Understanding Crypto Wallet Types and When to Use Each
Cryptocurrency wallets are the method used to store your cryptocurrency, no matter the type of coin or token that you have. There are several types of wallets, each with their own advantages and ideal use cases. Take a closer look at cryptocurrency wallets in general as well as the various types to better understand when to use each of your wallets.
Defining Crypto Wallets
At its basic level, cryptocurrency wallets serve as digital wallets. They are software that lets you send, receive, and store your chosen cryptocurrency. Most wallets will support just one or a handful of token types, but some have support for dozens or more.
The wallets store your private keys, which are long hexadecimal codes that keep your digital funds safe. To spend money in a crypto wallet, you need both these private keys and a public key.
How Cryptocurrency Wallets Work
Remember that crypto wallets are pieces of software. These wallets store your private as well as public keys and connect to the blockchain. This blockchain connection lets you check your balance and participate in transactions. When someone sends cryptocurrency, they release their ownership of the coins and instead give that ownership to the address for your wallet.
Only you use the private key, and just for signing transactions. This key proves that you own the public key which it connects to. Never share your private key as doing so gives others access to your cryptocurrency. The public key comes into play when it comes time to receive funds. Anyone can find this key on the public ledger and it lets the network identify your account.
Cryptocurrency wallets cannot send funds unless the public address and private key in your wallet match. Just looking at the wallet addresses, you are unlikely to see any connection between them. The technology, however, knows that they correspond to the same wallet. When these keys match properly, the balances of each wallet get adjusted automatically and there is no need to do anything involving real coins. You can tell a transaction occurred via the change in your crypto balance and by looking at the blockchain record.
The Range of Wallets
There is a vast array of wallet types, some of which are more common than others. Many are connected to the internet in some way, at least occasionally. Others involve storage of keys offline on USB-like devices and there are even cold storage options, where you write down the private key, so it never connects to the internet.
How to Make a Crypto Wallet
The specific steps to creating your crypto wallet will depend on the wallet type you select as well as the particular wallet itself. Your wallet provider should give you a straightforward step-by-step guide to setting it up. The process is usually incredibly quick. Just ensure that you store your private key securely somewhere. You will also likely make a backup keyword phrase as a wallet recovery option. Store this in a secure location as well. That recovery phrase will be the only way to avoid losing your cryptocurrency if you cannot find your private key.
Main Wallet Distinctions: Hardware, Software, and Paper
Any type of cryptocurrency wallet fits into one of three categories. It can be a hardware wallet, a software wallet, or a paper wallet. Software wallets are those that you access via software on your device or a website. They can include general online wallets, desktop wallets, and mobile wallets. Hardware wallets involve storing the cryptocurrency on a device. Paper wallets are those where you just keep a piece of paper with the private key.
Understanding Desktop Wallets
As the name implies, a desktop crypto wallet is one that you download then install on your laptop or PC. You can only access this type of wallet from that particular desktop device. As such, these wallets offer high security levels, unless your computer gets a virus, or someone hacks it.
Understanding Mobile Wallets
Mobile wallets are similar to desktop wallets, running on a device, but they run on your smartphone. This is a convenient choice for those who want to spend their funds since you can have the wallet with you as you shop. Because of the limited storage on smartphones, mobile wallets tend to be simpler and smaller than desktop ones.
Understanding Web Wallets
Web wallets run using the cloud so you can access the wallet from any device that connects to the internet. These provide a great deal of convenience in terms of accessibility, but they are less secure. That is because a third-party is responsible for the security and general control plus your private keys will be stored online. This combination increases the risk of theft and hacking. The wallets found on exchanges typically count as web wallets.
Understanding Hardware Wallets
A hardware wallet relies on a USB or other hardware device. These wallets will conduct the transactions online but store the crypto and relevant information offline. That offline storage increases security. Depending on your chosen hardware wallet, it can support numerous currencies and web interfaces. In fact, some hardware wallets support hundreds of cryptocurrencies. Ledger, for example, supports a truly impressive 1,185 cryptos. However, this is not the norm.
To use a hardware wallet, you will plug the hardware device into your internet-connected device. You then enter your PIN and can send the currency after confirming the transaction. Hardware wallets offer a nice middle ground, safely storing crypto offline while also making transactions easy.
Understanding Paper Wallets
Paper wallets are the most secure type of crypto wallet. Paper wallets can include a printout or physical copy of both your private and public keys. Alternatively, it may also indicate software that will securely generate keys that you then print.
