How to Create Your Own Crypto Wallet: A Step-by-Step Guide
When investing in crypto, there is often a lot to learn about such a dynamic and ever-evolving form of wealth building. Perhaps one of the most fundamental lessons is how best to store your cryptocurrencies or non-fungible tokens (NFTs) to ensure their long-term safety.
This is a point that was made abundantly clear during the recent overnight crash of FTX, which was the second largest and fastest growing crypto exchange. The full ramifications of FTX’s insolvency and demise remain unclear, but many investors who had stockpiled cryptocurrency on the exchange stand to lose heavily.
In the wake of FTX’s fall, more than a few experts have stressed the importance of always storing cryptocurrency in a self-service wallet instead of an exchange.
What are crypto wallets?
A crypto wallet is a device designed to store and transfer your cryptocurrency through what is called self-custodial. That means that instead of going through a third party, like a bank or financial institution, you can store your crypto on the blockchain and access it using a private key (more on that later).
There are two primary types of crypto wallets: hardware and software. Software wallets allow for the secure storage of crypto online, while hardware wallets allow cryptocurrency owners to purchase physical hardware similar to a USB drive and store coins offline on that device. Once safely stored on your hardware, your crypto wallet can even be further secured by locking it in a safe or placing it in a safe.
One of the main advantages of both forms of self-storage for cryptocurrency is that the assets are protected by private key encryption, similar to the technology used to secure your credit card information when you make online purchases.
“These keys are what secure your assets,” explained Josh Fraser, co-founder of Origin Protocol, a company that created Origin Dollar, a yield-bearing stablecoin, and Origin Story, an NFT platform. “What it looks like in practice is a series of words that basically generate this private key and secure your assets.”
In addition to hardware and software wallets, there are also what are known as host or custodial wallets. But to be clear, these are not self-deposit wallets. Rather, they are a form of storage hosted by brokerage houses or online platforms. And depending on the brokerage or platform, this approach can be less secure, as the FTX implosion illustrated. If the brokerage fails or does not handle your coins responsibly, your investment may be lost.
“Determining the best wallet to use really depends on the type of person you are. If you have trouble keeping track of passwords, accounts and other important information, consider using a custodial wallet provider, such as Coinbase, which can help you get back to your wallet in case you forget your password, says Tyler Moebius , co. -founder of SmartMedia Technologies, a leading creator of Web3 and blockchain solutions. “However, if security and privacy are your priority, you will choose a self-storage solution.”
How to create a software wallet
Setting up a wallet is a simple, straightforward process that can be completed in just a few steps.
Step 1: Choose a software wallet app you want to use. The first step is to do your research and find a software wallet provider that you like best. There are many options that provide different levels of security, ease of access, customer service and price points.
It’s also important to keep in mind when searching that some platforms offer the option to store your wallet on both your desktop and smartphone, while others may only offer one of these options.
Step 2: Download the wallet app to your phone or computer. Once you’ve decided on the software wallet to use, the next step is to download the wallet app to either your phone or computer.
Step 3: Create an account. The good news about many software wallets is that there isn’t much involved in getting your account established. For example, few require personal information at all, according to Coinbase.
Step 4: Transfer assets. Once your wallet is established, you are good to go and can start transferring cryptocurrency to your wallet. Often this means transferring crypto from an exchange or broker to your software wallet.
“People usually fund their wallets using centralized exchanges like Coinbase, but you can also get a friend to send you some crypto in exchange for cash or another payment method,” says Fraser. If you’re using a centralized exchange, the best practice is to move your assets to a wallet you control as soon as you can.”
There is an important caveat to software wallets to keep in mind. You are responsible for maintaining the keys to access the cryptocurrency assets, which can be problematic if you lose this information.
“If you choose this option, you are solely responsible for keeping the cryptographic keys that secure your assets. However, the stakes are high. If you lose the private keys, your assets are gone forever,” Fraser said.
This means that you will likely want to back up your private key information in multiple secure locations. But you also need to be careful with these backups, because anyone who gets access to your private keys can take all the assets that those keys secure, Fraser adds.
How to make a hardware wallet
Hardware wallets allow offline storage of cryptocurrency, which can be an extra layer of security or comfort for some investors. The hardware is similar to USB drives and as such is a very mobile form of storage. The wallet can be taken with you anywhere. Setting up this type of wallet is as easy as a software wallet.
Step 1: Select the hardware you want to use. There are different crypto wallet options available. Some of the top names in this space include Ledger, Trezor and Keepkey, according to Coinledger. Some of the hardware options are more budget-friendly, while others are easier to use or offer higher levels of security.
Step 2: Purchase the hardware and install the software required to establish your wallet. After purchasing the hardware wallet that best suits your needs, the next step is usually to install the software that comes with it, explains Coinbase. Each hardware wallet has its own software that allows you to manage the contents of your hardware wallet.
Step 3: Transfer your cryptocurrency. Once your hardware wallet is established, you can start transferring cryptocurrency from other places, such as an exchange or broker.
The takeaway
Self-storage of cryptocurrency is highly recommended by experts. It makes it possible to manage crypto assets on your own and keep them in your possession. But it’s important to do your research and carefully consider whether a hardware, software or wallet is the best fit for your needs.
