Playing With Crypto? You’ll Need a Wallet (or Several)
Credit to Author: Omar L. Gallaga| Date: Thu, 10 Feb 2022 14:00:00 +0000
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If people who buy cryptocurrencies intended only to hold on to them as speculative investments, there'd be no real need for crypto wallets. Exchanges and online brokerages that convert dollars to, say, bitcoin would store all that digital currency for you like so much money in a bank account.
But crypto wallets (aka “blockchain wallets”), which have been around since the early days of Bitcoin, serve a lot of purposes beyond just HODLing that cryptocurrency with no fees.
Wallets can also store digital collectibles like NFTs that you might want to buy, sell, trade, or transfer to someone else, or even to another wallet you own. They can make it easier to send and receive digital money to and from other people’s accounts, crypto exchanges, or digital marketplaces. And, because they’re typically decentralized, even if they’re created by an exchange like Coinbase Wallet or Binance’s Trust Wallet, you control the account. That means only you are responsible for what’s in the wallet, remembering the password and secret seed phrase that unlocks the wallet, and managing the funds that it holds.
While the concept is simple—a place to store your cryptocurrency and use it—choosing a crypto wallet can be an incredibly intimidating experience. There are somewhere in the neighborhood of 150 different wallets to choose from. Some handle only a few popular cryptocurrencies; others let you trade and store obscure types of digital tokens. Ready to get started?
The first thing you need to decide is what you plan to do with your cryptocurrency.
If the NFT market is what you’re interested in, choose a wallet that can connect to NFT marketplaces such as OpenSea, SuperRare, and Solanart. Some of these marketplaces operate on a particular blockchain, and that might determine your choice of wallet. For instance, OpenSea supports Ethereum, Polygon, and Klatyn blockchains; most transactions use Ethereum and a lot of NFT traders use Metamask to buy, sell, store, and list for purchase NFTs they got through OpenSea. Some of the top NFTs on OpenSea include "CryptoPunks” and “Bored Ape Yacht Club,” which you may have heard of.
For Solanart, which relies on the Solana blockchain, where NFTs like “Degenerate Ape Academy” are traded, you’d probably want to choose a wallet that is commonly used by Solana cryptocurrency holders such as Phantom, Solflare, or Sollet.
If you don’t care about NFTs and just want a place to store or to send and receive cryptocurrency, Coinbase, Trust Wallet, Atomic, and Exodus are good places to start.
Another thing to ask before you choose a wallet: Is there a mobile app version? Some wallets are intended for use on desktop computers as a browser extension and are not as mobile-friendly as you might expect, especially if they’re not as established as some of the wallet software mentioned here.
If you are most concerned about security, you might want to consider a hardware crypto wallet. These frequently come in the form of a USB stick that you can disconnect from your system (and the internet) for added security. We’ll talk more about that in the last section below. Some examples of popular hardware crypto wallets include Trezor ($63 to $220 for its two models) and the Ledger Nano X ($149).
The cofounder of Wallet Recovery Services, who goes by the online moniker Dave Bitcoin, says that crypto wallets are a way for people to take control of their coins without relying on a third party. He suggests doing some research on software and hardware wallets; websites and subreddit communities are full of discussions about the pros and cons of different wallets. It’s a good way, he says, of “making sure people are not complaining about having usability issues or theft of funds.”
While there’s always the chance an exchange could get hacked or a software wallet could have a security flaw that someone can exploit, “the first step would be to choose a wallet or an exchange with a good track record to minimize that possibly,” Dave Bitcoin says.
MetaMask
Once you’ve chosen a crypto wallet, the next step is to install it and set up an account. Some wallets like Metamask can be downloaded as an app or set up as a browser extension that you can bring up at anytime with a keyboard command or by connecting to certain websites that support that wallet (such as OpenSea). Setting up the wallet usually involves not only setting up a password but also generating what’s called a “seed phrase,” a string of words that can be used to recover your wallet if you forget your password.
This is critical: You need to keep track of your seed phrase. Write it on a piece of paper or print it out and put it somewhere safe, paste it into an encrypted file on a thumb drive and put it away, email it to yourself, whatever it takes to ensure that you don’t lose that seed phrase. The world of crypto is full of stories (including from us at WIRED) of people who forgot their password and/or seed phrase—and along with it, millions of dollars in wallet-bound cryptocurrency.
