much more confident to take advantage of this exciting opportunity and buy as much as they want.
Take a look at the different factors to keep in mind and decide which cryptocurrency wallet is right for you and your needs.
There's a good chance you'll want to go with a combination of a hardware wallet for security and a software wallet for ease-of-use and functionality.
Do you have any experience with cryptocurrency wallets, or know about any important detail we've missed?
If so, please share your stories in the comments below!