Types Of Cryptocurrency Wallets Explained
If you invest in cryptocurrencies, it is beneficial to store them in a wallet. This will help to protect your investment; however, knowing which wallet to choose can be somewhat confusing. For more basic information regarding what a cryptocurrency wallet is, and how it works, please see our other guides, where we go into more detail. For now, we will be focusing on what types of wallets are available to you, how they differ, and which one is right for you.
Before we take a look at the different types of cryptocurrency wallets, and the advantages and disadvantages of them, we will just run through a few additional wallets, as background information, which will then help you when we come onto the different types of wallets available to you.
Hot and Cold Wallets:
Quite simply, a hot or cold wallet refers to whether the wallet is connected to the internet or not. Hot wallets are connected to the internet, and because of this, poses more risks, and are seen to be less secure; however, they are more user friendly.
On the contrary, cold wallets are not connected to the internet, and are wallets that are stored offline. This comes with a lot less risk and have improved security; however, they are best compared to a vault or a safe, where you would store larger sums of money, as opposed to a wallet that you would carry around with you on a day to day basis for simple transactions.
For day to day transactions, you are much more likely to use hot wallets, as opposed to cold wallets, and cold wallets for more long-term holdings.
Multisignature wallets, which are more fondly known in the field as multisig wallets, and as the name suggests, they require more than one signature in order to complete the given transaction. This is considered to be an additional security feature, as you will not be able to access the account without all of the signatures.
You should consider a multisig wallet to be much like a shared bank account, where no transactions can be made unless all of the parties have entered their PIN, or signed for a withdrawal. This is exactly the same context for the Bitcoin wallet, and is therefore ideal for families and businesses.
Multicurrency wallets are fairly self-explanatory, and simply allow you to hold and store more than one crypto currency. These are great if you have several different coins, as you do not have to have multiple wallets, and can instead store them all in one place.
Some multicurrency wallets have added features that will allow you to convert one cryptocurrency into another; for example, if you have existing Bitcoins that you want to convert into Ether, you can with some multicurrency wallets.
However; not all wallets will offer this feature, so if this is something that you are wanting, it is important to research the different wallets in order to make this easier. If you have already picked one though, and wish to convert some coins into a different currency, this is still possible, but it requires additional steps which you will have to complete online.
Public and Private Keys:
All cryptocurrency is represented by an entry in the blockchain, which is associated to a public key; but, in order for you to move your cryptocurrency around, whether that is to exchange it, or to convert it to another currency, you will require your private key to unlock it. You will usually find your private key in your crypto wallet.
One thing that is worth bearing in mind is that your private key is the only way in which you can access your funds, and if you lose this, all of your cryptocurrency is lost. Some private keys are kept offline, to prevent them from getting hacked, so it is important that you carry out research and make an informed decision as to where you wish to store your key when you choose your wallet.
Different Types Of Cryptocurrency Wallets
An online wallet is sometimes referred to as a Web Wallet, and is one that you access via your web browser. This should not be confused with hot wallets, which, although they are online, does not refer to all online wallets. Online wallets also refer to mobile and desktop wallets, and are any that you access via an internet connection.
The same applies with hot wallets though, and online wallets should not be used to store large amounts of currency in, as they are more at risk of becoming hacked.
To help you decide whether an online wallet is for you or not, we have highlighted a few of the advantages and disadvantages…
- You can complete your transactions very quickly. This is because you have instant access to your wallet.
- Some have the ability to store and manage a range of different currencies and allow different transfers between them.
- Online wallets also allow your currency to be directly integrated into an exchange.
- If you only have small amounts invested in cryptocurrencies, online accounts are ideal.
- You can use a TOR network for added Privacy
- A TOR network is a well-known and trusted anonymity network.
- You do not have to install any software on your PC, as it is all stored online.
- One of the biggest advantages is that they are so accessible. There are often mobile apps that you can download onto your phone that will allow you to access your cryptocurrency wallet on the move.
- It is not a good idea to store large amounts of money in an online wallet, so if you are looking for a long-term place to store a high investment in, online wallets are not ideal and should be avoided.
- You are more at risk of being hacked and are susceptible to phishing scams, malware, DDOS attacks and outdated security measures.
- There are a lot of risks associated with doing anything online, as it leaves your computer completely open to viruses, which can affect your wallet. You can reduce this risk keeping your software up to date, and not using internet café’s etc – the usual things you would do to help keep any financial transactions secure. Take advantage of two step authentication, and always enable it if it is available to you.
- You do not have control of your wallet. Because it is online, it is effectively stored on a third party, which does not come without it’s risks.
As the name suggests, mobile wallets can be used on a mobile device, and allows you to access your wallet on the move. One of the great things about mobile wallets is that they can often provide more features than wallets that are purely internet based. That is not to say that they do not come without risks.
