đź’ˇ TL;DR
- Cryptocurrency wallets do not physically store coins like pocket wallets.
- The public and private keys needed for purchases of cryptocurrencies are instead stored in these wallets, and they also offer digital signatures to confirm each transaction.
- There are many different types of cryptocurrency wallets, including hardware, software, and even paper. Every type of cryptocurrency wallet has unique benefits and downsides.
- The best cryptocurrency wallet for you will largely depend on your unique use cases and requirements.
For wise cryptocurrency investing, it is very crucial to understand several forms of crypto wallets. But the crypto sphere is huge, and it’s easy to get lost in a sea of terminologies. What are hot and cold wallets? What’s the difference between custodial and non-custodial? Which option is better?
If all these choices overwhelm you, and you’re wondering which types of crypto wallets on the market are the most suitable for your need, you have come to the right place.
What is a crypto wallet?
A crypto wallet allows you to interact with a blockchain network. In simple terms, they store your private keys (and your seed phrase depending on the type of setup), and safeguard your digital assets. Crypto wallets enable you to perform sell/buy or send/ receive actions of cryptocurrencies like Bitcoin and Ethereum.
Essentially, the act of sending tokens means you are validating a transaction using your private key, which is reflected in the blockchain network in real time. Following that, the network will subsequently incorporate your transaction to display the updated balance for both your address and the recipient’s address.
Understanding Crypto Wallets
There is no ideal cryptocurrency wallet, for each form of crypto wallet has advantages and disadvantages. Some options come with higher security levels, while others are simpler to use, and some are more flexible and mobile.
Certain wallet types will require more responsibility from their users in keeping track of their own keys, while others allow you to trust a third party and keep your assets safe. The following are important decisions you must make about the type of cryptocurrency wallet you choose to use:
- Online or offline: Hot or cold wallet
- Control of private key: Custodial or non-custodial wallet
- Level of security: Online, mobile, desktop, or hardware wallet
Different Types of Crypto Wallets
Hot Wallet
A hot wallet is basically any crypto wallet connected to the internet. Hot wallets can be web-based, installed as an app on your phone or PC, or both. This kind of crypto wallet is the most convenient because you must always be online in order to buy and sell your digital assets.
Hot wallets are generally not as secure as cold wallets since they are more vulnerable to hacking and data phishing attempts. However, hot wallets are much more user-friendly, easy to use, and convenient for the everyday user.
Cold Wallet
A cold wallet, on the other hand, is almost always offline, making it highly secure and almost impossible to hack.
Usually, cold wallets are hardware wallets that you can have access to. It’s like a specialized device that you can connect with your devices using USB port or Bluetooth. Cold wallets are the most secure type of wallet, however, this is at the cost of not being able to make transactions instantly and conveniently.
Non-Custodial Wallets
The difference between custodial and non-custodial wallets is simply whether or not these different crypto wallets enable you to control your private keys.
The private keys play an identifying role in a crypto wallet, in that it is used to assign ownership to the wallet owner. A non-custodial crypto wallet will allow its users to have control and responsibility over their private keys, rather than leveraging the role of keeping their key secure to a third-party service. This is considered the more secure and flexible approach because you can control how and where your private keys are stored.
Custodial Wallets
If the keys in your crypto wallet are controlled by a third party, it’s considered a “custodial” wallet. These crypto wallets are web-based and/ or exchange wallets that you can access via mobile or desktop. You must trust the custodian of your keys (the party that’s responsible for keeping the key secure).
In many ways, this is similar to keeping physical assets like gold at a vault to secure your valuables in reality. Therefore, it is important to choose a good crypto custodian.
Different Types of Hot Wallets
Web-based wallets
These are crypto wallets that are accessible via your internet browser and from any mobile or PC devices. Examples of these wallets include Bittrex or QuadrigaCX, and online wallets like Coins.ph and GreenAddress. These wallets come with the lowest security scores due to their 24/7 connectivity to the internet, making it more susceptible for hacking.
Desktop and mobile wallets
These are crypto wallets that are generally more secure than web-hosted wallets since they are built using software that is downloaded to your phone or computer. Examples of these wallets include Exodus, Multibit, Armory, and Bitcoin Core (desktop) and Jaxx, BreadWallet, Mycelium, and CoPay (mobile).
Crypto hardware wallets
These are considered specialized hardware devices. They are often offline when you are not making transactions. Examples of these can be products by Ledger, Trezor, and KeepKey. Since the cryptocurrency transaction is “signed” “in-device,” remote hacking is not possible. Crypto hardware wallets connect to the internet while transacting via a USB port or Bluetooth connection to a personal computer. Although they are the least convenient, these crypto wallets are the most secure.
Closing thoughts
Choosing which type of crypto wallet to use, like choosing which stocks to purchase, doesn’t come with an all-encompassing answer. Knowing what you want to accomplish with your cryptocurrencies is the first step to understanding the types of crypto wallets, or a combination of usage that works best for your purpose.
