If you want to transact on a blockchain network like Bitcoin or Ethereum, you’ll first need a place to store your cryptocurrency. This storage location is called a cryptocurrency wallet.
There are three types of crypto wallets:
- Paper Wallets
- Hardware Wallets
- Software (online) Wallets
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In this guide, we’ll explore the 3 different types of crypto wallets, as well as the difference between custody and non-custodial wallets and hot and cold wallets.
What is the simplest crypto wallet?
WHAT IS A CRYPTO WALLET?
A blockchain wallet allows users to store, manage, and trade cryptocurrency assets. It also allows users to interact with DeFi (decentralized finance) and exchange NFTs (non-fungible tokens).
The main function of a crypto wallet is to store your private key, which is necessary to make transactions on any blockchain network.
It’s important to note that your cryptocurrency is never stored on a wallet itself, but on a blockchain (such as Bitcoin or Ethereum). The private key held in your wallet simply unlocks your blockchain address, which is where the cryptocurrency is actually stored.
Before we explore the different types of cryptocurrency wallets, let’s take a moment to understand what exactly “public” and “private” keys are.
PUBLIC KEY VS PRIVATE KEY
When you first open your crypto wallet, you will automatically be assigned a public key and a private key.
- A public key is a large string of digits that allows its owner to receive cryptocurrency by encrypting sensitive data.
- The main function of a private key is to verify both transactions and ownership of a wallet address. A private key obtains this with an algorithm that decrypts and encrypts sensitive data.
A public key is like a mailbox where anyone can see this address and send mail (crypto) to it.
However, only the owner of this mailbox has the key to open it and receive messages. This key is similar to the “private key” in cryptocurrencies.
Even if the private key
and the public key are mathematically linked together, it is impossible to derive a private key from a public key alone.
Never reveal your private key to anyone. If you do, that party could steal all of your cryptocurrency.
Note: Most modern wallets use “seed phrases” instead of private keys. A seed phrase is a long series of random words that are linked to a private key.
CUSTODIAN AND NON-CUSTODIAL WALLETS: WHAT ARE THE DIFFERENCES?
All crypto wallets come in two forms: custody and non-case.
- In a custody wallet, an exchange contains your private key for you. A popular example of such an exchange is Coinbase. Custody wallets do not allow interaction with Web3 because a user does not have direct access to their keys.
- In unguarded wallets (sometimes called self-custody wallets), the user has direct access to their keys and, therefore, complete control over their digital assets. This control allows non-holder wallet owners to interact directly with a blockchain. With self-custody wallets, crypto is traded on decentralized cryptocurrency exchanges (DEXs), such as Uniswap.
This article will mainly focus on the three different types of non-holder portfolios.
PAPER WALLETS: HOW DO THEY WORK?
- A paper wallet is a printed piece of paper that has your private key written on it.
- Paper wallets are best for users who rarely plan to interact with their proprietary cryptocurrencies.
- Paper wallets themselves are not secure.
The first type of crypto wallet on our list is the simplest: the paper crypto wallet.
A paper wallet is simply a printed (or handwritten) sheet of paper that has written your private key and possibly scannable QR codes on it.
Although paper wallets are completely disconnected from both the internet and the blockchain, the keys on them actually represent keys on the blockchain that are still active and can be used to locate the cryptocurrency.
One of the biggest disadvantages of paper wallets is the fact that they are stored on paper. If the card gets wet or burned in a fire, you won’t be able to read your private key (or seed phrase) and representative encryption will be lost forever. A water/fire safe is required for the secure storage of a paper wallet.
Paper wallets also make the transaction process with blockchain networks tedious: a Bitcoin private key is a 256-bit string.
HARDWARE WALLETS: HOW DO THEY WORK?
- Hardware wallets are physical devices that store the private key.
- Hardware wallets can be either connected or disconnected from the Internet.
- offer a safer place to store cryptocurrencies than paper wallets.
Hardware wallets
In blockchain technology, a hardware wallet
is a cryptocurrency wallet that stores private keys on a hardware device, such as a USB drive.
The hardware wallet has features of both “hot” and “cold” wallets (which we will talk about soon).
Hardware wallets
are like paper wallets in that they allow their owners to securely store their private keys offline.
In addition to safeguarding your private keys offline (where they can never be hacked), most hardware wallets allow users to sign and confirm blockchain transactions by simply connecting their device to a computer.
After a transaction is completed, a user can disconnect their device and does not have to worry about it being constantly connected to the internet. This constant connection makes a portfolio vulnerable to threats.
Two of the most popular hardware wallet providers include Ledger and Trezor.
SOFTWARE WALLETS: HOW DO THEY WORK?
- Software wallets are both the most efficient and risky type of wallet.
- include browser extension wallets, mobile app wallets, and desktop app wallets.
Software wallets
Software wallets
are the most popular wallets in the cryptocurrency world. This type of wallet is always connected to the Internet. This constant connectivity allows users to seamlessly and quickly interact with DeFi protocols. Borrowing and lending, betting, trading tokens, and trading on DEX (decentralized cryptocurrency exchanges) is a breeze with a software wallet.
