The choice of which cryptocurrency wallet to use couldn’t be more important. You wouldn’t go for a fake bottom physical wallet, and at least you should generally be aware of cryptocurrency wallet options so that you don’t choose a crypto wallet with potentially critical flaws.
It can be helpful to start defining what a crypto wallet is. A cryptocurrency wallet is the digital storage space for cryptocurrency, although many have other functions. Non-physical cryptocurrency requires a digital wallet, as well as private keys that indicate who owns the wallet (and the cryptocurrency in it). Crypto wallets have both functions.
To establish an operational crypto wallet, a person may need to:
- Choose a wallet provider
- Enter certain personal information
- Link a funding and deposit source, such as a bank account
Once a user takes these steps, they may be able to buy and sell cryptocurrency, purchase goods and services using crypto, and use decentralized financial (DeFi) products such as decentralized exchanges and lending services.
Choosing a crypto wallet requires more thought than you may think.
There are two broad categories of crypto wallets: hot wallets and cold wallets. Hot wallets refer to wallets that are (usually always) connected to the internet. Cold wallets are not directly connected to the internet, but they can be used to complete transactions. Let’s dig deeper into the specific types of crypto wallets.
Crypto Wallet Type # 1: Paper wallet
Services such as the Dash paper wallet generator allow users to:
- Private keys, or the encrypted signature that makes a wallet specific to a person
- Any public address, that Coinbase is similar to an email address as it allows other users to know where to send cryptocurrency
A paper wallet can also contain a scannable QR code for easier transactions, including but not limited to payments and crypto transactions.
Some advantages of a paper crypto wallet are:
- That a user can have physical possession of his public and private keys
- That a paper wallet is not directly hackable
- That a paper wallet is disconnected from the internet and therefore not as vulnerable to energy or internet related issues as hot wallets
Paper wallets can be just as secure as the user who owns them. While digital hacks can be prevented with a paper wallet, it is vital that the owner of a paper wallet ensures that it is kept as its loss can have disastrous consequences.
Crypto Wallet Type # 2: Desktop Wallet
Desktop wallets can generally be behind paper wallets in terms of security (hacking-related security at least), but above online crypto wallet alternatives.
The apparent difference between an online-only crypto wallet and a desktop wallet is the download of the wallet itself. This action results in a user’s private keys being stored on their computer’s hard drive instead of an online server. In some cases, this information can be stored on a desktop as well as an online server.
It can be useful to keep a wallet on your desktop if:
- An online wallet host is being hacked
- An online wallet host crashes
For practical reasons, desktop wallets are connected to the internet. They allow users to view real-time changes in the value of their tokens and, depending on the characteristics of a specific wallet, they can also complete transactions.
While desktop crypto wallets offer some degree of separation from full internet dependence (thanks to the download of keys and addresses), they are still directly connected to the internet. This always means hacking is a possibility, but users may think of a desktop wallet as a more secure alternative to a wallet hosted by a third party over the internet.
Crypto Wallet Type # 3: online wallet
Online (or web) crypto wallets are arguably the most instantly accessible and low maintenance way to store and trade tokens. Casual crypto traders and investors may be drawn to online wallets because:
- An external service can do all the heavy lifting (providing the wallet, keys and maintaining the server)
- An online wallet may have an easy to use interface
- An online wallet can be accessed from any device with an internet connection
- An online wallet can enable trading and crypto wallet services on one platform
Crypto Wallet Type # 4: Hardware Wallet
Hardware wallets provide the physical nature of paper wallets, but can provide additional features and significantly more punch. Hardware wallets generally have common features, including:
- A screen
- A handheld format
- Buttons or other means to operate the wallet
- The capacity to store significant amounts and different types of cryptocurrency
- Computer connectivity
Simply put, online wallets can be the convenient option. However, history has shown that they are not the first option to secure. Your online wallet is always connected to the internet and can become a victim of hacking, and if the host gets corrupted, your wallet can still be compromised. You can also take a gamble that the hosts of the online wallet service are ethically responsible.
Hardware wallets store users’ private keys. Unlike paper wallets, hardware wallets can have security features that prevent access to private keys in the event that the wallet falls into the wrong hands.
A pull factor for hardware wallets is their offline nature. This, like paper wallets, makes them less vulnerable to hacks, third-party crimes, and other threats that loom over internet-dependent wallets. Still, hardware crypto wallet owners can connect their device to the Internet at any time to make transactions.
This gives hardware wallets a kind of hybrid nature that can appeal to security-conscious crypto traders.
Crypto Wallet Type # 5: Mobile Wallet
Mobile phones have become highly sophisticated and ever-present, with many cryptocurrency buyers, sellers and holders preferring mobile wallets. Many online wallets offer a mobile version, while some wallets are designed exclusively for mobile use.
Mobile wallets can justify the same security-related concerns as any hot (internet-connected) wallet. The money in your mobile wallet may be as safe as the host who provided it. By the way, it may be as secure as your mobile device. Therefore, there is certainly an element of “buyer beware” for anyone using a mobile crypto wallet.
However, there are clear benefits of mobile wallets. They contain:
- Extreme convenience
- All-in-one platforms that enable banking and trading
- Compatibility with both Android and iOS operating systems
- The possibility to pay from a mobile wallet by means of QR scans
In an increasingly mobile world, mobile crypto wallets offer clear benefits. You can weigh these pros and cons of different types of crypto wallets when choosing the right wallet for yourself. Nomics provides a comprehensive overview of cryptocurrency wallets in their many forms.