What to look for in a crypto wallet
There are many options for cryptocurrency wallets and it can be hard to decipher which one might best suit your needs; so before you start looking at the options, we will delve into what things you should look for in a wallet so you do not run into problems down the road.
In order of importance, here are nine things you should consider when choosing a wallet:
A custodial wallet is like a traditional bank where the wallet maker holds onto your coins. This is a very dangerous type of wallet because the wallet maker could lose or steal your funds. Even if the company behind the wallet is legit you are trusting them to keep accurate records of your balance and to always be available to you. This level of trust defeats the entire purpose of crypto. Thankfully very few wallets are like this. One quick proof a wallet is custodial is if it is possible to recover your account with anything other than your recovery phrase. That may sound like a benefit, but hackers could also take advantage of this loophole. Another possible indicators a wallet is custodial, is if the wallet needs any personal information.
2) Standard Compliant:
Nothing lasts forever. In order to safeguard funds and to make sure your recovery phrase will work on any other wallet, there are standards that all wallets should follow¹. Thankfully most wallets follow these standards. Even if the wallet you choose stops working for any reason your funds can be safely accessed from any other standard compliant wallet. An easy way to check if the wallet you are interested in is standard compliant is to create an account, put the recovery phrase in iancoleman.io and check that the addresses created match. To be extra safe do not send any funds to that wallet, delete it then create a new wallet for you to use. Using a wallet that is not standard compliant will eventually leave you with no easy way to access your funds and thus are not recommended.
3) Multifactor Authentication:
All wallets use at least one factor authentication. Good wallets use at least two. So what are the factors? Something you are (fingerprint, retinal scanner), something you have (hardware wallet or your phone) and something you know (a password or pin). Of the three factors, “what you have” is the strongest deterrent from thieves since they would need to get their hands on the physical device to steal funds. “What you know” can be a strong deterrent when combined with other factors but is very weak on its own because someone may see your password when you use your wallet. “What you are” systems generally only add inconvenience to a hacker, but not any extra security since the biometric systems can usually be bypassed if they already have the device in their possession. That said, “what you are” can be a strong deterrent against thieves of convenience and allows for extreme ease for valid users.
4) Address Management:
Good wallets change your receive address after each use. There are two good reasons for this. First off, by spreading your funds out over multiple addresses it helps with anonymity so people cannot easily determine how much you have based on the address you give them. Secondly, once an address sends funds it is theoretically possible to figure out the private key for that address based on the information on the chain. Traditional computers cannot do it unless the wallet uses a weak method of creating the private keys in the first place, but quantum computers are rapidly improving and they will be able to do so once they become more powerful. An address that has never sent funds is safe from even quantum computers so good wallets always leave addresses with zero balance after they have used the funds.
5) Wallet Platform:
The most secure wallet for long term storage is a BIP38 encrypted paper wallet. However, they are not very user friendly for daily use. Hardware wallets provide excellent security by air gapping the private keys from the internet and possible viruses. Cell phone based wallets are extremely easy for daily use and if the wallet maker takes reasonable precautions can be almost as secure as hardware wallets. Web and PC based wallets should be avoided because there are lots of viruses out there that can attempt to steal your funds.
6) Long Seed Phrases:
Ideally all wallets would use 24 words for the seed phrase. This provides 256 bits of entropy to the wallet which is proven to be impenetrable to brute-force attack due to energy requirements necessary to do so². Some wallets do use 12 words which presently provides significant security but may not be sufficient down the road. My recommendation is to always future proof and find a wallet that uses 24 words.
7) Handles the Newest Protocols:
Crypto is a rapidly developing field and there have been some major advancements over the years. Originally all Bitcoin, Litcoin, and DigiByte addresses were made up of 58 symbols(Base 58). These addresses have been made obsolete since it is hard for humans to copy an address correctly if the address is case sensitive and many chains used the same prefix leading to people sometimes sending funds to the wrong chain. The newer addresses (bech32) are not case sensitive and have a prefix like bc1, ltc1, or dgb1 that make it obvious what chain they are for. Even better, the encoding system allows the wallet to know what letter you typed wrong so you can fix it easier. You want a wallet that keeps up to date and makes updates like this available to you because even if your wallet address uses the old format you may need to send funds to someone using the new format. Other advancements like domain-based addresses add convenience you will want to have.
8) Login Systems:
There are some new crypto based login systems being developed like Digi-ID which allow for you to use your wallet to securely login to web sites. Finding a wallet that supports these and using them whenever possible will help keep you safe online. Keep in mind using Digi-ID on a non-standard compliant wallet could result in you permanently losing access to your account, so make sure you pick a standard compliant wallet.
This is not a must have, but sure does add a lot of convenience. You probably do not want to have six different wallet apps when one will do.
My general recommendation is the cell phone version of Coinomi since, to my knowledge, it is the only wallet to have all of the above features. However, there are many other options out there that have most of them.
Some wallets you may want to avoid and why (referenced to the feature # as listed above) are:
- DigiByte Mobile(2,6,8,9)
- DigiByte Go(2,5,6,9 — also currently non-functional which proves why 2 is so important)
A few last pieces of advice:
- Never give your recovery phrase to anyone. With the recovery phrase all your funds can be taken. Scammers will often pretend to be tech support and try to get this phrase from you. Real support will never ask for it.
- Never store your recovery phrase online. Don’t take a picture of it. Don’t save it as a note. Don’t save it in a text document and change the extension to try and hide what it is. Just do not ever store it by any electronic means. Write it on paper, or punch it into metal. Offline is best.
- Take care to store your recovery phrase in a safe place. If you lose your recovery phrase you lose your funds. I recommend splitting the phrase up into 3 pieces like https://digibyte.rocks/seed.pdf that way you can recover with any 2 of 3 pieces. Make sure you put them in safe places where they won’t be found if you do.
Make sure you don’t photograph your seed phrase( image courtesy of cipherblade.com )
- If your curious about the standards they are BIP32,39,44,49,84
- See https://en.wikipedia.org/wiki/Brute-force_attack#Theoretical_limits for why 256 bit is impossible. Wikipedia uses 128 bit and room temperature and finds it is doable but impractical. At 256 bit even at the background temperature of deep space you get an amount of energy exceeding the energy contained in the visible universe. Any lower temp will result in a larger energy value due to cooling requirements to achieve that temperature.