Before we dive into the nitty gritty of crypto wallet options, let’s first define what exactly is a crypto wallet.
Simply put, crypto wallets are tools that enable users to interact with blockchain networks. Similar to that traditional leather wallet you have in your back pocket (or purse), crypto wallets allow for the safe storage of one’s funds – be it cryptocurrencies (e.g. Bitcoin, ETH, stablecoins, etc.) or collectibles (i.e. Non-Fungible Tokens). Now, unlike those leather wallets, crypto wallets provide quite the utility-box of functionality. Not only can you store your crypto-assets, but you can also participate in the burgeoning ecosystems seen on the Ethereum network with its Decentralized Finance movement, along with other networks following the same breath. Through the use of these wallets, people now have the full capacity to interact directly with one another (peer-to-peer), without relying on an intermediary to facilitate the transaction. In other words, cryptocurrency wallets are like individualized banks in your pocket, granting you access to transact with virtually anyone & everything you’d like.
How do crypto wallets work?
All crypto wallets generate essential information needed to send & receive cryptocurrency through blockchain transactions. “What is this essential information?” you may ask. Good question. In order to execute a transaction with your wallet (sending or receiving), your wallet would have to hold both Private and Public Keys.
What are these keys?
Public and Private Keys are integral elements of cryptocurrencies that utilize Public Key Cryptography. These Public and Private keys assist in creating an alphanumeric identifier which serves as an address, or a particular spot on the blockchain where users can send funds. With this in mind, private keys allow the individual to prove that the public key is theirs. Thus, without the private key, a user will not be able to initiate any transactions, since they cannot prove that the public key is their own.
If you’re just starting out in crypto, you’ve probably run into quite the variety of crypto wallets: Coinbase Wallet, Ledger, Trust Wallet, MetaMask – the list goes on and on. All of these wallets offer distinct features that differentiate them from the pack.
Before we dive into the types of wallets, we first have to grasp an understanding of what kinds are available.
Kinds of Crypto Wallets
Hot & Cold Wallets
Hot wallets are classified as any wallet that needs to be connected to the internet in order to operate. As you’ll see, if you were to create a Coinbase account, or eventually a Coinsource Wallet 👀 , you will always need to have access to the internet in order to use it.
Cold wallets, on the other hand, don’t need an internet connection to operate. Instead, they tend to use a physical medium to store one’s keys off-chain (offline). Cold wallets are endorsed as the safer alternative of storing one’s coins, since it is disconnected from the internet – making it harder for hackers to compromise one’s funds.
Desktop Wallets – Hot Wallet
These wallets are to be seen as programs that store and manage your private keys locally on your computer. As the name implies, desktop wallets (or computer wallets as I like to call them), are only accessible on – you guessed it – your computer! Dissimilar to other wallets, desktop wallets give you complete control over keys as well as your funds. What’s more interesting is that you can also transfer your private keys to other devices, as a precautionary measure in case your primary device stops working.
- Easy Set Up
- Full Control
- Safer than Online and Mobile Wallets
- Inconvenient for vagrant traders
- Constant Back-ups required
Mobile Wallets – Hot Wallet
One of the most common and convenient wallets, Mobile Wallets are easily downloaded through as smartphone’s app. store (e.g. Google Play, IOS). Since most smartphones are supported with internet accessibility, they are also deemed hot wallets. The benefits of Mobile Wallets is their streamlined capability to initiate peer-to-peer transactions, all the while securely storing user funds and equipping them with Web3 and decentralized finance compatibility (with certain wallets).
- Convenient & Easily Accessible
- Easy to Use
- Can be funded with a debit card (most mobile wallets)
- Funds can be lost if phone is damaged or accidentally discarded
- Susceptible to malware, viruses, and bugs
Hardware Wallets – Cold Wallet
Typically utilizing a physical medium to facilitate the storage of one’s funds, hardware wallets are one of the most secure options on the market. Some of the most popular hardware wallets such as Ledger and Trezor, store users’ funds on a USB-like device while completely disconnecting their private keys from the internet (also known as off-chain). These wallets are also referred to as Cold Storage, since all keys are held offline – the exact opposite of hot wallets which need to be connected to the internet in order to function. This minimizes the possibility of a users’ funds being compromised and potentially liquidated.
- Extremely Secure
- Good for long-term storage
- Unlikely to get hacked by cybercriminals
- Expensive in comparison to Software based wallets
- Inconvenient for the avid trader
- Can be physically stolen if not kept in a secure location
Paper Wallets📝 – Cold Wallet
By far the most old school approach for asset/fund storage, Paper Wallets brings things back-to-basics. All a user needs is a piece of paper and a pen to jot down her/his private key and public address (public key). After taking notes, it may be within the user’s best interest to put this paper in a security deposit box, or a safe; anywhere that is away from prying eyes and inclement weather.
Although paper wallets are known as one the simplest forms of private key custody, it is also the riskiest. Why? Well, after writing down their wallet information, most people have a tendency of misplacing it or even throwing it in the trash without noticing. Bye-bye Bitcoin (and other cryptocurrencies) 👋🏼. On the other hand, Paper Wallets – if managed properly – could be one of the safest forms of storing your keys. Majority, if not all, of paper wallets are completely detached from any online source, removing the prospect of theft and malware.
- Extremely Secure
- Completely off-chain
- Easily mismanaged/misplaced
Which Wallet Is Suitable For Me?
At the end of the day, it’s all about preference.
If you’re a crypto-bull and have a long-term outlook on Bitcoin, Ethereum and the grander crypto-verse, it may be best to acquire a hardware wallet.
On the other hand, if you’re an active trader and would like to take profits any chance you get, then a Mobile Wallet and Web Wallet may be your best bet.
Depending on your allocation strategy, you could potentially have multiple wallets serving different purposes.
You’re beginning to notice that Bitcoin wields the characteristics of being a store-of-value. Thus, you decide to purchase a Ledger wallet and port your Bitcoin for safekeeping. In the same breath, you would also like to keep some Bitcoin on standby just in case it appreciates in value to make a quick trade. You’ll probably open a Coinsource account and keep a decent amount of Bitcoin in your Bitcoin wallet for convenience.
To reiterate, wallets are all about preference. You have to ask yourself, what are my short-term and long-term goals? Answering this question will step you in the right direction on how to appropriately manage your crypto-assets.
What does the future entail?
The storage of private keys can be expanded beyond the realm of finance. For instance, eventually, people could store encrypted versions of their identity or digital goods (NFTs or “equity tokens”) in their digital wallets. Rather than carrying around a social security card, or drivers license, or paper receipts after a grocery store run, people will simply have a multi-faceted wallet that serves as a proprietary custodial account.
About The Author
Jeremy Guzmán is currently a Product Manager at Coinsource, while also an active DeFi (Decentralized Finance) enthusiast. Check out some of his previous works:
- Banking without a Bank
- Set Social Trader Spotlight
- How to participate in the Ampleforth Geyser using Argent Wallet
Coinsource is the world leader in Bitcoin ATMs. With a focus on compliance and ease of use, Coinsource is aiming to bring Bitcoin to the masses. Follow for blogs about Bitcoin, finance, company updates and Bitcoin ATM information!