Wallets

When dealing with cryptocurrencies, there are two types of wallets: online and offline.

Online wallets like Coinbase let you store your BTC or USD with them so that you have it available to trade using the cryptocurrency exchanges.

Online exchanges will store your cryptocoins as well, so that you can buy/sell at will without having to worry about sending or receiving coins in order to make transactions.

If you do a lot of trading, it’s not unreasonable to keep these online balances filled to whatever amount you need to trade. It saves time and you don’t have to worry about constantly funding your account.

If you want to make a one-time trade to hold on to some cryptocoins for the future in hopes that the price will rise (kind of like investing in gold or silver coins, or even stocks for that matter) then you might want to store those coins in an offline wallet on your PC (or even off your PC, i.e. on a flash drive or even paper).
All cryptocoins have a wallet associated with them. Well, at least I think so. For Bitcoin, the wallet is what allows you to transact with other users. It gives you ownership of a Bitcoin balance so that you can send and receive bitcoins. Just like email, all wallets can interoperate with each other.

Once you install the wallet (there is a different program/wallet for each cryptocoin which you need to install separately), you can generate an address to send or receive cryptocoins.

So now, you can (within Coinbase, Cryptsy, or other online wallet or exchange) send whatever coins you have to an address that you generate with your local wallet. Once that transaction gets processed, the coins are now held in your local wallet.

Many people do this as a security measure so that if an exchange crashes, or worst case goes out of business or gets shut down for some reason, you won’t lose whatever coins you had stored with them.

Personally, if I’m in this for the long term, I would recommend keeping all of your cryptocoins offline. In fact, I even copy the data file from my PC to a flash drive (or even multiple flash drives for security, or in case one fails) and then delete the data file on my PC.

Why do this? Well, if you get hacked, the hacker can steal that data file and get ALL of the coins in that wallet. And if you’re dealing with thousands of dollars’ worth of cryptocoins, even tens of thousands, then you probably want to make sure your money is safe. It’s like a safe deposit box.

Let’s continue our example with Joe:

Joe just bought 37.95 LTC on Cryptsy and wants to store this offline in his Litecoin wallet.
Joe goes to https://litecoin.org/ and downloads and installs the LTC wallet. 

When Joe runs the wallet for the first time, it takes hours to sync, since it needs to download all of the previous transaction blocks. Once this is done, Joe is ready for the next step. 

Joe generates a new address within the LTC wallet to receive coins. 

Within Cryptsy, Joe chooses to withdraw his LTC to his local wallet. He does this by going to his Account Balances, hovering over Litecoin, and choosing Withdraw LTC. 

Joe puts in 37.945 as the amount since there is a .005 LTC withdraw fee. 

Joe then enters the withdraw address that he created from his offline LTC wallet installed on his PC. After entering his password and captcha, he processes the withdraw. 

Joe opens his LTC wallet on his PC and lets it run. Eventually it processes his transaction and his offline wallet is now credited with 37.945 LTC.

OK, that may have been too long and drawn out for some of you, but I wanted to go through the entire process, showing you everything that is involved when you’re dealing with buying and selling cryptocurrencies.