In order to navigate safely through this complex world of cryptocurrencies and blockchain, it is an absolute must to be well informed about how this new emerging technology works. Aside of learning what cryptocurrencies really are or where and how to buy them, it is equally important to understand what the different storage methods are for your crypto assets. You’ll also want to educate yourself on how to send cryptocurrencies, receive coins and more.
Storing and transacting crypto coins & tokens safely, might not be as straight forward as one might think due to the fact that no crypto wallet solution really ticks all the boxes. Your choice will have to be a thoughtful consideration, balancing ease-of-use, security and cost.
Therefore it could be helpful to break down the information about crypto wallets a bit further so that you will have no problem in choosing the right type of cryptocurrency wallet for any kind of situation.
In this article we’ll try to help you differentiate between the 5 commonly discussed wallet types, namely; mobile wallet, web wallet, desktop wallet, hardware wallet and paper wallet, and briefly talk about functionality, liability, security and price for the different types of crypto wallets.
Furthermore, this article will help you make sense out of some of the crypto lingo which is often used in relationship to the different methods of storing cryptocurrencies. Hot wallets vs Cold wallets, Custodial Wallets VS Non-custodial wallets, discussing Third Party liability & Personal Liability and more.
Now, just to make sure that you have a good idea of what a cryptocurrency wallet is, let us start with breaking that down for you. If you’ve got that covered already, you can use our table of contents to skip to straight to the different wallet types.
What are the 5 different types of cryptocurrency wallets?
#1 Web Wallets or Online wallets
Before we dive somewhat deeper in what web wallets, also known as online wallets, are, make sure you don’t confuse cryptocurrency online wallets or web wallets with digital wallets, also known as ‘e-Wallets’ linked to the traditional banking sector which we are not discussing here.
A cryptocurrency web wallet provider offers a free web service which allows you to create a crypto wallet to store, send, or receive your cryptocurrency assets.
Cryptocurrency web wallets distinguish themselves by being accessible on the internet. This means that you do not need to download any software on your computer or phone to connect with them.
Web Wallets fall in the category of ‘HOT Wallets’. Contrary to hot wallets, we speak of a ‘Cold Wallets’ whenever the private keys of a wallet never touch the internet.
Now you’ll have to make a distinction between Custodial Web wallets, as used by centralised exchanges, and Non-Custodial Web Wallets, like MEW for example. Custodial Web Wallets are wallets where you essentially allow a third party to be in control of the private keys, they are holding your assets for you. With a non-custodial Web Wallets nobody but you has access to your your private keys!
In other words, you choose wether you allow a third party to ‘be your bank’ or if you choose to ‘be your own bank’
Non-custodial Web Wallets:
A non-custodial web wallet allows you to connect with the blockchain as long as you have access to the worldwide web. These online Web Wallets allow you to consult the balance your crypto wallet address or addresses, send cryptocurrencies to other wallet addresses.
The benefit of non-custodial web wallets obviously has to do with the fact that you are still in control of your private keys and that you have easy access.
Non-custodial web wallets are also an easy way to get started and learn about how everything works. They make it easy for you to learn how to create a crypto wallet, send, store and receive cryptos and so on.
The downside of non-custodial wallets is that you always have to consider the risk that someone is monitoring your access to the web service and tries to get hold of your private keys.
While this risk can be mitigated if the web wallet allows access or login with a Hardware Wallet (we’ll discuss hardware wallets later in this article),you should still be wary of the fact that there might be vulnerabilities within the code of the online software provider of which you are not aware.
Example: While you hardware wallet might make it safe to access the online web wallet, a beneficiary address might change without you noticing.
- Access web wallets anywhere, as long as you have an internet connection
- Functionality allows you to create a new wallet address from scratch & Sending and receiving cryptocurrencies are being made easy
- Login with your wallet private keys – You are your own bank
- With web wallets you are never sure who is looking to steal your private keys. The solution to this would be the use of a hardware wallet in combination with a web wallet. However this option is not always available.
All-in-all Non-custodial we web wallets should be used with caution.
