Different Types of Cryptocurrency Wallets You Should Know About
In this article, we will cover the different types of wallets that you can choose from, what their features are, and when/why to use them. At the end of the article you will find an extremely useful cheat sheet that will give a comprehensive overview of all available options and when to use them; be sure to check it out and share with others!
First of all, it is important to know that a wallet doesn’t actually store your coins/tokens. Coins and tokens are stored on the blockchain network itself. Wallet software stores your private keys that give access to your coins/tokens and the wallets interact with the blockchain by sending signed transactions that, when validated by the network, will be registered on the blockchain. A good analogy that bitcoin-evangelist Andreas Antonopolous uses is that a cryptocurrency wallet is not so much of a wallet, but more of a key-chain: it stores the (private) keys that can unlock your coins on the blockchain.
For a better understanding of wallet terminology, like wallet addresses and private keys, and how this works under the hood, please also read our article about crypto wallet addresses and public/private keys; this article should give a good fundamental understanding to be able to grasp the concept and aspects of cryptocurrency wallets better.
For having full control and ownership of your cryptocurrency (and not having to rely on third parties) it is an important learning step in the process of becoming a fully independent crypto user and investor to be able to store the keys to your crypto funds in a cryptocurrency wallet where you have full control over your keys. Always keep this important phrase in mind: “Your private keys, your bitcoin – NOT your private keys, NOT your bitcoin!” (I believe it was once again Andreas Antonopolous who introduced this proverb.) Whenever somebody else gets or takes possession of your private keys, they are fully able and technically entitled to do with the funds what they desire, like transferring all to their own wallet.
Cryptocurrency Storage: HOT vs COLD
The first difference between wallet categories is the type of storage for your private keys: hot vs. cold storage.
Hot storage is all software-based storage types that are connected with internet, such as exchange wallets, online wallets, desktop wallets, and mobile wallets.
Cold storage (or offline) storage are all types of storage that are not connected with the internet. For example: paper wallets and hardware wallets.
You will most likely buy your first cryptocurrency at an exchange. Exchanges usually have their own wallets linked to your user account where your funds are stored. It is essential to understand that these exchanges own the private keys of those wallets and basically control your coins until you withdraw your funds. Since exchanges are normally unregulated and can be hacked, go bankrupt, or even at any point exit scam, there is always substantial risk involved when storing your coins in exchange wallets. It may be okay to keep your coins on exchanges if you trade coins frequently (but then only the amount that you actually use for trading) or if the amount is too small to justify paying the exchange withdrawal fee.
There are some major drawbacks with using the exchange wallet, for a more in-depth discussion on safety of exchange wallets, click here.
These are online services that will let you interact with your wallet addresses through their software and via their servers. An advantage is ease of use because it doesn’t require the hassle of downloading and setting up software and you can login quick to access your funds for online payments or transactions, for which these wallets are a great tool. Very well known online wallets are Blockchain.info, Bitgo.com, Btc.com and Coinbase.com (at Coinbase the company takes full custody of your coins, but they have an insurance that should protect their crypto liabilities against things like hacks or employee theft; Coinbase basically functions as a Crypto bank and has 98% of their funds in cold storage). Make sure to back up your wallet and use strong password protection. If Two Factor Authentification (2FA) is available, then please activate this. In many cases the online wallet will provide you with a recovery seed phrase. Make sure you store this code on paper (not on your device; hackers will steal your funds!), because this is needed when you need to circumvent normal account login or if you need to import your wallet with another wallet provider.
Online wallets are very convenient and easy to use and a fairly reasonable compromise between security and convenience, but it is not recommended to store large amounts of crypto in these wallets. Only store the amount that you need for your average need for transactions. The only exception for using online wallets (or even the Coinbase wallet) for storing more than only transactional amounts, is if you (hopefully only temporarily) have no way of storing your private keys in a safe and secure enough manner. Your goal should however in all cases be to create a situation where you have full control, ownership (and the subsequential) responsibility of the private keys to your crypto funds.
