Cryptocurrency Wallet Types: Complete Guide

Jun 23, 2020
11:06
2 min reading

Choise.com team

Even if some people still don’t see Bitcoin and cryptocurrencies as money, there’s little to no doubt that digital currencies are just as good as cash and even better. But that’s a story for another day because today we’re focusing on how to store cryptocurrencies — a common question among those getting started with digital assets.

Cryptocurrencies are entirely digital, meaning there’s no way you can actually touch them. Yet, you have to store them somehow. So… What is the best way to store cryptocurrency? Are cryptocurrency wallets safe? How do cryptocurrency wallets work? Find the answers to these and other essential questions below.

What Is A Cryptocurrency Wallet?

Looking for a cryptocurrency wallet definition? Here’s the thing: while we normally talk about the storage of bitcoin and other cryptocurrencies, this is technically wrong since digital currencies are virtual and do not exist in any physical shape or form.

But again, they have to be stored somewhere and that’s the job of crypto wallets. A cryptocurrency wallet is a software used to store private keys and public keys, allowing the user to easily manage their cryptocurrency assets. With a blockchain wallet, holders not only can store assets but also send, receive and monitor their cryptocurrency balances.

How Do Cryptocurrency Wallets Work?

Cryptocurrency wallets might look similar to mobile banking apps, but the system behind the screen is essentially different. Cryptocurrencies are underpinned by blockchain technology. The blockchain is a distributed public ledger that keeps an immutable record of transactions.

A cryptocurrency wallet is a set of private and public keys that verifies the ownership of a digital asset, giving them the ability to send and receive digital assets that otherwise would permanently reside on a blockchain ledger.

Bitcoin wallets are considered proof of ownership of BTC that exist on the Bitcoin blockchain. You can spend your bitcoin through the use of private keys while the public key is used for receiving digital assets.

Confused? Here’s an easy way to think about it. Your public key is much like your bank account. You give it to people or businesses to send you money while the private key is like the PIN of your debit card or bank account password. It’s only known by you.

Cryptocurrency Wallet Types

There are three main kinds of blockchain wallets: hot, warm, and cold wallets. This distinction refers entirely to internet connectivity. Hot wallets are those always connected to the internet, while cold wallets are kept offline. Warm wallets are connected to the Internet, but keep funds in cold storage.

For some users, online wallets might seem more susceptible to hacks and thefts, but they’re also so much comfortable and easy to access. Here is a rundown on the different types of wallets.

Hot & Warm Blockchain Wallets

Apart from being online all the time, hot blockchain wallets tend to control your private key. But what makes user friendly and convenient to use also makes them susceptible to thefts and hacking.

Being online all the time, hot blockchain wallets have quickly became an easy target for hackers. Most cryptocurrency exchanges fall into this category. That’s why holding your cryptocurrency on your exchange account is highly unrecommended. Unless you’re using funds for active trading, of course.

If you like the user experience that hot wallets provide, but don’t want to wake one day to find out an empty balance, then you should try a warm wallet. Unlike the hot versions, these wallets keep most funds in cold storage. Yet, they’re always connected to the internet and offer some killing user friendly platforms.

Desktop crypto wallet

A desktop wallet, just as the name suggests, resides on a desktop. A desktop wallet is downloaded on a computer or laptop and can only be accessed on that machine where it is installed.

Most desktop blockchain wallets offer a good level of security but they can also be broken into. Things can go wrong if your computer is infected with a virus. There is a possibility that you may lose your funds unless you take measures to mitigate such risks. No idea how? No worries…

Here are 10 ways to protect your cryptocurrency against any cyber threat.

One of the key advantages is that your keys are stored on your hard drive. These crypto wallets are ideal for traders since they can easily manage their funds without switching devices.

Mobile crypto wallet

Mobile wallets are apps that you install on your mobile devices and their main advantage is that you can access your funds on the go. Send, receive, store, and even spend with just a few taps.

Mobile wallets tend to be friendly and bring together multiple services into a single app, making them a perfect choice for those giving first steps in the world of cryptocurrencies.

Generally, mobile crypto wallets hold funds in cold storage, although private keys aren’t directly under your control. In some exceptional cases, the companies can provide your private keys after successfully verifying your identity.

Web crypto wallet

The web blockchain wallet is browser-based. In other words, it isn’t hosted on your personal device. Obviously, this comes with a few advantages and disadvantages attached. For instance, gaining access to your computer isn’t enough to hack the wallet. Just don’t use the “remember password” feature. Overall, accessing a web wallet requires nothing more than an internet connection and a basic desktop, laptop or mobile device.

On the other side, web wallets are considerably exposed to security threats. If you’re all-in for a web wallet, better to try one that keeps funds in cold storage. While the Crypterium Wallet is mobile-first, it also has a web version available. That doesn’t mean that the Crypterium Wallet is a hot wallet like the ones offered by exchange platforms.

Cold Blockchain Wallets

Hardware crypto wallet

As its name suggests, a hardware wallet is a physical device, sometimes in the shape of a USB drive, that securely stores your private and public keys. Among all the different types of wallets, hardware wallets are considered by far the safest option to store your digital currencies.

Hardware wallets are reportedly resistant to computer viruses. Using a hardware wallet isn’t complicated. All you need to do is plug the device onto a computer with internet access, select the amount and currency you want to send and be on your way. But here’s the deal: if you lose the wallet, accidentally step on it, or your dog eats it, it’s over.

Paper crypto wallet

Paper wallets are really easy to use and can give you peace of mind because they are highly secure. A paper wallet can mean two different things. It can either refer to the printed version of your private keys, or to a software that can generate private keys and public keys which you then print out.

You receive cryptocurrencies by sending funds to the public address you printed out. You can transfer funds out of paper wallets by either scanning a QR code on the paper wallet or manually entering your private keys.

One of the selling points of paper wallets is that you are not storing your keys digitally, making it impossible for hackers or computer malware to exploit your funds. However, you still need to take precautions.

Make sure that no one is watching you when you create your set of keys. Most importantly, store your private keys in a place where your paper wallet will not be exposed to elements such as water, fire, or chemicals that may otherwise destroy it. Remember, the paper represents your private key. And seriously, sh*t happens.

A piece of good advice is to laminate paper wallets and keep them in a safe deposit. You could also play Sherlock, break down the keys into different chunks and store them in different locations.

Are cryptocurrency wallets safe?

There is no universal answer to this question. All wallets are secure up to a certain extent and the level of security depends on several factors such as the wallet type and the service provider.

Hot wallets are bit riskier because they expose you to hackers while offline wallets cannot be attacked. Of course, the risk levels of using online wallets can be considerably reduced with some safety measures:

Keep a backup of your wallet
Update your wallet regularly
Enable Two Factor Authentication (2FA)

How to choose the best cryptocurrency wallet?

There are plenty of factors that could influence your decision on cryptocurrency wallet types, such as the amount of tokens you own, the way you use them, your country of residence, etc.

A person who has a large stash of digital currencies and wants to hold them for a long time may opt for a hardware or paper wallet. On the contrary, someone who wants to use cryptocurrencies to pay for goods and services would be better off with a mobile wallet such as Crypterium.

At the end of the day, the wallet you choose should be a balance between convenience and security.