CRYPTO WALLETS EXPLAINED

A complete guide to crypto wallets and the different types available, examining the pros & cons of each

If you want to own a cryptocurrency, because you are looking to invest or because you want to spend money online, you will need a crypto wallet. Using one will keep your cryptocurrency safe while also allowing you to transact.

And just like you need a wallet to protect your cash and credit cards, you also need to know where you will store your cryptocurrencies. When you buy digital currencies on an exchange or trading platform, you may have the option to leave the “keys” of your cryptocurrencies inside the account.

That is a form of storage. But you can also move the currencies off the platform to a personal crypto wallet (“crypto wallet”), which can be software connected to the internet (a hot wallet) or an utterly offline device (cold storage).

What are crypto wallets for, and the different types you can use? That’s what this page is all about. We will will discuss different types of crypto wallet and their pros and cons to enable you to make a good decision when buying any digital currencies and storing them in a wallet.

What Are Crypto Wallets?

Crypto wallets are apps similar to those found on a smartphone or computer. You can also purchase a physical device that runs wallet software if you want the tactile feel of holding a wallet.

Crypto wallets, unlike regular wallets, do not technically store your cryptocurrency. Your assets are stored on the blockchain but can only be accessed with a private key. Your keys validate your ownership of your digital currency and allow you to conduct transactions.

You lose access to your money if you lose your private keys. Keeping your hardware wallet secure or utilizing a reputable wallet provider is critical.

You can imagine your cryptocurrency saved on the wallet in the same way that files are stored on a USB drive. Still, the information stored on the wallet points to the location of your cash on the blockchain, the public ledger that records and validates all cryptocurrency transactions.

A crypto wallet comprises two key pairs: private and public keys. A public key is produced from the private key and is used to send cryptocurrency to the wallet.

The private key is the most vital aspect of a wallet, and it is often where inexperienced users get into difficulties. A private key is similar to a safe deposit box key. Anybody that accesses a wallet’s private key can take control of the balance.

However, unlike a safe deposit box, crypto users who hold their private keys and conduct transactions through non-custodial wallets (i.e., wallets not maintained by an exchange or other third party) effectively become their bank.

Now, let’s discuss the different types of wallets

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What Are Crypto Wallets?

Crypto wallets are apps similar to those found on a smartphone or computer. You can also purchase a physical device that runs wallet software if you want the tactile feel of holding a wallet.

Crypto wallets, unlike regular wallets, do not technically store your cryptocurrency. Your assets are stored on the blockchain but can only be accessed with a private key. Your keys validate your ownership of your digital currency and allow you to conduct transactions.

You lose access to your money if you lose your private keys. Keeping your hardware wallet secure or utilizing a reputable wallet provider is critical.

You can imagine your cryptocurrency saved on the wallet in the same way that files are stored on a USB drive. Still, the information stored on the wallet points to the location of your cash on the blockchain, the public ledger that records and validates all cryptocurrency transactions.

A crypto wallet comprises two key pairs: private and public keys. A public key is produced from the private key and is used to send cryptocurrency to the wallet.

The private key is the most vital aspect of a wallet, and it is often where inexperienced users get into difficulties. A private key is similar to a safe deposit box key. Anybody that accesses a wallet’s private key can take control of the balance.

However, unlike a safe deposit box, crypto users who hold their private keys and conduct transactions through non-custodial wallets (i.e., wallets not maintained by an exchange or other third party) effectively become their bank.

Now, let’s discuss the different types of wallets

Different Types of Crypto Wallets

There are two main types of Crypto Wallets, each with pros and cons. They are as follows:

There are hot wallets and cold wallets. Hot wallets are wallets that are in some way connected to the internet. While, cold wallets are physical wallets that are not connected to the internet.

Hot wallets are more adaptable than cold wallets but less secure. Because hot wallets are digital, you can access your money while on the go. They are, however, vulnerable in several ways due to their digital nature.

Cold wallets are often more secure because they are not linked to the internet. It would have to be physically taken to lose money from a cold wallet (Your old school paper wallets is a type of cold wallet as well).

We will list and explain several types of crypto wallets in the hot and cold wallet categories below.

  • Exchange Wallets
  • Desktop Wallets
  • Web Wallets
  • Mobile Wallets
  • Hardware Wallets

Exchange Wallets

If you first bought cryptocurrency on a centralized exchange (CEX), it is in an exchange-based wallet. When you purchase cryptocurrency on a cryptocurrency exchange, it is immediately put in your exchange-hosted wallet.

The exchange typically retains your private key, which means the exchange has access to your private keys.

Now, what are the pros and cons of exchange wallets?

Pros

  1. Cheaper rates: There’s a reason why traders keep using them. When trading bitcoin between wallets outside of an exchange, there are always fees and gas charges that take a chunk every time you transmit some coins.

 

So, if traders played it safe and did this every time they made a transaction, their returns would be substantially lower.

 

While holding cryptocurrency in more secure wallets outside of the exchange is far safer, it is not feasible for high-frequency traders who make several daily transactions.

 

  1. Convenience: The main pros of exchange wallets are their ease and the incentives that exchanges provide for using their wallet. It is simply easier to leave money in the exchange’s wallet so that you can rapidly trade your held coins for another.

 

It is speedier and less expensive. Traders frequently store smaller sums in exchange wallets while storing the rest of their crypto holdings in a separate cold storage wallet.

Cons

  1. Less Secure: One of the significant drawbacks of exchange wallets is their centralized structure. This structure makes it easy for hackers to identify newcomers who may be investing large sums of money in specific currencies.

 

Without a blockchain to disperse your activity across millions of nodes, there is a single point of failure that, if accessed, exposes all of your sensitive information and holdings in that exchange wallet.

