If you thought a shopping trip to a department store to make a wallet purchase was fraught with too many options, wait until you try to shop around for a bitcoin wallet. You won't be deciding between material, color and size as you would for a conventional wallet. Instead, you'll be comparing storage options and types of keys you'll need to unlock the access to your intangible currency in your invisible wallet.
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What Is Bitcoin?
In a nutshell, Bitcoin is digital money. This virtual rate of exchange is also called cryptocurrency because of the cryptographic protocol that encodes a user's access to it. Unlike fiat money, which a government deems legal tender even though it's not backed by a tangible commodity, cryptocurrency is a decentralized monetary system that does not have accountability to a regulatory agency or any type of central authority. Instead, it's self-regulated through a system of checks and balances in a peer-to-peer network, in which users verify transactions that are recorded on a blockchain, which is a public, digital ledger.
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What Is a Crypto Wallet?
Also called a cryptocurrency wallet, a crypto wallet allows its user to receive and send bitcoins through a software program. The wallet doesn't actually store bitcoins; it holds digital credentials in the form of a key that allows its users access to their virtual funds. Users can set up their crypto wallet at an online marketplace, also called a bitcoin exchange, where they buy and sell bitcoins. Coinbase, Bitstamp and Bitfinex are examples of bitcoin exchanges.
A crypto wallet can be maintained on a user's digital device (hardware wallet); installed on a computer (desktop or laptop wallet); accessed from a smartphone (mobile wallet); or stored in a digital marketplace (web wallet). Users may also create a printout of the keys to their account (paper wallet) if they don't want to store this information digitally. A paper wallet contains a Quick-Response (QR) Code with encoded key information, which gives users the ability to store their bitcoins offline. Some websites, such as Bitcoin.com, offer paper-wallet generators that allow users to create paper wallets.
Best Bitcoin Wallets 2018
U.S. News & World Report's review of bitcoin wallets reveals its top five choices for the best bitcoin wallets in 2018.
Paper wallets lead the pack because of their strong "cold storage" capability; that is, storing Bitcoin information offline where it is less vulnerable to hacking.
Hardware wallets, such as Ledger or Trezor, are more expensive; but they rate second only behind paper wallets for their mobility and safety features.
The highest-rated desktop wallet is Electrum, which debuted in 2011. It has a stellar reputation in the industry because of its user-friendly interface and reliability. It also offers its users exclusive control of their own private keys and two-factor authentication, which gives Electrum a measure of safety that other types of desktop wallets do not offer.
Blockchain asserts a bold claim on its website (Blockchain.info) that it's the world's most popular digital wallet, but even third parties such as U.S. News & World Report support these claims. As a web wallet, Blockchain boasts more than 100 million transactions among more than 25 million wallets in 140 countries – statistics (as of June 2018) that make it a formidable contender among other bitcoin wallets.
Coinbase is one of the biggest worldwide bitcoin exchanges. Users can buy, sell, trade and exchange bitcoins in this user-friendly marketplace as well as open a digital wallet to store their Bitcoin data. Because it's an online exchange, Coinbase is not considered as secure as other types of bitcoin wallets, such as hardware wallets or paper wallets, but its storage method (called Vault) plus a two-factor authentication protocol place Coinbase at the top of the list among other bitcoin exchanges.
Other Considerations
When Bitcoin hit the cryptocurrency market in 2009, its security risks flew pretty much under the radar for the first several years … until cybercriminals began hacking into digital wallets and stealing cryptocurrency. Bitcoin wallets had to tighten their security in response to this threat, which is an ongoing strategy that continues to be fine-tuned. Look for a bitcoin wallet that employs multiple signatures for a higher level of security against hackers than a single signature key. These multi-sig wallets have more than one access key that must be authenticated before someone can access the bitcoin currency inside the wallet.
The IRS considers bitcoins as property and, therefore, subject to federal income taxes. Among other things, this includes wages that are paid in bitcoins, payments made to independent contractors, profit from investments and capital assets. Navigating the bitcoin waters is not for the faint of heart and neither is calculating your bitcoin tax liability. Hiring an accountant who is well-versed in today's cryptocurrency tax laws can help you get a leg up on this relatively new tax consideration.