Custodial Web Wallets
We speak of ‘Custodial Web Wallets’ whenever the crypto holder hands over the private keys and ‘custody’ of his crypto assets to a third party. (Example: Coinbase.com, binance.com, exchange.bitcoin.com)
Centralised exchanges are a prime example of a ‘third party’ which is using custodial web wallets as the anchor for their business model.
As a user, instead of ‘logging in with your private keys’, you will have a common login procedure (username/password), often accompanied with other security measures like two-factor authentication.
Most centralised crypto exchanges will not hold all your cryptocurrencies in their hot wallet (connected to the internet) which they need as a liquidity pool for trading purposes.
They will keep most of their assets in cold storage aka cold wallets which are not connected with the internet. Needless to say that that they essentially are ‘crypto banks’. They operate in a similar way as traditional banks and ask you to trust them with your money.
Other types of custodial services focus on providing fiat on and off ramps. Coinbase.com for example is focused on being the preferred fiat on and off ramp, allowing you to easily send dollars, euros, and so on from your bank account to Coinbase, where you can convert them into crypto assets, like Bitcoin, Bitcoin Cash, Litecoin, Ethereum and vice versa.
- It’s a low risk and easy-to-use onramp for new users as it replicates ‘traditional online banking & trading’ services.
- You are not your own bank! Your provider could be hacked, could go bankrupt and government could intervene and order to freeze your assets.
#2 What is a Desktop Wallet
Downloadable software for your PC or Laptop
A Desktop Wallet is a downloadable wallet software for you computer (Laptop or PC). The better software wallet providers will have a versions for Windows OS, Mac OSX and Linux.
A Desktop wallet is considered to be a ‘Hot Wallet’
Similarly as the Web Wallet, Desktop Wallets fall in the category of being a ‘hot wallet’ as you’ll need to connect with the internet in order to use it properly.
Functionality & Ease of use of a ‘Cryptocurrency Desktop Wallet’
With respect to functionality you can assume that all desktop wallet providers will offer a set of standard features making it easy for you to send & receive your cryptocurrency & create new crypto wallets.
However, before making a choice on which desktop wallet is best for you, have a look at some of the features which differentiate the different desktop wallet options out there. Here are some examples;
- Multi Signature: ‘Multi-sig’ is a security feature which requires multiple parties to sign of on a transaction.
- ‘Login’ with a ‘Hardware Wallet’. Do check if your particular brand of ‘hardware wallet’ is supported.
- Multi-currency or Single currency? – Some wallets focus on only bitcoin , or only Ethereum for example. Other wallets will provide support for a much larger amount of crypto currencies.
Desktop Wallet Security? Private Key stored on the computer.
Another feature of the desktop wallet is that it stores the private key on your computer. Now, while desktop wallets might generally be considered to be somewhat more secure than non-custodial web wallets, you should take into account that you’d need a computer which is not infected with malware.
Also consider that you should have a backup in place just in case that your computer breaks down!
In other words, for small amounts ‘software wallets’ are a valid solution, however, you should never hold the majority of you crypto assets stored on a desktop wallet. Choose cold storage solutions for your long-term holdings!
#3 Mobile Wallets –
A Downloadable Mobile App
A cryptocurrency mobile wallet is a third party application (Mobile App) which you can install on your mobile phone.
You’ll find that most mobile wallets will be available for Android mobile devices in the ‘play store’ aka ‘Google Play’ and for the iphone in the Apple’s ‘App Store’.
A mobile wallet is considered to be a ‘Hot Wallet’
Just like desktop wallets and web wallets, cryptocurrency mobile wallets also fall into the category of ‘hot wallets’, as the third party application connects with the internet to enable its functionality.
Custodial Mobile Wallets & Non-custodial Mobile Wallets
Mobile cryptocurrency wallets come both in the form of Custodial Wallets like the popular Coinbase App, and Non-custodial wallets like the Bitcoin.com Mobile App or the multi currency Coinomi App for example.
As a reminder, a custodial wallet means that you are not really holding the private keys on your phone. You are just using a mobile interface to access you account with the custodial wallet provider which is holding and storing your assets for you.
A non-custodial mobile wallet provider will never have access to your private keys and the private keys are stored on your mobile phone.
Functionality & Ease of use
So, similarly to desktop wallets a mobile wallet comes in the form of a software that you install on your mobile device which makes it a very easy and straight forward process to install.
