The different types of crypto wallets, explained
8.4 billion passwords were recently hacked and released in the largest password leak in history.
While this leak included many old passwords, it also included current passwords to bank and email accounts.
When you factor in the billions of dollars of cryptocurrency that are exchanged each year, it further enforces a need for strong security.
One of the first rules of investing in cryptocurrency is not to invest more than you can afford to lose. Even so, you still should protect yourself from loss in any way that you can.
This is why knowing the types of crypto wallets that are available is crucial if you are investing in cryptocurrency. Using a wallet can help keep your assets secure from hackers and other wrongdoers.
Here is a breakdown of what a wallet is and the different types that are available so you can invest with caution.
What Is a Wallet?
Owning cryptocurrency is different from owning traditional currency, as you’ll never be able to hold a Bitcoin in the palm of your hand. Cryptocurrency is never physical, but it is instead like a group of codes.
Cryptocurrency is stored on the blockchain with a specific address. A public key allows other users to send you crypto. A private key unlocks your crypto to you.
A crypto wallet is similar to a traditional wallet in that you use it to keep your funds safe. If someone were to gain access to your traditional wallet, they’d have your cash, credit cards, IDs, and more.
Luckily, crypto wallets provide additional security features over a traditional wallet. Crypto wallets don’t store your actual cryptocurrency, but instead store the keys to your crypto.
A wallet holds the information that can connect you to your funds to keep them safe. But couldn’t you just keep your crypto in the same place that you bought it?
Why You Need a Wallet
You technically can store your crypto in the exchange where you bought it. Anyone who has bought small sums of cryptocurrency will typically see that it is stored in their account initially. It appears similar to a bank account balance.
It will even have some layers of security. Cryptocurrency exchanges typically have insurance policies to protect against losses. Funds are also usually stored in FDIC-insured accounts.
But these security measures won’t help you if someone hacks into your account and transfers your crypto. Insurance policies held by your exchange won’t cover this type of loss and your funds will be gone without a trace.
While there is no foolproof security for crypto storage, a wallet will provide a strong layer of protection to your assets. If you invest in cryptocurrency, you owe it to yourself to investigate wallets so you can protect your investment.
Types of Crypto Wallets
There are two main categories of crypto wallets. Each category has its own set of pros and cons.
Hot wallets are wallets that are connected to the internet in some way. Alternately, cold wallets come in a physical form and are not connected to the internet.
Hot wallets offer more flexibility but are less secure than cold wallets. Since hot wallets are digital, some will give you the ability to access your funds while you are on the go. On the flip side, because they are digital they still have some level of vulnerability.
Cold wallets are not connected to the web, so they typically offer more security. A cold wallet would need to be physically stolen for funds to be lost. This level of security does make it more difficult to trade funds while traveling, however.
For those with large cryptocurrency holdings, a combination of cold and hot wallets may work best. The majority of funds can be secured in a cold wallet, while some funds are more flexible in a hot wallet.
A hybrid approach can maximize your security with flexibility. Selecting the specific type of hot or cold wallets will allow you to better personalize your security.
Within both the hot and cold wallet categories, there are different types of crypto wallets. The three main types are software wallets, hardware wallets, and paper wallets.
Most software wallets fall into the hot wallet category, as they are connected to the internet. There are many types of software wallets, but the most common are web wallets, desktop wallets, and mobile wallets.
Web wallets are accessed through a web browser. Because you can access them through a browser, you don’t have to download any specialized software on your computer or phone.
Browser access also means you can access your crypto from anywhere as long as you have your password and a device with a web browser.
With a web wallet, the website often holds the key to your crypto, however. This gives you a little less control over your cryptocurrency.
Some websites will offer multisig wallets, where there are two keys. The website holds one and you hold one. This gives you more control over your web wallet.
Since the keys to your assets are at least partially held by the wallet provider, it is important to research the security of the site you choose. You will be putting your funds essentially in their hands for safekeeping.
A desktop wallet requires you to download an application to your computer. With the application, you’ll generate a data file that will hold your keys. You’ll also need to create a password to access the keys.
One of the benefits of a desktop wallet is that you are the holder of your key. However, because you are holding your key, you’ll need to ensure your computer is free of any viruses or malware. It is also crucial that you do not lose your password.
If you opt for a desktop wallet, you should export a copy of the data file and back it up elsewhere. This way you could still access your funds when you are remote or if something happens to your computer.
Mobile wallets work essentially the same way as a desktop wallet. The primary difference is that the wallet is a mobile application on your phone.
A mobile wallet offers more flexibility for where you can be when you’d like to exchange funds. They also often come with QR codes so you can more easily buy and sell crypto.
Mobile wallets offer more flexibility but do result in additional security precautions. Mobile wallets also must remain virus-free to keep your crypto safe. In addition, you must take more caution to not lose your phone.
A hardware wallet keeps your keys are saved on a physical device rather than in software. Most hardware wallets work similarly to a flash drive. They can be connected to a computer or other device through a USB drive.
This is one of the major benefits of a hardware wallet. It is not connected to the internet, so that removes a major security vulnerability. With a hardware wallet, you create a seed phrase to help you access your crypto if you lose your device.
When creating transactions, your private key will never leave your device. The device requests the transaction details and then validates the data itself. This way your private key doesn’t leave the device.
Devices like the ledger hardware wallet are compatible with multiple applications and blockchains. This way you can work with different types of crypto all on one device.
While potentially more costly than a software wallet, hardware wallets provide more security. They are especially recommended for those who have a large sum of crypto or who will hold their funds for a long time.
A paper wallet is another type of cold wallet as it is physically a piece of paper. The document contains all of the data needed to access your cryptocurrency.
While cold wallets typically offer more security, the format of a paper wallet creates a vulnerability. If you lose your paper wallet, you lose your funds as well.
Another disadvantage to a paper wallet is the inability to easily send partial funds. There are workarounds, but they can be time-consuming. Due to these downfalls, the use of paper wallets is typically discouraged.
Trade With a Sense of Safety
The different types of crypto wallets offer varying security and features. Selecting the best types for your investment will help keep your crypto safe. Once you’ve got a security plan, you can focus more on making those gains.
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