The Definitive Guide to Crypto Wallets
Did you find the right crypto wallet for your digital assets? If you’re still searching, you’re not alone. Discovering the right wallet is a common preoccupation of crypto enthusiasts. The concern is understandable. Cryptocurrencies put us in a position we’re not used to. Suddenly, the security of our money is dependent on us and not on the government, banks or the credit card companies we do business with. This shift in responsibility can feel heavy. The weight is increased by the ever-expanding number of wallet options that need to be researched in order to make the right selection. If you’re just starting out, simply deciphering between different types of wallets can seem daunting. That’s why I created this post. If you’re looking for a detailed layman explanation of the various types of wallets and their pros and cons read on.
For the sake of being thorough, I’ll first define what a crypto wallet is. In my post, Convenience -vs- Security: The Tradeoff I described it this way:
Unlike your real-world wallet, a crypto wallet doesn’t actually store your digital money. A crypto wallet stores your private key (similar to a PIN number on your debit card) and public key (similar to your bank account number). Using algorithms, it allows you to send, receive and track your digital assets which are traceable via the blockchain network.
Hot storage wallets are easy to use and convenient. However, their drawback is that Internet connectivity makes them susceptible to cybercrime. There are three types of hot wallets: desktop, mobile and online wallets.
Desktop wallets are software applications that are downloaded on a single computer. Your private keys are stored directly on the machine. Desktop wallets are regarded as the most secure type of hot storage. Some people elevate the level of security these wallets offer by downloading them on a computer that is used only for sending and receiving digital assets. Others go even a step further and effectively turn them into cold storage by using a dedicated machine that is never connected to the Internet.
• Desktop wallets are easy to use
• They give you full access to your money
• They can be highly secure (if configured that way)
• Your computer can be compromised, it’s susceptible to hacks and viruses that could erase your keys and therefore your ability to access your money
• You will lose your coins if your hard drive crashes (unless you have a backup)
Mobile wallets are software applications that are downloaded on a mobile device. The private keys are stored directly on the device. You only need to scan a QR code (using the camera on your device) to make a purchase via a mobile wallet. The greatest benefit of these wallets is that you can use them while on the move.
• Mobile wallets are easy to use
• If you are like most people, your phone is always with you, which means your money is always with you
• They’re great for small purchases when you’re out and about
• Mobile wallets are easily hackable, they’re susceptible to keylogger infections, viruses, malware etc…
• If you lose your phone, you lose your money (unless you created a backup)
Online wallets (also referred to as web wallets) are accessible via a browser. Some online wallet services allow you to control your keys but most don’t. When using an online wallet, the security of your money is largely dependent on the security of the service provider. Unfortunately, the fact that they store private keys online makes them an alluring target to hackers and therefore the riskiest type of wallets to use.
• The setup process is quick and easy
• You can access your money from any location
• You can use any Internet enabled device to access your account
• They’re convenient when you need to make a quick transaction
• Some are multifunctional and support a variety of activities e.g. storing and managing currencies, making purchases and trading
• In most cases, your money is in someone else’s hands (this is generally a bad idea unless you’re using the service for a quick trade or purchase)
• Your money is susceptible to hacks, scams, viruses, malware etc…
• Because some of your personal information is stored by the service provider, your data is susceptible to bad actors and it could even be publicized to government officials if requested
While the accessibility of hot wallets is appealing, your money is always at risk when it’s exposed to the Internet (and we all know that anything that is connected to the Internet is hackable). If you’re going to use a hot wallet, use it in the way that it was intended to be used – for making small short-term transactions. In fact, it’s good practice to use your hot wallet the way you use your real-world wallet. You wouldn’t walk around with thousands of dollars in your pocket or purse, would you? Treat your hot wallet the same way.
Cold storage wallets are revered for the security they offer. The tradeoff however, is that they are less convenient to use on a daily basis than hot wallets. There are two types of cold wallets: hardware wallets and paper wallets.
Hardware wallets are electronic devices that generate their own private key. A variety of hardware wallets are available on the market; many have unique features and techniques for securing digital assets. In general, most store the private key inside the wallet and provide a backup method for it, execute transactions via installed software and require one or more pin codes for access. To further thwart intruders, some hardware wallets are programmed to wipe your data if the wrong pin is entered multiple times.
• Hardware wallets are very secure (but not impenetrable)
• They give you full access to your digital money
• Some support multiple currencies
• They are versatile because in addition to storing keys, they can be used to facilitate transactions when plugged into an Internet enabled device
• A hardware wallet must be physically in your possession in order to access your coins
• While many other types of wallets are free, hardware wallets are not
• If you lose your recovery seed and the pin to your device, you lose access to your money
Paper wallets are a physical copy of your private and public keys, typically in the form of QR codes. As the name suggests, they are usually made out of paper (although they could be made out of other material). Paper wallets can be generated via an online paper wallet tool and then printed out or they could be handwritten on a piece of paper. To make a transaction, the QR codes would need to be scanned or the private key would have to be manually entered into another type of wallet. Paper wallets provide a high level of security and complete control of private keys.
• Paper wallets can be generated for free
• They give you full access to your money
• The private keys can be encrypted
• They aren’t vulnerable to hacks when properly generated
• They aren’t susceptible to computer related failures
• Like real cash, if a paper wallet is lost or stolen, it’s gone forever
• Paper is not durable, you could tear it or spill something on it that makes it illegible and therefore unusable
• The process of creating paper wallets seems easy until you realize that a number of cumbersome steps are required to properly secure your sensitive data
• They’re inconvenient for transactions (they’d certainly be tedious for trading)
Cold wallets are ideal for long term investors because the private keys are stored safely offline. In particular, hardware wallets are appealing because you can make transactions with them. However, like all electronic devices, hardware wallets can become obsolete over time. On the other hand, you can put a paper wallet somewhere safe and not ever worry about it (assuming you were cautious when initially creating it).
As you can see, there are a lot of storage options for your crypto assets and each has its own set of advantages and disadvantages. This makes it difficult to choose just one type of wallet. If you’re holding a lot of digital money, a better approach to putting all your eggs in one basket would be to get a mix of wallet types. In other words, get one hot storage wallet for short term daily use and one cold storage wallet for holding coins long term. This strategy provides a healthy balance of security and convenience. Besides, this is how they were designed to be used! I would even go a step further and get a third cold storage backup to protect against theft or the more realistic threat to your money, accidental loss.
Keep in mind that no wallet is foolproof. A large part of keeping your money safe will depend on your personal security habits (a topic I’ll address in another post).
Happy wallet hunting!
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