Dave Bitcoin suggests using a word-based seed wallet and storing it somewhere like a safety deposit box. “It would also be worth looking onto a multi-sig setup with the help of a service like Casa and choosing an appropriate level of security based on the amount involved,” he said. Multi-signature wallets (“multi-sig” for short) require two or more private keys in order to make a transaction, making it less likely someone can hack a wallet’s private key.
Once your wallet is set up, you’ll want to add funds to it. If you have some cryptocurrency in a stock trading account or crypto exchange, you can transfer those funds to your wallet. Some wallets allow you to buy or swap one cryptocurrency for another directly in the wallet for a fee.
One of the easiest crypto tokens to use is USDC, a so-called “stablecoin” that always stays at a 1:1 ratio with the US dollar. About $50 billion worth of USDC is currently in circulation. Exchanging US dollars for USDC, and then using USDC to swap for other cryptocurrencies, is one way to avoid drawing money from your bank repeatedly.
Your wallet will contain a unique blockchain address for each type of blockchain/currency. This means that your Ethereum address won’t be the same as your Bitcoin address, for instance. Going into “Receive” in your wallet should allow you to see your wallet address for specific blockchains. You can copy that 25- to 30-character string and use it to allow someone to send you cryptocurrency or transfer from another account.
A “private key” works similarly but for sending cryptocurrency to someone else (or to another wallet) from your wallet. Some services may ask for a private key address instead of a wallet address in order for you to make a purchase. Some websites have a button that allows you to connect your wallet to the site for things like making bids on NFTs or investing in tokens to earn interest.
Different blockchains may have different fees associated with transferring money and digital goods. Ethereum, for instance, is notorious for huge “gas fees” that are paid to the crypto miners who help make these transactions happen in order to—supposedly—offset the energy costs of mining crytpocurrency. It’s not uncommon for someone to end up spending more in gas fees than the amount of crypto they were intending to send, or the purchase cost of an NFT. Some exchanges warn buyers to wait until off-hours or low-use times when gas fees are low to make their purchases or investments. Many other emerging blockchain technologies have put an emphasis on keeping these types of fees minimal.
One common practice among those who buy and sell NFTs is to create what’s called a “burner wallet.” That’s a temporary second wallet you create for a single transaction if you are worried that minting (the word for creating a unique NFT) may open you up to some internet shenanigans. A burner wallet would ensure that only the funds in that wallet are at risk, not all the funds you may have in your primary wallet.
You could use a burner wallet to, say, buy an NFT, transfer the NFT and any remaining funds to your main wallet once the transaction is complete, and then delete the wallet. You could also use this method to spread your cryptocurrency across different wallets in order to not have all your digital currency eggs in one basket, an approach Dave Bitcoin says is a reasonable one. But, of course, it’s important to keep track of all your wallets, and again, don’t lose your password and seed phrase for any of them.
Hardware wallets are one good way to make sure that your crypto wallet won’t suddenly be pilfered when you’re not online, but they have their drawbacks. Your hardware wallet could still be hacked when it’s plugged in and connected online if your password and seed phrase are compromised. They’re much more expensive, obviously, than software wallets, and if you lose the device, you’ve lost the cryptocurrency on that wallet. And anyone who’s lost data on a bad flash drive or SD card knows that data stored on a portable hardware device is not 100 percent safe for long-term storage. Hardware crypto wallets holding a lot of currency should have a backup. Software wallets can also be backed up, either as a software backup or to a hardware device.
Software wallets are more likely to be hacked—not by some nefarious online group targeting your precious NFTs—but by user error. Trusting sketchy cryptocurrency projects or websites that want to connect with your wallet or sending cryptocurrency to fraudsters who lured you into a scam are more likely to happen than someone targeting your Metamask.
Keep your crypto safe by limiting what sites you connect your wallet to and whom you give out your wallet address to (especially your private key—do not post it online). The learning curve for crypto wallets used to be incredibly high for those new to cryptocurrency, but they've gotten much more user-friendly in recent years. Don’t be afraid to start small. There’s no shame in creating a crypto wallet to store $10 worth of bitcoin until you get the hang of crypto wallets.