Quick Overview of How Cryptocurrency Wallets Work

(video transcript below)

Paper Cryptocurrency Wallets

We’re going to talk about Cryptocurrency exchange wallets now, and we’re going to start off with paper wallets. I don’t really care for these kinds of wallets. Sometimes they’re a necessity, when you’re transferring money from one exchange to another, but there are potential problems with security when you’re transferring money anyway, from one exchange to another. When you have your money on exchange, there’s always the potential for it to get hacked in that moment in time. The sooner you can get it out of that exchange and into a wallet that is not related to the exchange, it becomes more secure. I talked about Coinbase in another video. Coinbase is a different beast, I believe, because of all the security layers there, the regulations there, the steps that they’ve taken to really secure their exchange. Other exchanges, not so much.

So, what you have with a paper wallet is basically, it’s a wallet that you keep on your desktop or maybe on your phone, and it’s not related to an exchange. The way it works, right here’s a picture of one. You have these barcodes and these addresses. That’s what you use to send the money to the wallet. Let’s say, in Coinbase, if I got a wallet … Let’s just use this picture here, and I want to send from Coinbase to my wallet, and my wallet is just like your wallet you put in your back pocket or in your purse and carry around with you, I would get this address here, this barcode, and I can scan that on a Coinbase and have the money transferred to this wallet.

I have to be sure I’m doing it right, because again, if you send it to an address that does not exist, you’re going to burn your money. It’s just very tedious when you start involving these various kinds of steps. Then there are security issues with the paper wallets, as well. They are not the most secure form of wallet.

Hardware Cryptocurrency Wallets

The most secure form of wallet is a hardware wallet. We’re going to look at a few of those. The first one is going to be the Ledger Wallet. Let’s go take a look. Here we are, Ledger wallet. I think it is sold out of the UK. You can see here, it’s in Euros, 79 Euros. What it does is, it’s basically cold storage or off line storage or a hardware storage of cryptos, so instead of a paper wallet, you’ve got this kind of hardware wallet. It is the most secure from currently, of a wallet. If there’s a lot of crypto currency involved, this is certainly a good choice here. If you want to see the Ledger in action, Ivan On Tech did a great Youtube video showing how the Ledger works.

Going back to Coinbase, they actually store 98% of their crypto currencies off line, so that’s a personal decision, which one to use. So, going into the Ledger, the way this works is that you’ll get the Ledger. You plug it into your computer, and it runs I think right now, out of Chrome. There’s some software that you would download. You would run the interface to the wallet out of Chrome.

Transferring Cryptocurrencies Between Exchanges and Wallets

If you want to send money from Coinbase to your hardware wallet, again you would use the barcode we looked at with the paper currencies, scan it and however much you want to transfer to this wallet here. Once that’s done, you unplug it and you’re done. No one can access your wallet.

You need to follow some steps to insure that you don’t lose what’s called your password phrases, because then your money can be lost forever. So, what happens when you get the Ledger and you set it up, brand new, you get I think it’s 24 words. You have to write those down somewhere and keep them. It’s good to make say, two copies. Laminate them, so they don’t smear or anything like that. You would probably put one copy in your safe deposit box, and then keep another copy somewhere safe at your home, just for convenience. So, if you ever need it, it’s right there. You don’t have to go to the safe deposit box. If someone gets ahold of those, they can certainly open your crypto wallet, so again, it goes back to security management of those password phrases.

If you want to send money from your wallet back to Coinbase, for example, or whatever other exchange, it’s just the same kind of thing. You scan the barcode and you send the money. That way you can also use addresses, which is a long alpha-numeric number that you can copy and send, but those are some tedious steps. You have to be very careful when you’re transferring money from one wallet to another wallet. Very tedious kind of thing, a bit air prone as well. Just have to be very careful, very cognizant of what’s going on, so that you don’t miss a step and end up losing money over it.

Security And Hardware Cryptocurrency Wallets

Going back to the hardware wallet being the most secure form, you want to make sure you get a wallet from the manufacturer, from the ledger website directly, not a used wallet, not a wallet that says, it’s new and it’s being sold on Ebay. It’s got to come from Ledger. Here’s why.

Used wallets are a security risk already. If someone sells you a used wallet, it’s pretty much no good I would say. There are steps you can do, though, if you do get something like that, but there was a case out in Reddit, where someone had purchased a wallet off of Ebay, and they had like 25,000 pounds worth of crypto currency in that wallet. It got hacked and all their money was stolen (source: In For A Shilling).

The way it got hacked is that the wallet was sold on Ebay. Someone actually put in the pass phrases, and it looked brand new. Looks like it had never been tampered with. It had the Ledger branding and everything on it. So, then this person gets the pass phrases, they were actually phrases created by the scammer. The scammer just waited for the wallet to get connected and then broke into it, basically, and took all the currency.

No one’s going to have the pass phrases if it comes directly from Ledger. Or you can also reset. There’s three attempts, I think, when putting in the pass phrases, and then it will reset and generate a whole new list of pass phrases. That would be one step, if you’re buying a used Ledger wallet, could reset it and generate all new pass phrases, although I just advise against buying a used wallet.

There is another wallet, called the, I think it Trezor. Let’s see here, trezor.io. Very similar kind of wallet. Minor differences in the features, although they are both pretty much the same. I think the Trezor’s a little bit more, but like maybe 115, but they’re very similar. I think a lot of people prefer the Ledger over the Trezor, but this is a good choice for a lot of currency, maybe thousands or something like that, that it’s more secure and less chance of the currency getting hacked on an exchange, for example.

That is a quick look at wallets. Again, going back to Coinbase, if you’re just staying on Coinbase, they have the private and public keys. They do the management of the wallets, so those are not something you’re ever going to really interact with. You have to get involved with barcodes or addresses or anything like that, when you’re just dealing with Coinbase, for example.

Okay, so that’s the quick overview of wallets and a little bit about their security. Thank you for watching.