To fund a paper wallet, you send the given cryptocurrency to the public address of the wallet. To withdraw, you engage in “sweeping,” which means transferring the paper wallet funds to a software wallet. To do so, you either type in the private keys manually or scan a QR code that your paper wallet has.
Keep in mind that if you use a paper wallet, you will have a delicate piece of paper with very important and expensive information. As such, you should protect it from water and other damage. Many people choose to laminate their paper wallets, then store them in safes or their bank deposit boxes to overcome this issue.
Crypto Wallet Security
Some people have concerns about using third parties for storing cryptocurrency. After all, the third party theoretically could access your private key, giving them access to your funds. This is why it is crucial to always research a wallet and the company behind it before loading funds. It is theoretically possible for a company to claim it offers a crypto wallet but really steal your private keys.
It is also possible for a company to collapse and leave users unable to withdraw funds. To avoid those issues, always choose a wallet from an established company. It should also have the latest technology as this will maximize protection for your funds.
There are also some other things you should keep in mind to ensure your cryptocurrency remains safe, regardless of your chosen wallet. Always watch out for malicious software on your smartphone, laptop, or whatever device you use to access your wallet. Keep updated antivirus software on these devices.
In the case of a hosted wallet, always take care with emails that you get from them. Pay attention to the email address and look for an indication that the email is truly from the wallet provider. Furthermore, do not share your private keys via email or ever.
Comparing Security of Wallet Types
It is also important to note that while the above general security information regarding cryptocurrency wallets applies to all types, some types of wallets inherently offer more security than others. Any wallet that connects to the internet is less secure than those that do not and the degree of connectivity impacts the level of security. This comes down to an increased chance of hacking and malware on your device if there is internet connectivity.
This means that cloud or web wallets are the least secure since they connect to the internet all the time. From there, desktop and mobile wallets are the next most secure since they connect to the internet whenever you use them, but do not need to connect 24/7. Hardware wallets are the next most secure since they only connect to the internet to complete a transaction, and even then, your keys remain offline. Paper wallets, also known as cold storage or offline wallets, are the most secure since they never connect to the internet.
Additionally, any wallet that relies on third parties to keep them secure will pose a greater security risk than one you secure yourself. You can mitigate that risk by choosing an established wallet from a company with a strong reputation and high security standards.
Additional Fund and Cyber-Security Tips for All Crypto Wallets
No matter the type of cryptocurrency wallet you have, you should always backup your cryptocurrency wallet. This includes storing your recovery phrase and private keys in a secure location that you can access but no one else can.
You should also always ensure that your software is up-to-date. Update the wallet software as well as the general software on the device you use as this will ensure you have access to the latest security measures.
You can also enhance the security for your cryptocurrency with a few steps. Opt for a complex, long password that the wallet will require before withdrawing any funds. You should also opt for wallets with good reputations and that offer things like PIN requirements to open the application and two-factor authentication. For added security, consider a multi-sig wallet that requires signatures from more than one user before any transactions.
Ideal Uses for Each Wallet Type
When choosing which wallet you want to store your cryptocurrency in, you should balance security with convenience. Most cryptocurrency owners will want to store their crypto in a combination of various wallet types.
If you trade cryptocurrency regularly, then keep some of your funds on the exchange you use. If you like to spend cryptocurrency, then a mobile or web wallet will likely be useful. If you only spend from home, a desktop wallet can be a good option. In each of those cases, maximize security by storing the minimal amount of crypto you need there. Plan ahead so you do not have too much extra crypto on your desktop, mobile, or web wallets, but so you have as much as you will need in the near future.
If you have cryptocurrency that you plan on holding for a very long time and do not need to spend any time soon, then consider a paper wallet. This will provide the most security and you will not mind the handful of extra steps required to access it. You should have the bulk of your crypto in paper wallets, assuming you will not spend it soon.
Use a hardware wallet if you want additional security and plan on holding your crypto for a shorter period of time. Hardware wallets are also useful for those who only spend their crypto when they have access to an internet-connected device that the wallet can connect to. Remember that choosing a hardware wallet will increase the security of your crypto but require a few additional minutes whenever you want to spend.
The Bottom Line
If you have just started using cryptocurrency and do not have much yet, then storing it on a web or software wallet will probably be fine. For added security, consider a hardware wallet or a paper wallet. Those with more crypto, especially coins they do not plan on using or selling anytime soon, will also want to use a paper wallet. Some wallets will only support a single cryptocurrency while others support dozens or hundreds. You can have as many wallets as you need or want, provided you can keep track of your private keys and recovery phrases.