Understanding Crypto Wallets

I have been getting many questions from people about what wallets are and if you have to have a wallet to buy cryptocurrency.

You do not have to have a wallet to buy and store cryptocurrency but it is highly advisable to have one.

When you buy bitcoin or altcoins on an exchange the crypto that you have bought sits on the exchange until you transfer it or send it somewhere.  The main advantages of having it on an exchange is if you are:

  • Trading
  • Wanting to sell quickly
  • Using it to exchange for other altcoins
  • Keeping it there to benefit from any upcoming forks

Lets just delve into that last point first.  If your crypto has been transferred off the exchange there is no way for that exchange to give you your equivalent in a newly forked coin.  On Binance this is called distribution.  I have a list of my recent distributions below:

Binance distributions

In August BitcoinCash forked off Bitcoin and anyone holding Bitcoin could get an equivalent amount of BitcoinCash.  Some exchanges didn’t release that to their customers for a period of time because they didn’t support buying and selling of the forked crypto.  On the 19th of December at approximately 4pm Pacific Time Coinbase.com started allowing BitcoinCash to be traded on their exchange.  And all the people that held Bitcoin when it initially forked on August 1st were able to see and use their amounts of BitcoinCash.  My brother had held 0.5 Bitcoin (BTC) at that time and was pleasantly surprised to see BitcoinCash (BCH) sitting in his Coinbase account – at that time worth approximately $3500 USD.

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The other reasons were active trading, having access to your crypto allows it to be traded easier than transferring back and forth from your wallet.  Wanting to sell quickly when the price rises sharply, or using it to exchange one altcoin for another.  For example I buy Ethereum (ETH) on coinbase.com and then transfer it to Binance and buy altcoins with it, as altcoins can only be bought (at this time) with BTC, ETH or LTC and not with USD.  If you want to read my post on buying altcoins using IOTA as an example please go and read:

How to buy IOTA cryptocurrency

If you want to store your crypto in a wallet then the hardware wallets trump all – they are a bit pricey but they are very secure.  There are two main hardware wallets:

The ledger nano s



and

The Trezor


There is also online wallet apps such as Jaxx Mobile App wallet which are free and don’t support all coins.

You also have the option of printing out your crypto onto paper and storing it offline.

Getting started

The first step to getting your bitcoin into cold storage is creating an offline Bitcoin address. This address will have both a public and private key-pair which never goes online (until you’re ready to spend it). With this guide, we will show you how to make a free cold storage wallet using the paper wallet method.

Setting up a paper wallet

Setting up your cold storage paper wallet is fairly simple and requires very little technical knowledge. The first step will be to go to the Bitcoin.com paper wallet tool here.

Before doing anything else, while on this page you will want to save it locally to your computer. To save a web page to your local machine, press Ctrl-S and save the file as a complete webpage (to your desktop for example). After saving, simply close out the open Bitcoin.com paper wallet tool page. Then disconnect your computer from the internet; don’t worry, you only need it offline temporarily for this task.

After disconnecting from the internet, open the saved file (on your desktop). Move your mouse around on the page and/or type some random characters into the text box to create extra entropy (randomness). By doing this, you create a random Bitcoin address that has both a public and private key-pair. Since you saved the file locally and are not connected to the internet, the Bitcoin address you created was done completely offline.

Print the page

The next step is making an offline copy of your Bitcoin address which you can later load with Bitcoin for a complete cold storage solution. While on the locally saved paper wallet page, while still disconnected from the internet, click on the Print button. Warning: before printing the page, make sure your printer is also offline (not connected to the internet through wifi for example). Once you are sure, print the page. Congratulations, the hard part is over! You have now created an offline Bitcoin address and made a hard copy of it locally for safekeeping. On the printed page should be the public Bitcoin address and QR code with the corresponding private key and QR code. We strongly recommend that you store the paper wallet somewhere secure, such as a fireproof safe. You can now safely connect back to the internet.

Coldstorage paper wallet

How does this work?

The Bitcoin.com paper wallet tool is a client-side address generator, which generates public and private Bitcoin key-pairs locally through your browser. The benefit of this technique is you can load the JavaScript locally and trust that the JavaScript did not change after being loaded. The tool is open source and the code can be reviewed at any time. Also, make sure you never share your private key with anyone or online.

Adding funds to your cold storage wallet

The next step is you want to add bitcoin to the wallet. Just like with any other bitcoin transaction, using a wallet you may have online, scan the public cold storage wallet QR code or copy the address, and send funds to your cold storage. You can check the status of the funds at anytime using a Bitcoin block explorer.

Redeeming bitcoin from cold storage

When you are ready to spend from your cold storage wallet, you will need to import the private key to a Bitcoin wallet that is online. Any wallet that supports importing private keys will work. For example, if you download the Bitcoin Unlimited wallet (which is a full Bitcoin client) you can import the private key. To do so, simply follow these steps:

  • Open the client and click on Help
  • Select the Debug Window and click on the Console tab
  • Type in the field “importprivkey <bitcoinprivkey>” (replace <bitcoinprivkey> with your private key and remove quotes)
  • Hit enter to import the private key; this will require a rescan of the blockchain which may take a few minutes to sync

References used in this blogpost:

https://blog.coinbase.com/coinbase-is-not-a-wallet-b5b9293ca0e7

https://www.bitcoin.com/guides/setting-up-your-own-cold-storage-bitcoin-wallet

 

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