An Introduction to Cryptocurrency Wallets: Which Wallet Type Suits You Best?
Published at March 29, 2021 – 8 min read
As the blockchain and digital asset ecosystem continues to blossom and produce revolutionary technologies that may potentially be the driving forces of the Fourth Industrial Revolution, newcomers to the space are considering what storage options are available for assets such as cryptocurrencies and crypto tokens.
Since the launch of Bitcoin in January 2009, we have seen an evolution in the functionality and security of different wallet types that have been brought to market over the years.
Below, you will find a brief overview that introduces the concept of a wallet for blockchain-based digital assets and, after this, we will dig a little bit deeper into different types of wallets such as web wallets, hardware wallets, mobile wallets, and desktop wallets.
What Is a Wallet for Blockchain-Based Digital Assets?
When you hear the term “wallet,” it might lead you to think about physical storage. For many of us, a wallet is simply a pocket-sized case that is typically used to hold fiat money and plastic bank or credit cards. With regard to cryptocurrencies and crypto tokens, this is not the case. A wallet should be thought of as a tool that provides you access to a blockchain and the information needed to send or receive cryptocurrencies or crypto tokens. This information is mainly generated from complex maths that involve public and private keys.
Each wallet has its own key pair, which is a representation (made up of various numbers and letters) of the location for your cryptocurrencies or crypto tokens that reside on a blockchain. Since wallets utilize blockchain technology, as long as you have control of the private keys, you are able to access a wallet from your computer or compatible device to manage your digital assets.
Web wallets (referred to as “hot wallets”) are accessible through a web browser with an internet connection. This type of wallet is typically the first kind encountered by newcomers to the blockchain and digital asset ecosystem. Utilized by centralized exchanges, these wallets help platforms make your cryptocurrencies and crypto tokens easily accessible, so that they can be actively traded. Examples of centralized exchanges include Binance, Coinbase, and Kraken.
The ability to easily access digital assets is of great use to traders, as there is no need to move funds across different platforms in an effort to actively trade. The simple and intuitive user interface of web wallets is considered one of the easiest ways to get started with cryptocurrencies or crypto tokens. Recently, exchanges have begun to offer incentives and rewards (such as staking and high interest rates) for holding your cryptocurrencies or crypto tokens on their platforms.
There are also web wallets that are not centralized, and they only serve as a point of connection to blockchain. It’s the case of MyMonero or EtherWallet where the users use the web interface only to compute transactions keys and the server does not log the private keys. This type of web wallet usually do not keep any personal information of user such as name, personal address, or any ID and represent a unique alternative to centralized web wallets.
While there are benefits to the usage of web wallets, they can potentially carry substantial risk to your digital assets. If an exchange is hacked and your cryptocurrencies or crypto tokens are compromised, you can lose all of your digital assets in the blink of an eye. Some exchanges are backed by some form of insurance and/or have returned lost funds to users. The bottom line is that there is never a real guarantee that you will get your cryptocurrencies or crypto tokens back if they are compromised. Lastly, when using exchanges, remember that you do not have access to your private keys. As Andreas Antonopolous famously said, “Not your keys, not your crypto.”
It is strongly recommended that you use web wallets only to trade and offline hardware wallets to store your assets, which we will discuss next. Web wallets might also represent a point of centralization, so it’s comparable to an online banking platform.
Hardware wallets are physical devices that allow you to manage several private keys. With hardware wallets, you are in full control of any interactions with the device and the associated cryptocurrencies and crypto tokens stored therein. For individual use, the most popular hardware wallets are Ledger and Trezor, even if more are probably to be developed and the industry is fully committed to explore further ways to keep funds securely via an hardware element. Both offer best-in-class products that help keep your digital assets safe.
Think of these wallets as USB-type devices that have small screens and navigation buttons that can be used to impart commands at the hardware. In order to use them properly, you will need to connect the device to a computer and utilize the associated desktop application in order to perform your desired function. Some hardware wallets, such as the Ledger Nano X, have bluetooth capability for easy connectivity.
When you receive the physical hardware wallet and begin the process of the initial setup, the device will generate seed phrases that must be written down on a piece of paper and kept in a secure location that you will not forget. It is important that you never enter the words that make up a seed phrase onto a computer or even take a picture of them. Always be sure to delete any digital existence or record of a seed phrase, so that nefarious actors cannot gain access to it.
Hardware wallets are considered the safest way to store your digital assets, as they offer the highest level of security. The downside of these wallets is that if you lose and forget your seed phrases, you will never be able to access your wallets and the cryptocurrencies and crypto tokens will be locked forever. So, remember to write your seed phrases on a piece of paper and store it in a secure location.
Smartphones are omnipresent devices that most people frequently use on a daily basis; thereby, making them the most convenient type of wallet for storing cryptocurrencies and crypto tokens. As mobile wallets need to be connected to the Internet, these wallets are often considered “hot wallets” and can be given an average safety rating. Similar to web wallets, they could be mainly connected with a centralized exchange that might give the possibility to exchange cryptocurrencies with fiat currencies.
Every mobile wallet is different and comes with a variety of features, so it is important to do your research and choose the wallet that best suits your needs. Some factors to consider are the integrity of the developers, application design, ability to control your private keys, and overall usability.
A separate discussion should be made about the “security” of these wallets. As always, wallets are secure as you keep private keys as a secret. Once those are accessed via any attack (physical or digital), your funds can be considered gone. Also there are more chance to lose your mobilephone (and then the private keys) than a desktop device.
Examples of the most trusted mobile wallets include MetaMask, Exodus, Trust Wallet, and my favorite one CakeWallet. Many of these mobile wallets are complemented by desktop or browser extensions for additional convenience ― in the event that you want to use multiple devices to access and manage your digital assets.
Desktop wallets are programs or files that can be downloaded from a company or project directly to your computer and setup via installation. These wallets are specifically designed to hold one or a variety of digital assets. Examples are Bitcoin Core, Cardano’s Daedalus wallet, and Exodus (which, as mentioned above, functions as a mobile wallet as well).
As these wallets are connected to the Internet and accessible through a computer, they are not considered very secure (relative to other wallet options). Standard precautions, such as running antivirus software and a firewall, are essential and must be taken to decrease the likelihood of a potential hack.
The benefits of desktop wallets are that they are convenient and often well-designed. Given that these types of wallets allow you to be in control of your private keys, they are considered to be more secure than an exchange hot wallet. There are many desktop wallets in the market, so as recommended with mobile wallets, do your research and choose the wallet that best suits your needs. In addition to this, the first wallets to keep funds from blockchain were originally aimed for desktop environment, so those are well-maintained and could also be directly connected to a cryptocurrency node.
Wallets for blockchain-based digital assets will continue to evolve. From the simpler days of Bitcoin paper wallets, we now have wallets that offer accessibility across multiple applications and platforms. As a member of the blockchain and digital asset ecosystem, you can rest assured that there is a wallet out there for you.
It would be remiss of us if we did not mention a bit more about paper wallets. These wallets are extremely rare in this day and age, but they were popular back when Bitcoin launched in 2009. People would print out their private and public addresses on a piece of paper and use it as a way to exchange Bitcoin. The security for this option is top-notch as your private keys are stored offline, but not all cryptocurrencies and crypto tokens support this type of wallet.
Now that you are equipped with an overview of the various wallet types for blockchain-based digital assets, whichever wallet you decide to choose, we hope this gives you additional insights into an essential first step on your journey: the storage of your cryptocurrencies or crypto tokens.