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How Essential are Digital Currency Wallets?

Digital Currency Wallet Comparison

As the digital currency and blockchain technology industry continues to expand and evolve, the importance of deciding which type is the best digital currency wallet to store your digital assets in has become more essential than ever before. This choice can be overwhelming at times, especially for newcomers of the industry. The purpose of these wallets is to store a users’ public and private keys securely which allows a user to have access to their currency and make transactions. The differences between each of the digital currency wallets’ practical uses and general security can be enough of a difference for some users to choose one over the other. As it stands, there are three types of wallets that can be purchased and used by the average individual: Hardware, Software, and Hosted wallets.

Hardware Wallets vs. Software Wallets vs. Hosted Wallets

Digital currency security differs greatly from storing your funds at an established financial institution. The main difference revolves around the use of private keys and that a user’s coins are digitally transacted on a blockchain. Blockchains are essentially open registers that are continuously updated by users and are used to make transactions between other users. This differs greatly from a financial institution because users can make a secure digital transaction without any centralized authority. Users have the ability to hold and have full control over their own keys using either a hardware or software wallet such as a Ledger or Trezor device, alternatively, they can even choose a hosted platform such as Electrum or Exodus. There is also an option for users to have their digital currencies held on an exchange using web services such as Coinbase, Gemini, or Kraken – to name a few.

Hardware Wallets

Hardware wallets are a type of digital currency wallet that allows users to store their keys on a secure physical device. These wallets are stored offline at all times and are normally encrypted with pin protection, which means a user’s keys and digital currencies can only be accessed through this physical device. Users are only able to view their balance or make a transaction by having access to this device, which makes it the most secure method for users to store their keys and digital currencies.

Although this method is the most highly regarded method, it can be the hardest entry point for new users due to the price of these wallets. Some of the most highly recommended hardware wallets such as a Trezor or Ledger device typically cost more than their software and online alternatives. However, given the substantial advantages, these wallets have over their alternatives, these types of wallets can make a major difference in the likelihood of a users’ information being stolen.

Software Wallets

An alternative method for storing digital currencies is to use a software wallet that offers users a way to store information on their local desktop or laptop’s hard drive. This method is considered a useful option for users that are trading in small amounts and are in need of a wallet that can be used at a moment’s notice.

Some examples of software platforms that offer wallet services include Electrum and Exodus. Both offer fast and intuitive interfaces that can be easy to learn for beginners. What makes software wallets safer than online wallets is that the risk of exposure to outside parties is more likely to be determined by the user rather than a third-party company. For some users, the accessibility and price of this type of wallet may outweigh the inherent exposure to outside parties. Both the software and hosted wallets are accompanied by the option to turn on the two-step verification (2FA), which has become a growing security option for a majority of online and software services on the market. The importance of this option cannot be stressed enough, especially given the inherent nature of these assets and the underlying possibility of your account being compromised. Despite the potential risks and uncertainties that come with these types of wallets, they do offer a more convenient and easily accessible service to those in need of a wallet that offers faster ways to make crypto transactions.

If you have any questions, please contact a member of Withum’s Digital Currency and Blockchain Technology Group.

Hosted Wallets

The last method allows users to keep their digital currencies on an online hosted platform such as Coinbase, Gemini, or Kraken. These online exchanges can be more easily accessed from anywhere and at any time, however, the biggest concern is that the user does not own their keys. Additionally,  concerns relating to online hosted wallets are that the security and safeguarding of a user’s information is left in the hands of a third-party company. This can create a level of unease for some users due to the lack of control they have on their own information.

However, that does not mean there are not ways for users to safeguard their own information on a third party’s platform. As described above, 2FA security is essential when using any kind of software or online hosted platform. Any type of security that requires multiple passwords or any two-step verification process before signing in has shown to be an effective way of protecting a user’s digital information.

Which Wallet Structure is the Best?

At the end of the day, the choice of which digital currency wallet to store your assets in is entirely preference-based due to all three types allowing a variability of advantages and disadvantages for users depending on their ultimate purpose.  The decision on which wallet is best for a given user can depend on how frequently they expect to make transactions and the cost at which a user is willing to spend on a wallet solution. Overall, the usage of hardware or hosted wallets comes down to user preference, but the necessity for a secure method for storing digital currencies is something that will continue to be a critical need as technology continues to evolve.

Author: Austin W. Miller | austinmiller@withum.com

Digital Currency and Blockchain Technology

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