The cryptocurrency mobile app allows you to seamlessly store, transact and even buy or sell cryptocurrencies from the conveniency of you mobile phone.
If you intend to use cryptocurrencies as a payment tool, it makes a lot of sense to have a cryptocurrency mobile wallet installed on your mobile phone. Whether it is to swipe and pay for a Coffee at Starbucks or pay for a couple of drinks in a bar. It’s quite obvious that you wouldn’t be using a desktop wallet, web wallet or any other kind of cryptocurrency wallet for this task. So, this makes the crypto mobile wallet ‘unique’ and arguably a ‘must-have’ application for your mobile phone.
As Mobile phone cryptocurrency apps are increasingly becoming popular, the available functionality & features are also growing as time goes by. Here’s a small list of functions you can expect crypto mobile wallets to do for you.
- Store, Send & Receive crypto coins & tokens
- Have integrations in place with both centralised and decentralised crypto currency exchanges.
Are Mobile Wallets secure?
As your private keys are being stored on your mobile device it also bears similar kind of security risks as with your desktop wallet.
- Don’t forget to have a backup phrase safely stored in case you’d break or lose your mobile phone.
- Beware that hackers might search to compromise your phone or the installed software.
#4 What is a Paper Wallet –
Free Cold storage: Your wealth printed or written down on a paper
Paper Wallets are without a doubt one of the best ways to store your crypto currency. It is essentially nothing more than a piece of paper with your private keys written down or printed.
In the end, if you go back to the essentials, you understand that the beauty of cryptocurrencies is that you can have all your wealth stored in a single string of letters and numbers. This encrypted private key allows you to have an ‘unconfiscatable’ store of value or means of exchange on you in times of need.
A paper wallet is considered to be ‘Cold storage’ also known as a ‘cold wallet’ as it is for obvious reasons not connected to the internet.
If you’d take it a step further and learn it by heart, you would have created what some refer to as a ‘BrainWallet’. Remember that if you don’t have a backup to your brain wallet, you’d better not forget what you’ve learned, or your assets will be lost forever.
Only suited for ‘secure crypto storage’
While everyone is looking for the perfect solution to hold their cryptocurrency assets safe, there are always compromises to be made.
One of the drawbacks of a paper wallet for example, is that while it is a perfect medium to store your cryptocurrency, it is not a viable choice if you plan to make frequent transactions or if you desire to trade your cryptocurrency on exchanges.
How secure are paper wallets?
Paper wallets are obviously only secure as long as:
- Create them while being offline
- They don’t get lost or destroyed
- No one else has access to them
- You have never used the private key to login into a Web wallet or Desktop wallet
What can you do to make paper wallets safer?
- Make multiple copies & store them in different places
- Don’t keep them at home as it could make you a target
- Choose to create a paper wallet with an additional password. This makes the private key alone unusable without this extra password or keyphrase.
How to create a paper wallet?
If you’re unsure how to get started with paper wallets, but would like to do so, we’ve created a practical guide on how to create paper wallets for Bitcoin which explains the process entirely. We’ll also go into more detail on how how you can apply additional security measures to ensure that you don’t make costly mistakes! (coming soon)
So if you think that you’ll want to move your cryptocurrency around you’ll have to use another solution. Currently, it is widely accepted that Hardware Wallets are the perfect solution to have a ‘cold wallet’ solution which also allows you to connect safely with ‘Hot Wallets’.
Hardware Wallet – ( Best Choice!)
Hardware wallets are devices which store your private keys on an encrypted storage medium. They are extremely popular and give cryptocurrency users who value non-custodial wallets a great balance between security and ease-of-use.
The most well-known devices come in the form of a storage device which connect to your computer through a USB port. However, the hardware wallet space is quickly developing and we start seeing hardware wallet solutions which work with your mobile phone also.
While the paper wallet is superb medium to hold or ‘hodl’ cryptocurrencies, they are pretty useless if you want to ‘use’ your digital crypto assets on a daily basis. This is where a Hardware Wallets have added a much needed extra layer of security when it comes to crypto currency usage. You see, together with the growing popularity and value of digital assets, there’s also an increasing number of sophisticated ‘bad actors’ in the space who will try to hack into any loophole searching to steal your wealth.
