As cryptocurrencies become more accepted as an asset class, many people are wondering how to add them to their portfolios.
If you want to begin investing in crypto assets, you need to know how to set up a cryptocurrency wallet. The good news is that it’s much easier than it used to be. Back when I received my first bitcoin, in 2011, I had to go through the whole process of setting up a bitcoin wallet on the hard drive of my computer. Today, there are several ways to quickly and easily set up a crypto wallet.
Here’s what you need to know about how to set up a crypto wallet and how to use one to store and protect your digital assets.
What is a crypto wallet?
A crypto wallet is a digital wallet designed to help you store your digital assets, such as cryptocurrency or non-fungible tokens (NFTs). It’s used to store the private keys associated with your crypto assets so that you don’t have to remember them. Because these keys are randomly generated and difficult to memorize, a wallet is an easy way to store them and use them to access your digital assets.
Your crypto wallet is designated by a string of numbers and letters designed to be a unique digital address. As long as you know your address, it’s possible for others to send digital assets your way. And, because the transaction is recorded on the blockchain, you can prove ownership of a particular crypto asset by matching the transaction with your wallet address.
When you want to buy, sell or trade cryptocurrencies or other digital assets, you’ll use your wallet to complete the transaction. Because your assets are basically bits of information, your crypto wallet helps you manage that information in a format that’s easy to understand and use.
There are different types of crypto wallets available, and each has its benefits and drawbacks. You can use different wallets for different purposes, ensuring that your crypto assets are accessible in a way that works for your strategy.
With a custodial wallet, someone else manages access to your crypto assets. These wallets are also referred to as hosted wallets. A custodial wallet is common on cryptocurrency exchanges such as Coinbase, Gemini, or Binance.US, which set up wallets on your behalf to hold your coins.
Custodial wallets are very similar to how a bank keeps track of your cash. Before you can access your bank account, you need to prove your identity. You might need to provide an ID or a password to access your account online. With a custodial wallet, you use a password to access your account, similar to logging in to other online services.
Here’s how to set up a crypto wallet as a hosted wallet:
- Find a platform you trust: Start by looking for a reputable platform. A cryptocurrency exchange can be a good place to start. They are likely to have a high level of security and might even provide insurance to protect you against loss due to theft, malware, or hacking.
- Create an account following the required steps: Each exchange has its own requirements, but in general, you need to provide an email address, identifying information, and create a password.
- Start adding cryptocurrency to your wallet: When using an exchange, you can simply buy the cryptocurrencies you’re interested in, using fiat currency. You will also be given a wallet address that you can copy and paste. Some exchanges also let you access your account through desktop wallets or a mobile device. If you already have cryptocurrency in another wallet, you can send it to yourself using the key associated with your wallet.
When choosing a custodial wallet, think about the features that make the most sense for your situation. Consider the coins you want to buy — and whether they’re available on the exchange in question. Also, find out if they offer security measures such as two-factor authentication (2FA) and if they keep fiat funds in an FDIC-insured account. You can also look at fees, ease of use, and rewards.
In addition to offering convenience and ease of use if you’re just learning how to buy cryptocurrency, custodial wallets also protect against losing your private keys. When you have a custodial wallet, you can set up a recovery phrase or seed phrase to get access to your accounts.
A non-custodial wallet is one that you’re entirely in charge of. If you lose your private keys, you don’t have someone else to help you access the wallet (even if you have your seed phrase), so it’s important to keep track of your information. Some non-custodial wallets include Mycelium, Electrum, and Exodus.
Here’s how to set up non-custodial cryptocurrency wallets:
- Choose a wallet app: When you’re ready, look for a desktop or mobile wallet app with the features you want and then download it. Coinbase has a non-custodial mobile app for iOS and Android that differs from the custodial wallet available on its exchange. MetaMask is another popular non-custodial wallet compatible with several different digital assets.
- Set up your account: With a non-custodial wallet, you don’t have to provide identifying information as you do with a custodial wallet. Instead, you simply create your account, make a note of your private key, and keep it in a safe place.
