What are crypto wallets?
To understand the different types of cryptocurrency wallets, it’s important to first understand what a cryptocurrency wallet is. Cryptocurrency is not a physical currency like traditional money, but rather a collection of codes that are stored on a blockchain with a specific address. The public key can be used by other users to send cryptocurrency to the wallet, while the private key is used to access and unlock the cryptocurrency stored in the wallet.
When you buy cryptocurrency from an exchange, you can store it on the exchange itself, like a bank account balance. This is the most basic type of cryptocurrency wallet and it is provided by default when you purchase crypto. While exchanges do offer some security measures, such as insurance policies and FDIC-insured accounts, these may not be sufficient for ensuring the safe storage of your cryptocurrency. For added security, you may want to consider using a different type of cryptocurrency wallet. There are several options to choose from, which we will discuss in the following section.
Hot Wallets
Hot wallets are a type of cryptocurrency wallet that are connected to the internet and are generally less secure, but offer better accessibility. While hot wallets are more vulnerable to fraud and hacking attacks, they are also more user-friendly.
Types of Hot Wallets
Web Wallets
Web wallets are a type of hot wallet that can be accessed through a web browser without the need to download any special software or app. This makes them convenient and easily accessible from any location with a device and internet connection. With a web wallet, the website has control over the keys to your cryptocurrency, although there are options like multi-sig wallets that give users more control over their wallet.
Desktop Wallets
Desktop wallets are applications that you can download onto your desktop or laptop computer. They generate a data file to store your wallet keys and require a password to access them. While desktop wallets give you ownership of your keys, there is a risk of physical damage to your device or infection with malware or viruses.
Mobile Wallets
Mobile wallets are a type of hot wallet that can be installed on a smartphone as an app. They offer convenience and flexibility for exchanging funds, but also come with some security risks. Mobile wallets function similarly to desktop wallets.
Cold Wallets
Cold wallets are another type of cryptocurrency wallet designed for cold storage, which means they store your crypto tokens offline. This makes them more secure, particularly for users with large amounts of cryptocurrency. However, there are some cold wallets that can still connect to the internet while maintaining their basic functionality. Using a combination of both cold and hot wallets (which are connected to the internet) can provide a balance of security and flexibility. For example, you could store a large portion of your funds in a cold wallet for added security, while keeping a smaller amount in a hot wallet for easier access.
Types of Cold Wallets
Hardware Wallets
Hardware wallets are a type of cold wallet that offer high levels of security by keeping private keys offline. They work like a flash drive, storing keys on a physical device that is disconnected from the internet. Hardware wallets are easy to use and can be connected to computers or other devices via a USB drive. Even when the device is connected to the internet, the private key does not leave the device. Hardware wallets request transaction details and validate them before completing the transaction, which is then recorded on the online network. Some popular hardware wallets include Trezor and Ledger.
Paper Wallets
The name gives a lot away about paper wallets when it comes to understanding them as one of the types of crypto wallets. Paper wallets are nothing but physical pieces of paper. The paper must contain all the data you would need for accessing the cryptocurrency. Cold wallets generally offer additional security.
However, the same does not hold strong in the case of paper wallets. In event of losing the paper document, you have the risk of losing the crypto assets in the wallet. Furthermore, paper wallets also present the setbacks of limitations in sending partial funds easily. In addition, the time-consuming nature of transactions with paper wallets also presents formidable setbacks for their use.
