I set up my first cryptocurrency wallet about a decade ago. I’ve done it a dozen times or more since then and it’s still confusing. Since about half of those wallet setups have happened in the last 6 months and the number of people asking me how to do it is growing every day I thought it would be helpful to document and explain some of what I’ve learned along the way and hopefully help smooth out some of the learning curve speed bumps. I’ll be talking about Ethereum Wallets and Mac/iOS apps though much of what I’m saying should apply elsewhere too as a lot of it is browser based as well.
The first and most important thing to understand is that Wallets and Exchanges do different things. Though since some exchanges offer wallet services and some wallets now have built in exchange options it gets messy quick. So while there is overlap, I try to think of (and encourage others to think of) them as separate things. Hopefully the following will de-mess-ify things a bit.
Public/Private key: This is what everything is built on when we’re talking about cryptography and cryptocurrency. Very simply: Your public key is your address that you give people so they can send things to you, your private key is the secret thing you keep which allows you to receive what is sent to you. If you loose your private key, you loose access to your assets.
Wallet: As the name suggests a wallet holds your assets, however this gets immediately confusing as your assets are not actually inside your wallet, rather your wallet keeps your private keys so that you can access your assets which are on the blockchain. Remember that with public ledgers/blockchains the ongoing updates just document who holds/owns what but there’s no asset actually traveling to you (like an email) rather the assets are being allocated to different wallets all the time on the blockchain, and if you have the private key to a wallet with an asset then you can choose what to do with that asset – such as send it somewhere else. This is why if someone gets ahold of your private keys they can steal everything from you, and why a wallet that protects your private keys is so important.
Wallets are either custodial or non-custodial, which means either you hold your own private keys or a company holds them for you. This is where the the saying “Not your keys, not your coins” comes into play as technically any assets you have in a custodial wallet could be seized, frozen, stolen, lost, etc and there’s nothing you could do about it, and there’s also risk of policy change at any given moment so the operator of the custodial wallet could decide that you have a 10 day waiting period on any withdraws or impost a limit on how much you can move around per day and since you don’t have your own keys you are 100% at the mercy of the people running that software. As a benefit though if you don’t have your own keys you cant lose or forget them. With a non-custodial wallet you manage your own keys and make your own decisions. Of course if you are sloppy with your security and someone else gets ahold of your keys you can still lose everything, but for a lot of people the risk of losing things because they made a mistake themselves is much easier to accept than the risk of losing everything because of legal or business decisions happening outside of their control.
Metamask is the most popular non-custodial wallet largely because it’s just a browser plugin so it’s really simple to set up and use. If the idea of having a wallet in your browser doesn’t sit right with you, Rainbow is my favorite non-custodial iOS software wallet (which will require you to do some pairing / QR Code scanning to sync with websites). If you want a totally separate air gapped hardware wallet then the best bet is really to buy a Ledger. Though if you are just getting started that might be overkill depending on how much crypto you plan to buy and/or hold. All three of these options have partnerships with exchanges that allow you to buy crypto assets from inside the wallet. Here’s where it gets a little confusing, Coinbase Wallet is also a non-custodial iOS software wallet, which is a different thing than Coinbase which is an exchange that offers a custodial wallet service, similar to Binance or Blockfi or Crypto.com. Coinbase and Coinbase Wallet are owned by the same company and can be set up to work together, but can also be used separately or independently.
Exchange: The primary function of an exchange is, again as the name suggests, to exchange your crypto assets for other crypto assets. Centralized exchanges require you to move assets from your own wallet to theirs first (or buy them directly through their system) while de-centralized exchanges (also called a DEX) will just connect to your own existing wallet to authorize the transaction on the fly.
Coinbase, which I already mentioned, is an example of a centralized exchange. To use Coinbase you need an account, and you likely have to go through some KYC (Know Your Customer) verifications like uploading your ID and proving you are who you say you are and you live where you say you live. You’ll need to either buy crypto assets through Coinbase (and depending on your level of verification you may only be able to buy a small amount each day) or send assets you already have to Coinbase before you can do any kind of exchanges on Coinbase. Uniswap is an example of a DEX. To use Uniswap you just connect your wallet and make your transaction – Uniswap doesn’t need to know anything about you. Coinbase only lets you exchange some assets and offers some level of protection, while Uniswap lets you exchange anything and you are on your own. There are different reasons why either option might be better for you for any given situation but that’s a different article and for the moment let’s just recognize that most people will likely end up using both options at different times for different things.
That was a lot, I know. But you now understand this better than probably 99% of the population.
There’s a few more things. While Metamask is fast and easy, you really don’t want it to be your only wallet. You’ll want to keep enough in it for transactions and impulse buys, but for anything more significant it’s probably better to put it somewhere else. That’s why I like the Metamask + Rainbow combo (or + Ledger if you are getting serious). But here’s some things to note:
When starting any of these apps you will be given the choice to add a wallet or create a wallet. If you have a wallet already and want to use the same one then you will choose “add” and then you’ll need to put in your seed phrase. Wait, what’s a seed phrase? When you create a wallet you will be given a seed phrase (a list of 12-24 words). THIS IS SUPER IMPORTANT. Write it down. Protect it. That seed phrase will allow you to rebuild your wallet should you lose access to it. It will also allow anyone else to rebuild your wallet if they are trying to hack you – so don’t put it anywhere someone else might get it. Don’t put it online, don’t put it in a shared note app, don’t put it on a post it note on your monitor. Lock it away somewhere safe. Treat it like a secret password to all of your money, because that’s what it is.
Rainbow will let you add or create several wallets which you can switch between easily for different purposes. Metamask will only give you one wallet, though it will allow you to create different “accounts” which are subsets of the one main wallet. That’s super confusing, I know. Let me draw you a picture:
Don’t ask me why it’s like this, companies just do weird shit ok?
It’s likely that you’ll want a wallet that is accessible from Metamask AND Rainbow, so create it first with Metamask and then using the seed phrase add that to Rainbow. If you do that in the other direction, Rainbow first and then add to Metamask it will replace anything you previously had in Metamask. Trust me here, it’ll save you a bunch of headaches later. Metamask first, then add it to Rainbow. I know more than one person who accidentally wiped their Metamask wallet because they tried to add another wallet later and couldn’t remember where they wrote down their Metamask seed phrase. Just to keep adding more layers of confusion there’s also a Metamask iOS app which you can use to import your Metamask wallet from you browser and that will allow you to authorize various websites from it’s built in mobile browser as well. That might be too much for right now, but just know it’s possible.
That was also a lot, I know. And there’s so much more, but that’s enough to get you going and allow you to start using Web3 websites which use a wallet instead of a login for your account management. Also, having a wallet does not automatically mean having crypto, so you’ll still have to get some, but that’s a whole other thing that I’m not going to walk you through, though Coinbase is probably the thing most people use at least at first. So if you are just starting, you can start there.