Set up a wallet
This article is the second in a series on cryptocurrency for beginners. The first article discussed whether you should purchase crypto and why. By now you weighed the pros and cons of entering the crypto markets and made a decision to buy crypto, so now you must secure your coins. There is no longer a third party intermediary responsible for keeping your investment safe, like a bank traditionally would, so security should always be at the front of your mind when storing and moving your crypto.
All wallets share common characteristics. Your wallet has a private key, a public key, and an interface for identifying your available funds, transaction history, and security options. The primary differences are security and liquidity, which are always in tension with each other. The more liquid your crypto, the less secure it is, and vice versa.
Further, “wallet” is a bit of a misnomer, as your coins are not actually stored in the wallet, like fiat currency can be physically stored. A wallet merely allows you to interact with the blockchain. There is no exchange of physical coins.
There are a few methods you can choose from for storage. Your options include keeping your coins on an exchange, storing them in a hardware wallet, a software wallet, or a cold wallet. Your decision depends on your approach to security, need for liquidity, and overall investing strategy. I will discuss the advantages and disadvantages and provide a step-by-step guide for each option.
Option 1: Keep it on the exchange
Pros: Most liquid option — you can cash out at anytime; Likely secure; User friendly; Simplicity
Cons: Less secure than other options as the exchange could be hacked
When you made your first purchase, you had to use an exchange like Coinbase or Gemini to trade dollars for crypto. The exchange automatically created a wallet for you when you made the purchase without needing you to actively do anything at all.
Not all exchanges are built equally, however, and some exchanges are more trusted by the community than others. Some exchanges have been hacked, the most notorious being the Mt. Gox hack which resulted in the theft of millions of dollars of Bitcoin and caused the market to crash. This is rare, but it happens, and exchanges are massive targets for ambitious hackers.
If you are actively trading coins, this is your best option, though generally speaking day trading is a horrible idea and the odds are against you.
Steps to keep your money on an exchange: None. You don’t need to do anything further if you’re content with this option, though at the least you need to enable 2 factor authentication for your exchange account. Anything less is negligence.
Option 2: Hardware Wallet
Pros: Most secure option; Peace of mind
Cons: Less liquid — takes more time to exchange coins; Expensive; A little bit of a learning curve
A hardware wallet is the gold standard for security. It is a physical device you must purchase, like a Ledger Nano S, which is designed to allow you to interact directly with your coins from a device exclusively in your possession. It has major advantages over software wallets, including:
- private keys are often stored in a protected area of a microcontroller, and cannot be transferred out of the device in plaintext
- immune to computer viruses that steal from software wallets
- can be used securely and interactively, as opposed to a paper wallet which must be imported to software at some point
- much of the time, the software is open source, allowing a user to validate the entire operation of the device (Source)
To date, there have been no verifiable incidents of coins stolen from hardware wallets. However, thieves might try an offline attack like shipping out used wallets that they still have access to and steal your funds after you add them to the wallet still under their control. The most important takeaway here is to not purchase a used hardware wallet, as it may have become compromised in the shipping or production process. Don’t end up like this guy.
Steps to use a hardware wallet:
- Purchase a hardware wallet. I recommend the Ledger Nano S. You can buy one on Amazon.
- Plug in your Nano S with the USB cable to an internet-enabled computer and follow the on-screen instructions.
- You can then choose to make a new wallet or import a wallet.
- Choose a PIN code. Make sure your PIN is memorable because three wrong PIN entries will reset your Nano S.
- Backup your recovery phrase. A recovery phrase is a 24 word mnemonic phrase designed to recover your device if you forget your PIN of if your Nano S is lost or stolen. Keep your “recovery sheet” in a safe place. (Ideally, stored in a safe)
- Install the Ledger apps on your computer to use your device and access your wallet. There are Chrome extensions that make this a breeze.
Voila. You can now send and receive crypto through a hardware device and you are using the most secure storage option. For additional security, keep the device in a safe.
Option 3: Soft Wallets
Pros: Strong security; Usually easy to use
Cons: Vulnerable to malware, viruses, and keyloggers; may not be a viable option for some very obscure coins; Quality of wallet software varies
A soft wallet is an alternative to a hardware wallet because it does not rely on a physical token but rather only on software. There are three types of soft wallets: desktop, online, and mobile.
Desktop — A desktop wallet is accessed through custom software made for a coin. It is common for the development team of a coin to create a custom wallet for their coin. This option offers the highest level of security for soft wallets, though is still less secure than a hardware wallet because hackers can use malware and keyloggers to attack your desktop wallet.
Steps to use a desktop wallet:
- Check to see if the coin you want to store in a desktop wallet offers this as an option. Most will offer a desktop wallet.
- Download the desktop wallet software from the Github or the coin’s website. An example I will use is the Neon Wallet, a wallet designed specifically for NEO and Nep-5 coins (coins built on the NEO blockchain)
- Install the software and fire it up. All desktop wallets are different, but you will at minimum have options to create a wallet and access it, and once accessed you can see funds available and transaction history.
