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Updated 18 Oct 2017 18:35:01 UTC

 



Cryptocoin Wallets

We've discussed what cryptocoins are, how they are created, and how transactions work, but where do you keep this invisible currency? In a wallet, of course, which is used to store, send, and receive coins. A cryptocoin wallet is a software application that incorporates your unique transaction data; the software can be installed on your PC, your phone, or on a website.

In the coin transaction section, we discussed sending coins from user 1 to user 2 and that the transaction was public but (mostly) anonymous, and left it at that. The way each user is identified on the network is by an address assigned by each wallet. When you create a wallet, it is empty with no addresses. To receive coins into your wallet, you have the wallet create a receiving address and provide the sender with this value. The sender creates the transaction with your wallet address as the destination, hits send, and voila, the coins are in your wallet. When you send, it is from your wallet address to a wallet address provided by whomever you are sending to.

For complete anonymity, you can use a different wallet address with every transaction. If you reuse a wallet address and it is associated with your name, the anonymity is no longer there and all your transactions can be identified. The coins, however, are secure, since having someone's public wallet address does not give you access to it.

To provide security, a private key is associated with each public address. It takes both the public and private key values to allow access to the coins your wallet. The private key must be kept secure, since it provides the access to your wallet contents. In addition, if you lose the private key there is no way for even you to access your coins! Thus, if you maintain a local wallet (installed on your computer) keep backups, and backups of backups, of your wallet data. When you use an online wallet, the hosting site is responsible for your private keys; however, you have the risk of the hosting company going out of business or being hacked.

To be viable, every type of cryptocurrency needs a wallet specific to that coin, and the more popular the coin, the more choices available. A "core" wallet is one that is local to your machine, and stores the entire blockchain. These are typically developed by the creator of the cryptocurrency and every coin type should have at least a core wallet available. The website for each type of coin will (should) provide wallet choices available.

If you choose to use a core wallet, you will be storing the entire blockchain for that currency on your local machine. For Bitcoin the amount of data is already very large (over 100GB), and very time consuming to download and index. This does give you complete control over your coins, at the risk of losing them through your own negligence. There are also desktop (local) wallets available that are considered "lightweight" which store your wallet contents on your machine, but the blockchain is stored on their servers. Electrum (available for Bitcoin and Litecoin) is an example of this type of wallet. Some well-known online wallets, which store both the blockchain and your wallet contents online, are Coinbase and Xapo. We have heard that Xapo fees can be quite high and thus discourage using it. If you are interested in working with several (or more!) different coins, online multicoin wallets are available, such as CoinPayments and Coinomi.

For novice users of Bitcoin, a light wallet such as Electrum is probably the best way to go to avoid loading and storing the blockchain; however the core wallet gives more flexibility on choosing transaction fees. In our last test, the minimum fee selectable on Electrum is 0.0013 BTC (130,000 satoshi). Imagine accumulating 150,000 satoshi in your wallet using faucets and finding out after deducting the transaction fee that only 20,000 satoshi is available. It should be noted, though, that 150,000 satoshi is only about US$1.50. That same fee could apply to a US$100 transaction, and the fee would be more reasonable. Using the core, you can select a much lower fee (although the lower the fee the longer it will take to send... and ultimately may never be sent).

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