However, this connectivity really has some downsides. Because a software wallet is constantly connected to the internet, it is constantly at risk of being hacked.
Threats to software wallets are not limited to cyberspace.
If you lose or lose an unlocked device on which your wallet sits, the recovering party could very easily gain access and drain the cryptocurrency from your wallet. It is therefore important to always have any device that contains a software wallet safeguarded by a password.
Let’s explore the different types of these online wallets.
3 TYPES OF SOFTWARE WALLETS
There are three main types of software wallets.
- Web Wallets
- Mobile
- Desktop Wallets
wallets
Web wallets (browser extension wallets)
Web wallets come in the form of a web browser extension. The software that powers a web wallet is stored on your internet browser, which can introduce security risks.
If you want to trade cryptocurrencies on a cryptocurrency exchange, you simply need to visit that protocol’s website and link your wallet. The transaction is set on the protocol but confirmed on the wallet. A browser extension wallet is the fastest and easiest to use way to interact with blockchain technology.
Web wallets are often targeted by malware, so it’s important to have a healthy computer before downloading one. Security measures, such as scanning your computer before downloading browser extension wallets, can help mitigate risk.
Mobile
wallets
In a mobile wallet, your cryptographic keys are stored on your real phone. This type of wallet comes in the form of an application, which is typically downloaded from the Google Play Store for Android or Apple’s App Store for iPhone.
Many mobile wallets have a built-in browser that allows you to connect to decentralized applications (dApps). MetaMask and Exodus are two popular mobile wallets.
Desktop Wallets
A desktop wallet is
exactly the same as a mobile wallet with one exception: your private key is stored on a desktop application rather than a mobile application.
2-factor authentication is recommended for both mobile and desktop wallets.
HOT WALLET VS COLD WALLET: WHAT ARE THE DIFFERENCES?
“Sometimes, people refer to a wallet simply as a ‘hot’ or ‘cold’ wallet.”
- A hot wallet is any wallet that is always connected to the internet, and therefore always at risk of being hacked.
- A cold wallet is any wallet that is not connected to the internet. A paper wallet would be an example of a cold wallet.
Hardware wallets
share the characteristics of both hot and cold wallets. When a USB flash drive is not connected to the Internet, a hardware wallet is considered a cold wallet. Once the USB is connected to a computer connected to the Internet, it becomes a hot wallet.
BITCOIN WALLET VS ETHEREUM WALLET
The Ethereum blockchain is not compatible with the Bitcoin blockchain. For this reason, you’ll need to have a wallet for each network if you want to interact with both of these networks.
Electrum and Mycelium are two widely used Bitcoin wallets, while MetaMask and Coinbase both offer popular Ethereum-based wallets.
The third most popular blockchain network is Binance. This network also has its own distinct wallet: Trust Wallet.
WHAT TYPE OF CRYPTO WALLET IS BEST FOR ME?
Determining the type of portfolio that’s right for you depends on a few factors.
How often are you going to interact with the blockchain?
If you want to buy popular cryptocurrencies like BTC or ETH to hold for a long time, a wallet solution for cold storage might be best for you. An example of a cold storage would be a USB flash drive. When encryption is kept on devices like these, your wallet is not connected to the internet and therefore is not at risk of being hacked.
If you plan to trade cryptocurrencies and/or interact frequently with decentralized financial applications, a software wallet may be your best option. Within these types of wallets, desktop and mobile applications offer the best security.
Do you tend to lose or forget things easily?
If you tend to move things around and are generally not well organized, you may want to consider a custody wallet. Unlike non-holder wallets, if you forget your password credentials for a custody wallet, you’ll be able to retrieve them through your broker.
TAKEAWAY
- The main purpose of a crypto wallet is to store a private key.
- In a custody wallet, an exchange safeguards your private key for you.
- In a non-holder wallet, you are only responsible for managing your private key.
- Three types of crypto wallets include paper wallets, software wallets, and hardware wallets.
- are always connected to the internet while cold wallets can be disconnected from the internet.
Hot wallets
FREQUENTLY ASKED QUESTIONS
Which type of crypto wallet is best?
Cold storage wallets are best for cryptocurrency users who plan to simply invest in cryptocurrencies for the long term. Hot wallets are best for cryptocurrency users who frequently interact with the blockchain.
What are the three types of wallets?
The three types of crypto wallets are paper wallets, software wallets, and hardware wallets.
What are the 4 types of cryptocurrency?
4 popular types of cryptocurrency include bitcoin, ether, solana and polygon. All of these cryptocurrencies are the native coins of a blockchain network.
What is a cryptocurrency wallet?
A cryptocurrency wallet is used to store private keys. Crypto wallets can be hardware, software, or paper.
What is a browser extension portfolio?
A browser extension wallet is a cryptocurrency wallet that saves a private key on an internet browser, such as Chrome. This type of crypto wallet is the most user-friendly but also the least secure.
What is the most secure type of crypto wallet?
Hardware wallets are generally considered the most secure type of crypto wallet. These wallets can be stored offline and therefore are not subject to risks of hackers and malware.