A hardware wallet is considered a Cold Wallet aka ‘Cold Storage’
Hardware wallets are unique in that they have found a way to communicate with different kind of web wallets and desktop wallets in a manner which allows the user to connect with the internet and transact without ever revealing the private keys.
What about Hardware Wallet Functionality?
When you think about the functionality of Hardware Wallets you really have to understand that while hardware wallets in the first place really just a device which can store the encrypted private keys. Other than that, the only other (very important) function that a hardware wallet helps you with is enabling a ‘secure connection‘ with all kinds of third party wallet services!
As of late, they are moving towards offering their own desktop wallet software, allowing you to interact with the blockchain and consult, transact, and so on.
So in other words, Hardware wallets allow you to go ahead and use any kind of software which is supporting their particular brand of Hardware wallets.
Hardware wallets are NOT free!
Unlike web wallets, desktop wallets, mobile wallets and paper wallets, hardware wallets do come at a cost. The price ranges between around 40$ for the cheapest models and around and 170$ at the high end of the price spectrum.
So, while cryptocurrencies are often seen as a tool to bank the unbanked, the truth of the matter is that even the cheapest model would add a significant cost for those users. Now, for anyone seriously looking to be involved with cryptocurrencies it is hardly a luxury and thus recommended!
Some popular Hardware Wallets are:
If you are interested in our comparison of the most popular Hardware Wallets the market today, go ahead and read up on the Onchain Guru Hardware Wallet Guide.
Are hardware Wallets Secure?
Current Track record has proven Hardware Wallets are secure
Hardware wallets by themselves have proven to be pretty secure until now. This does not mean however that there are no risks associated with using Hardware Wallets, as you will still have to use an interface & connect with the internet.
- Hackers might try to use malware to change the recipient address
- You might have bought a tampered device, so it is recommended that you buy your Hardware wallet straight form the manufacturer.
- The tampering might happen with the delivery process, so do check the recommendations by the manufacturer to ensure this hasn’t happened.
- With any hardware & software implementations there might be latent security vulnerabilities
- You could lose the device or break it! Use the recovery phrase which we’ll briefly discuss next!
Hardware recovery phrase as a backup
While hardware wallets are pretty convenient and secure medium to use your cryptocurrency safely, you still need to understand that they are not an end all, be all. These devices could break, get lost, be stolen and so on. Therefore Hardware wallets also usually have a 12 to 24 word passphrase recovery method just in case any of these events would actually happen. So, you’ll still need to have a paper backup or have memorised the recovery phrase in order to restore/ recuperate your access on a new device.
Conclusion About Cryptocurrency Wallets
If you read this far into this article then I’ll need to congratulate you as you have done the most important thing already, which is educating yourself. Now let’s come to a simple conclusion together!
1. Decide what your needs are!
Cryptocurrencies and utility tokens mean different things to different people. You must decide for yourself how you intend to incorporate cryptocurrencies in you life.
- Will you be holding your cryptocurrencies for the long term?
- Do you want to use your crypto to do day to day purchases?
- Are you planning to actively speculate with your digital assets?
- OR all of the above?
2. Know Yourself When it comes to security!
Will you have the discipline to take care of your own digital assets and choose for a non-custodial wallet, or does it make sense for you to choose a custodial solution.
While we might recommend that everyone should at least consider non-custodial wallets, the truth is that companies like ‘Coinbase’ are popular for a reason. Not everyone has the discipline or the desire to safeguard their assets personally.
3. Choose cryptocurrency wallet types based on your own profile
So, there! If you are only interested in ‘holding’ cryptocurrencies, you are perfectly fine using a paper wallet.
If you want to spend your crypto on a daily a basis, choose a respectable mobile wallet, but don’t store all your digital assets on them, similarly like you would not keep your entire fiat fortune in your pocket wallet.
If you are trader or speculator, you will have to assume the risk of using third party exchanges in order to trade in and out of trading positions. Do your due diligence on them.
If you are a casual trader, but non-custodial fanatic, do consider using decentralised exchanges and access them with your Hardware wallet’.