Desktop Wallets

These are cold wallets that store private keys on cold servers (on your desktop.) You can disconnect the wallet from the internet, conduct some offline transactions, and then reconnect it. If the primary server fails, a cold server, your PC, is used as a backup server.

These wallets can be downloaded on any computer but can only be accessed from the system on which they are installed, so ensure that the desktop or machine on which you are downloading the desktop wallet is safe (has a backup and is in a secure location) and that you are maintaining the hardware and not letting the machine go anywhere.

Pros and Cons of Desktop wallet

Pros

  1. Convenient: This is a convenient option for people who trade cryptocurrencies from their computers. They don’t have to go back and forth to their mobile devices to make transactions, and they have everything on their computer.

 

  1. Server: Your private keys are never sent to a third-party server; this is one of the main pros of a desktop wallet, so your digital currencies are relatively secure with a desktop wallet.

Cons

  1. Accessibility: It is more difficult to utilize your crypto-assets on the go; you won’t carry your desktop everywhere you go, so it’s challenging to use for emergency purposes.

 

  1. Security: It becomes a less secure hot wallet when linked to the internet. It is only secure as long you are offline.

 

  1. If you do not back up your computer and it crashes, you will lose all of your cryptos.

Web Wallets

A web wallet is a cryptocurrency wallet exclusively available online. It is accessed by a web browser or an internet-connected app. The private key for the coins (similar to the wallet’s password) is either held by a custodian (the person who controls the web wallet site) or is encrypted behind your chosen password.

Pros and cons of web wallets.

Pros

  1. Easy Accessibility: Because your wallet is online and instantly accessible, you can complete any transaction in a couple of seconds. Some web wallets allow you to trade your currencies for other currencies within the web wallet. If you are a frequent trader who needs to transfer funds between exchanges, a web wallet is excellent.

 

  1. User Friendly: Web wallets are user-friendly. They are available in mobile applications and others, allowing you to access them in various user-friendly ways.

Cons

  1. Security: The web wallets are less secure than other wallets because other people can access them. When you have a substantial quantity of money in cryptocurrency, using a web wallet may not be the most excellent choice.

 

Because a web wallet is always online, it can be viewed by third parties at any moment. Most wallets have good security, but some may have security issues. Malware, phishing schemes, DDoS assaults, and outdated security updates are just a few of web wallets’ weaknesses and risks.

 

  1. Ownership: Some wallets may not provide you with complete control over your wallet. This means that the wallet firm has private keys rather than you. This means that you are not in command, and the firm can take your money if they so desire.

Mobile Wallets

Mobile wallets, which have capabilities comparable to desktop wallets, are another essential crypto wallet category among hot wallets. You must install a mobile application on your phone that will function as a hot wallet. They employ QR codes for transactions.

Pros and cons of mobile wallets

Pros

  1. Flexibility and Accessibility: It’s similar to a one-click payment. However, you don’t have to enter card information and passwords all the time. One can connect their credit cards, debit cards, and bank accounts to pay instantly without entering the information each time. And it’s convenient to use.

 

  1. Costs: Mobile wallets often charge a fixed fee for various transactions or functionalities. Reloading a prepaid card from other sources, such as a credit card, may involve a nominal fee.

Cons

  1. Connectivity: The most significant constraint is a lack of mobile network access. Most underdeveloped countries have network challenges, and dependable and fast internet connectivity is unavailable.

 

  1. Security: People may not feel safe when using mobile wallets since they frequently do not understand how they work.

 

The increase in cyber attacks worldwide has fueled this idea since consumers frequently assume that someone else may access their wallets.

Hardware Wallets

Hardware wallets are independent devices that store and manage public addresses and keys. It looks like a USB with an OLED display and side buttons. It’s a battery-free device that links to a computer and runs native desktop apps.

It might cost anywhere from $70 to $150, but it is well worth it. In an offline environment, hardware wallets save private keys on a physical device and function similarly to a flash drive. Hardware wallets’ pros and cons

Pros

  1. Security: Experts believe that this is the safest wallet. Furthermore, they have a secure element chip, which adds an extra layer of security to your Hardware Wallet. Because of this chip, if a hacker tries to access your device, they will be unable to do it.
  1. Ownership: Direct control over your cryptocurrency; this is unlike exchange wallets controlled by the exchanges.
  1. User Friendly: Hardware wallets are one of the most user-friendly crypto wallet kinds in cold wallets since they can be connected to PCs or any other device via a USB drive.

Cons

  1. Cost: Hardware wallets are extremely expensive. If you only have a few Crypto assets, investing in a Hardware Wallet is not good. A Trezor Model T, for example, will set you back around $205, while a Trezor One Metallic will set you back around $685.

 

  1. Accessibility: Beginners may find it tough to use and less convenient for day-to-day transactions because of the processes you will pass through before using it.

What is the best Wallet for me?

This all depends on what you plan on doing with your crypto.

Understanding the various types of crypto wallets is critical for prudent cryptocurrency investment. Volatility is one of the most dangerous elements that recently emerged in cryptocurrencies. At the same time, security is a critical worry for cryptocurrency investors.

Are you going to be investing in bitcoin for the long term? Then a hardware wallet is the right one for you.  At Cryptathon we would recommend a Ledger Nano X. Because of its Bluetooth functionality, you can get the flexibility of a mobile wallet with the security of hardware wallet.

Are you going to be spending day to day? Then we’d recommend a web wallet – to get started you can read our guide to using the most popular web wallet, Metamask here.

As Demonstrated above, all wallet types have their own advantages and disadvantages, and it’s up to you to decide which one is best for your desired activities.