Software wallets: desktop
Desktop wallets are apps that you download on your computer. Many coins have their own software wallets (light clients) and sometimes these are the only options you have for storing those specific coins (in case your coin has not been integrated in any universal wallet). Other wallet software can support a wider range of coins — these are referred to as “multi-coin wallets” or “universal wallets” — that provide you different wallet addresses for each of those coins.
Some software wallets even have an exchange (usually Shapeshift or Changelly exchange) built in, so that you can directly swap one coin to another without the hassle of depositing on, buying/selling on and withdrawing from an exchange. Be careful with using this exchange option in the wallet software; although it seems convenient, the integrated coin swap feature sometimes may have issues. On a virus-free computer that you use responsibly, you can store larger amounts of cryptocurrency in these software wallets.
Software wallets: mobile
Many cryptocurrencies also offer a mobile version of their wallet software which you can download as an app on your smartphone or tablet. There are also apps which allow you to create wallets for many different cryptocurrencies (the universal wallets). These are usually the easiest and fastest wallets to use for cryptocurrency transactions. Mobile wallets are unfortunately also vulnerable to hacking or theft (make sure you back up the recovery seed phrase offline), so it’s advised to not store too many coins in these wallets; ideally you shouldn’t store more funds in your mobile crypto wallet than you would normally feel comfortable with to keep in your physical fiat cash wallet. Mobile wallets are particularly useful and practical to pay for goods and services at merchants that accept cryptocurrency as a payment method. Because you can scan the QR code of wallet addresses with your phone’s wallet app, payments are done very seamlessly.
Paper wallets are a form of offline storage. Because of the hassle involved in creating them securely, they are best used for long-term storage and are less convenient for frequent transactions. Because you store the private keys offline (on paper), they can’t be hacked (as long as you generated the key pairs in a secure manner), and are therefore one of the safest forms of storing your private keys. Although paper wallets can’t be hacked, they can be destroyed by natural influences (fire/water/decay) or lost/stolen. So it is important to make sure your paper wallets are kept in a safe place (preferably also have another copy stored separately). Many coins offer a paper wallet generation program that creates an address and private key pair which you can print.
To access the funds you store on a paper wallet address, generally, you need wallet software to “sweep” the wallet. It is highly recommended to sweep your entire wallet balance from a paper wallet. After using the private key of a paper wallet, or in fact the private keys of any wallet address of any type of wallet, it is also recommended to not use this paper wallet ever again out of security precautions. Please refer to our more in-depth paper wallet article for more information about paper wallets.
Hardware wallets are by far the safest places to store your cryptocurrencies. These are small devices that store private keys inside. By connecting the device to your computer, the software can generate transactions that will be signed WITHIN the hardware wallet device; the private key does not leave the wallet device and cannot be intercepted by a hacker. To sign a transaction with the private key, you need to press physical buttons on the hardware wallet, so even if your computer was compromised, a hacker won’t be able to steal your private keys. There are only a few choices in brands and models and usually, prices vary from around $100. This type of storage doesn’t make sense if you have only a small amount of crypto funds that don’t justify the expense (paper wallets would be a safe enough but cheaper alternative), but if you have large amounts of cryptocurrency (generally it would make more sense from between $500 – 1,000 worth of crypto), it is highly recommended to invest in a hardware wallet.
Besides safety benefits, they are also very convenient for frequent use and transactions and can also easily communicate with other cryptocurrency software like several dedicated crypto wallets, MyEtherWallet and some decentralized exchanges. When you buy a hardware wallet, don’t buy from a re-seller, but directly from the manufacturing company. Follow the company’s instructions for a safe setup of your device. If you are buying a Ledger Nano S hardware wallet (one of the most popular products), you can also read our article with instructions about installation and use.
Cryptocurrency Wallets Cheat Sheet
This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.