- Transfer cryptocurrency into the wallet: It’s important to note that you might not be able to use fiat currencies for transactions with a non-custodial wallet. You can, however, send coins and tokens from another wallet, including a custodial wallet on an exchange, to your non-custodial wallet.
Non-custodial wallets generally work well for those who want access to more advanced decentralized finance (DeFi) applications. Because you have 100% control of your key by keeping it offline, it’s also better for privacy.
For example, you can use a custodial wallet for basic buy, sell, and trade transactions, and you can use a non-custodial wallet with decentralized exchanges for lending and staking. Once you understand some of the surprising facts about crypto, you might want to use different types of wallets for different goals.
A hardware wallet is a physical device like a thumb drive and is non-custodial. Unlike the other software wallet options, hardware wallets store your private keys offline, which keeps your cryptos safe from potential hacks. For that reason, they are also called cold wallets since they are kept offline.
Setting up hardware cryptocurrency wallets requires the following steps:
- Buy the hardware wallet: You can expect to pay around $100 or so for a hardware wallet. Two popular hardware wallets are Ledger Nano X and the Trezor Model T.
- Get the right software: Once you have the actual hardware, you need to download the accompanying software. Then follow the instructions for setting up your wallet.
- Make sure you know your key: Make sure you make a note of your access phrase using a paper wallet, which is simply a printed piece of paper with your private and public keys and QR codes you need to make transactions. If you don’t keep track of it, you won’t be able to access your crypto assets.
- Transfer cryptocurrency to the wallet: You will need to plug your crypto wallet into your computer in order to receive coins from another source. However, you might not be able to buy crypto assets with fiat currency when you use a hardware wallet.
Although a hardware wallet gives you full control over your digital assets, it’s considered more of a storage solution than an active solution. Because you have to go through extra steps to connect your hardware crypto wallet, it isn’t always considered practical for frequent transactions.
For instance, you can use your hardware wallet to store the bulk of your crypto coins, tokens, and NFTs. This keeps most of your crypto portfolio secure and still lets you conduct other business using a software wallet that has a smaller portion of your crypto assets.
What is the best crypto wallet for beginners?
When it comes to cryptocurrency for beginners, it can make sense to start with a custodial wallet, such as one of those offered by a crypto exchange. These are easy to use and offer an intuitive user interface. As a result, they could be a smart way to start investing money in and trading cryptocurrencies. After becoming comfortable with crypto assets, you can get a different type of wallet and learn how to make use of it.
What is the safest crypto wallet?
Each type of crypto wallet has its own security features. In general, though, a hardware wallet is the hardest type to hack. It is safer for cold storage because it’s not connected to the internet or on your computer permanently. Because a hardware wallet is only connected to your computer some of the time, it’s also less vulnerable to being hacked.
On the other hand, if you’re worried about losing your private keys, both custodial and non-custodial wallets allow you to easily recover your private key and password using your seed phrase. Although custodial wallets are considered hot wallets and might be vulnerable to online hackers, some exchanges have started paying for insurance to help protect the customers’ digital assets.
Can you make a crypto wallet?
It’s possible to create your own crypto wallet, but it can be a more difficult process. You need to obtain the code for a wallet, and then configure it with the functionality you want. You can find templates and code examples from open-source platforms such as GitHub or NOWNodes.
However, this can be a complicated process, and if you forget your keys or make a mistake, you could lose access to your crypto assets. Unless you’re an advanced coder, you’re likely better off getting a ready-made wallet.
If you’re interested in using cryptocurrencies and getting involved with other digital assets, you need to set up a crypto wallet. Carefully think about what purpose you want your wallet to serve. Different types of wallets can be used for various purposes.
For example, if you plan to trade frequently and want an easy way to buy coins with fiat currency, having a custodial wallet connected to an exchange makes sense. You can also use a non-custodial wallet to participate in more advanced DeFi transactions while also keeping a hardware wallet if you want to store large amounts of cryptocurrencies securely.
When you’re ready to get started, consider opening an account with one of the best cryptocurrency exchanges to learn how to set up a crypto wallet and begin using digital assets.
Disclosure: the author uses Coinbase Vault wallet, as well as the Coinbase exchange, and owns a Ledger Nano X hardware wallet.
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