- They are among the easiest of the wallets to use, and much more practical. They can be used on the go, which is great if you are regularly making transactions.
- Just like the online wallets, you can use a TOR network, which will help increase anonymity and security.
- Many mobile wallets will offer additional features that simply are not available with other wallets, such as QR code scanning.
- Mobile phones are not at all secure, and there is nothing that will save your savings if your phone becomes maliciously compromised. It is wide open to malware and viruses, which can completely wipe out any cryptocurrencies that you have saved.
Desktop wallets are among the more secure cryptocurrency wallets; however, this does depend on how committed you are on keeping up to date with the latest online security measures.
Any laptop or computer; however old or young that has once been connected to the internet, even if it is not connected now, will come with a certain amount of risk, unless of course you completely clean the system, and install a new system on it. If you have a laptop that is completely clean – that is, it has never been connected to the internet, it can be used as a great cold storage method; which, if you remember from earlier is favoured to store large amounts of investment.
The great thing about desktop wallets is that a lot of people have old laptops lying around, which are not being used for anything, which are ideal for desktop wallets.
- It is associated with less risk, especially if the computer has never been connected to the internet.
- It is the ideal cold wallet to use if you are looking to store a large amount of currency somewhere.
- You are not relying on your private key to be stored on a third-party server, again, reducing the chances of your account being hacked and your money stolen.
- Desktop wallets are incredibly easy to use, unlike some.
- A TOR network can be used which will give you more anonymity and privacy.
- If your computer is connected to the internet, your privacy and security are at greater risk.
- Because everything is held offline, if anything happens to your computer, and you are unable to fix it, you could lose all of your investment.
- You have to regularly back up your computer for the same reason as above.
- Regardless of whether you are connected to the internet, and despite the fact that a desktop wallet is considered a lower risk choice, your computer is still open to viruses and malware, which result in you losing all of your coins; which is not good if you are using this as a cold wallet to store larger amounts.
Hardware wallets are a bit of a mixed drawer in terms of popularity, and along with it come many benefits and drawbacks.
They are marginally less user friendly than desktop wallets and web wallets; however, they are more secure than hot wallets, and easier to work with than paper wallets (see below).
Hardware wallets come in a number of different forms, so it is important that research is carried out into your chosen hardware wallet prior to placing any of your money in there. They are; however, great for storing large amounts of cryptocurrency, so long as you do not want to move it around often. They also offer great amounts of control.
- Some hardware wallets come with a screen, making them one of the most secure ways to store your cryptocurrency in the long-term.
- Even without, in general, hardware wallets offer greater security than many others.
- They are often quite difficult for beginners to use; however, if you have large amounts to invest, it really is the best one. However; because of this reason, hardware wallets are often sold out.
Finally, we are going to take a look at paper wallets. These used to be very popular for cold storage; however, since hardware wallets have come onto the scene, they are significantly less so.
That said, paper wallets are notoriously secure, so long as you undertake very strict security precautions when initially setting these wallets up.
A paper wallet is simply a document that contains all of the necessary data needed to generate Bitcoin private keys. This document can store a number of different keys; however, it allows you to keep a physical document containing this information.
- They are one of the most secure choices of wallet, and are virtually hacker proof.
- They are not stored on a computer, which would mean someone would have to physically break into your home to gather the information required to steal your money.
- You do not have to worry about your private keys being stored on a third-party server, because they are on a physical document in your home.
- You need to have a greater understanding of how wallets work
- Requires more effort if you wish to move your cryptocurrencies around.
So, which cryptocurrency wallet is best?
Deciding which wallet to use really is a personal choice. It is dependent on a number of questions, which you need to answer prior to choosing your wallet. These include; whether you need to access your wallet every day, or is it for a more long-term use? Do you wish to use several currencies, or just one? Will you need to access your wallet on the move? Once you have answered all of these, you can go about deciding which of the above wallets would be best suited to you and your needs.
Just remember that regardless of which wallet you choose, to keep it as secure as you possible can, you should be backing up your wallet regularly, ensuring you are using the most up to date software, and include as many security features as you can.
References and Further Reading:
- Hobo With A Laptop; 5 Types of Cryptocurrency Wallets Explained
- Bitcoin Exchange Guide; The Various Types of Bitcoin Wallets And Exchanges
- Bitcoin Wiki; Multisignature
- CryptoCurrency Facts; What is a Cryptocurrency Wallet?
- Comodo; Public Key And Private Keys
- Lifehacker; What is Tor and Should I Use It?
- Bitcoin Wiki; Paper Wallet
- Techco; Choosing a Bitcoin Wallet: The Basics
Blockgeeks; Cryptocurrency Wallet Guide: A Step-By-Ste