- To decrypt a wallet you created, you need to copy and paste your private key into the wallet software.
Always make sure your antivirus is up to date to protect yourself against attacks on software wallets. I have antivirus that protects against keyloggers as well as viruses and malware. I recommend Zemana antilogger.
Pros: More secure than an exchange; Easy to use; Multiple options for unlocking your wallet; Can interact with a Ledger Nano S
Cons: Hackers target online wallets for phishing scams; Private key file must be copied and pasted
An online wallet is accessible from anywhere as the user just needs access to a computer to visit a website that can decrypt his wallet. Wallets held on exchanges are considered soft wallets, but I categorize them separately to distinguish them from services like My Ether Wallet, which offers a soft wallet without needing to rely on accessing an exchange.
Online wallets allow you to visit a website where you can interact with the blockchain by decrypting your private key through a variety of options. My Ether Wallet, or MEW, is the best for Ethereum and coins built on the Ethereum blockchain called ERC20 tokens, but there are similar options for Bitcoin and other coins which offer many of the same features. I will use MEW as an example.
When you visit MEW for the first time, you will see a clickthrough introduction on how to use the website, its purpose, its limitations, and will have the option for a walkthrough on creation of a wallet. This process is simple.
However, the danger is the same for an online wallet as for desktop wallets. Hackers will may attempt to use malware to grab your private keys when you copy and paste them from somewhere else. Also, if you have to copy and paste a private key, it means you are storing that private key in a Word file or something similar, so that presents another attack vector for hackers who want access to anywhere that a private key is stored or copied.
One benefit of online wallets like MEW or the Chrome extension Metamask is that is they can interact directly with your Ledger Nano S, so if you want to access your online wallet with a web token you have the best of security and an easy to use interface. Otherwise, you need to access your wallet with less secure other methods discussed below.
Steps to use an online wallet:
I will use My Ether Wallet as an example. Other online wallets operate similarly.
- Go to www.myetherwallet.com. As a matter of security, don’t trust even the link I just offered you. Type that into your browser directly and make sure there is a little “lock” symbol next to the URL showing the link is secure and begins with “https.”
- Click through the notices provided by My Ether Wallet that explain the website and how it works.
- Begin the wallet creation process by inputting a password.
- Download the Keystore File. This file allows you to decrypt your wallet just like a private key does, so if you lose it or someone gains access to it, your coins are jeopardized. Save this file on a USB stick, put it in a ziploc bag or waterproof container, and hide it in a safe.
- Click “I understand, continue” and you will see your private key. Save this key by printing your paper wallet. Store this in a safe in a ziploc bag with the USB stick.
- MEW then gives you options for how you want to access your wallet for the first time. If you’re not using a Ledger Nano, you can upload the Keystore file you just downloaded or copy and paste the private key. It is safer to use the Keystore file because malware cannot attack it like they can your copy and paste command. Notice the Ledger Wallet is an option. This will decrypt your wallet and you can access your coins.
Besides making sure your antivirus is up to date, you should install a Chrome extension called EAL which is offered in the top navigation panel of MEW. This extension will alert you if you accidentally access a website that looks like an online wallet website but is actually a website duplicated to appear legitimate but is designed to phish your private key. Phishing scams are everywhere; never click a link to an exchange or online wallet from an advertisement or URL. Type the website URL into your browser directly.
Pros: Secure; Accessible; Convenient
Cons: Dangerous if your mobile device is stolen
A mobile wallet is ran on an app on your phone. They allow you to send and receive crypto directly from your mobile device. Many of these apps sync with hardware wallets. A mobile wallet stores the private keys directly on the app and allows users to make purchases from their mobile device as well. This is where crypto wallets are headed, and I foresee massive adoption of mobile wallets in the future. Mycelium is an example for Bitcoin that is highly reviewed.
Steps to use a mobile wallet: Install the application on your phone and walk through the setup steps for the app. Make sure two factor authentication is enabled.
Option 4: Cold Wallet
Pros: Very secure from hackers and malware
Cons: Not convenient; Needs a backup option; Paper can be destroyed by water and fire
A cold wallet is created when your private key is stored in a secure offline environment. A paper wallet is an example of a cold wallet because it your private key, printed on a piece of paper, is intended to be stored offline and have no connection to the internet. This is very secure because someone would have to physically obtain access to that piece of paper to decrypt your wallet and steal your funds. If your paper wallet is stored in a safe, your private key cannot be discovered on any of your devices and stolen.
If your paper wallet is stolen, whether intentionally or inadvertently with other valuables inside a safe, for instance, your wallet cannot be recovered. It is best to have two copies stored in separate locations, equally secure. Some use a personal safe at home and rent a lockbox for their second paper wallet’s storage.
Steps to use a cold wallet: Follow the steps above for creating a wallet on My Ether Wallet. When you print off your paper copy of your private key and public address, put it in a waterproof container and store it with your other valuables.
Now you have a secured wallet. Don’t get lazy with security! You are your own bank. Enjoy and be safe in Cryptoland.