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Blockchain 18 Sep 2018

What are cryptowallets and what you need to know about them

The tools known as cryptowallets allow the storage and exchange of cryptocurrencies, and are becoming increasingly relevant in the context of the cryptoeconomy and blockchain boom. It is important to recognize their characteristics and differences, as not all offer the same levels of security.

To know the etymological origin of words helps to understand their meaning, but sometimes this is not enough. For instance, the prefix ‘crypto’ comes from classical Greek and means concealed; but to understand what a cryptowallet or cryptopurse is, we have to go a step further. It is evidently not a well-hidden purse.

It is the digital application, occasionally with a physical support, which enables virtual currencies to be stored and traded, by safekeeping and managing private passwords. In other words, it is the digital space where the passwords allowing access to cryptocurrencies – and not the actual cryptocurrencies- are kept.

The private passwords are hexadecimal codes (that is, they use the first ten digits and the first six letters of the alphabet), and are similar to this one: ‘18978f661278acc6b8def352b354d’. Given their complexity, which makes them practically impossible to memorize, these passwords are stored in cryptowallets.

Hardware wallets

When choosing a cryptowallet, two key factors must be taken into consideration: ease of use and security provided.

To a certain extent, the logic of your choice must be the same as with conventional money. Nobody carries 10,000 euros in their wallet, nor opens a savings account to deposit 20 euros. In the digital world, the owner of cryptocurrencies who only wishes to learn how they work and perform small transactions, may choose one of the simple options, whereas a person considering cryptocurrencies as a form of investment of considerable amounts should opt for more secure methods. But which ones?

The safest option is the ‘hardware’ wallet, also known as a cold wallet: an actual physical device that stores, offline, the private password for associated accounts. It looks like a pen drive and is also connected via USB.

As the passwords are stored offline, they are not hackable via the net like a software program stored on our computer or in the cloud. The problem might be the theft of the device, but even in this case the passwords can be PIN-protected, and a secret spare code can also be created.

Physical cryptowallets can be purchased from around 30 euros, but those fitted with a small screen, useful to check the value of the associated cryptocurrency portfolio, are available for around 80 euros. The best known brands are Trezor and Ledger.

Dynamic wallets

The other big group of cryptowallets are those known as “dynamic wallets”, which work on internet-connected devices such as computers, mobile phones or tablets. Consequently, there is a risk, not significant but noteworthy, of being hacked over the net.

Basically there are two types of ‘dynamic wallets’. On the one hand, online wallets: websites in which users have exclusive control of their private passwords with no need to install any software. Coinpayments is one of the most succesful ones. And the other alternative is the wallet application: a ‘software app’ to be installed on the mobile, PC or tablet by the cryptocurrency owner, such as Electrum and Jaxx.

Once again, the user must take security measures very much into consideration; in this case, by keeping the device virus-free and not entering non-secure pages, not connecting to free WiFi networks and not inserting unknown peripherals, such as a pen drive, in the system.

Cryptowallets emphasize one of the important peculiarities of cryptocurrencies: the user has the power, as well as the responsibility. The private password must be protected (whether by what seems like a simple pen drive, by entering a website or downloading a program) and the user must be aware that if he or she hands it over to somebody, in fact he or she is giving that person the ability to manage his or her cryptocurrencies.

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