The cryptocurrency market is experiencing another bullish cycle, providing incredible profit opportunities. This hype has become a gateway to crypto’s true purpose – the much-needed freedom on how we handle and dispose of our capital.
However, this freedom comes at a price, as crypto implies an increased personal responsibility for one’s funds. So, as cryptocurrencies become more mainstream, crypto holders should be informed about the safest ways to store and use their holdings.
For this reason, we created this crypto wallet guide. It teaches you about everything there is to know about cryptocurrency wallets, how they work, and the differences between them.
We go through all the different options on the market and point out the advantages and drawbacks of each type regarding safety, privacy, and ease of use. This should allow you to pick the best crypto wallet depending on what you plan to do with your cryptocurrencies.
Finally, we go over some of the risks of using a crypto wallet and the best practices to remain on the safe side of things.
- Introduction to crypto wallets
- Crypto wallet guide – Different types and unique features
- Cryptocurrency wallet guide – Best practices
- Wrapping up
Introduction to crypto wallets
Cryptocurrency wallets are software solutions that allow crypto investors to handle their holdings securely.
You see, unlike traditional currencies, cryptocurrencies such as Bitcoin have no physical representation in the real world. They are simple transaction records on their respective blockchains. And while this makes them virtually impossible to falsify and duplicate, they require specific cryptographic technology for users to access and spend them.
This technology, in the context of our industry, is known as a cryptocurrency wallet. To get started with our crypto wallet guide, we first need to see how these wallets work.
How does a cryptocurrency wallet work?
Most crypto users wrongly assume that crypto wallets store their coins. Crypto wallets, in fact, serve as a gateway for users to access their crypto holdings and communicate with the blockchain. They are, in other words, a key to accessing your coins on the blockchain.
This technology, called asymmetric encryption, provides full control over one’s funds, without the need for an intermediary.
Every time you create a new wallet, two unique codes are automatically generated – the private and public keys. They function in the following manner:
- The private key allows users to access their coins and spend them. You can use it to “sign” cryptocurrency transactions. Hence, the private key is extremely sensitive information that needs to be kept safe and you should never share it online.
- The public address is derived from the private key and represents the location of the cryptocurrencies on the blockchain. Similar to a bank account number, users can share it whenever they wish to receive funds.
As such, crypto wallets are used to store and protect your private keys, instead of storing the coins themselves.
It’s worth noting that some blockchains (Ripple, Stellar, EOS e.g.) use an additional data point to locate your coins. These can bear many names such as Memos, Messages, or Destination Tags, and are used in order to identify a transaction in order to credit an account.
Custodial vs non-custodial crypto wallet
Before we go deeper into our wallet guide, it’s important to cover the difference between custodial and non-custodial wallets.
We previously mentioned that users in possession of their private keys retain full control of their cryptocurrencies. However, some wallets will not provide you with a private key (or keep a copy of it for themselves).
This is usually the case with cryptocurrency exchanges, payment processors, or centralized lending platforms.
These platforms provide you with a custodial wallet – meaning that your funds remain in their custody. As such, they can impose access and withdrawal restrictions, or limit the usage of your coins.
An example of such a custodial wallet is the crypto wallet on the PayPal app. At the moment, US-based users can only buy and sell cryptocurrencies through PayPal and are not able to transfer them to another wallet.
And while PayPal plans on giving users the possibility to do so in the future, your funds will remain in full control of the payment processor. In essence, access to your coins can be denied by the company if you breach their terms of services.
Furthermore, they are often the target of hacks, which usually results in an irreversible loss for the user.
All in all, custodial wallets are a convenient way to accessing crypto services on exchanges or payment processors. However, they impede on some of the main advantages of cryptocurrencies such as e the absence of an intermediary and the freedom to use your funds as you see fit.
Non-custodial crypto wallets
On the other side of the spectrum, we have non-custodial wallets, where the users are in full control of their funds.
These wallets provide the user with their private key, and often, a mnemonic phrase that helps users to recover their key in case they lose access to their device.
When using a non-custodial wallet, users can freely transfer their cryptocurrencies anywhere they desire, regardless of their situation.
Non-custodial wallets can also be linked to decentralized exchanges and lending platforms to be used in the growing DeFi ecosystem.
Considering this fact, we will be focusing on non-custodial wallets in the remainder of our guide.
That said, non-custodial wallets seem intimidating for large-scale investors who do not want to feel responsible for the safety of their funds. They would rather use a trusted third party to take care of their investments while ensuring their safety.
Crypto wallet guide – Different types and unique features
Given the wide array of options when choosing a crypto wallet, it can be challenging to pick the right one for your needs. First of all, we need to distinguish between two major categories of storage – hot and cold. Hot wallets are cryptocurrency wallets that are connected to the internet, while cold wallets are not. The main takeaways are:
- Cold wallets are intrinsically safer than hot wallets, as they are invulnerable to remote malicious attacks.
- Cold wallets are generally used for long-term storage and large amounts of crypto, while hot wallets are used for daily usage and small amounts of crypto.
Below, will go into detail about each one of the types of wallets you may encounter in each category. We lay down their pros and cons so you can make an informed decision when choosing your own.
Online wallets (hot)
Online or web wallets allow you to access and use your funds conveniently from any internet-enabled device. They require you to log in using a password you created and usually allow you to activate a 2FA process (email, authenticator) when logging from different devices.
Your private keys are commonly stored on third-party servers and can be exposed in case of a data breach. This makes them a primary target for hackers and we don’t recommend them for storing large amounts of crypto.
They also require you to sign up using an email, which can then be used to link your crypto address to your person, decreasing your privacy.
- Pros: great for beginners, accessibility, ease of use, on-the-go transactions.
- Cons: high risk of hacks, prone to phishing attacks, privacy concerns.
- Best Online wallet: blockchain.com.
Mobile wallets (hot)
Mobile wallets are by far the most popular and user friendly options in the market. These smartphone apps allow you quick and easy access to your crypto, while at the same time providing a decent level of security.
They store and encrypt your private keys on your device and can be recovered using a mnemonic phrase (or seed) provided at the time of the creation of your wallet.
Mobile wallets are ideal for daily transactions as they allow you to scan QR codes with your smartphone for sending crypto and generate your own for receiving funds. This greatly reduces the risk of errors in the receiver’s address that could result in a loss of funds.
However, the fact that your keys are stored in a mobile device is a security concern. Phones are easily lost, stolen, or damaged which makes them risky to use as your main holding storage.
- Pros: great for daily use, decent security.
- Cons: you can lose your funds in case you lose your phone (so write down your seed phrase)
- Best Mobile Wallets: Exodus, Atomic Wallet, Enjin wallet.
Desktop wallets (hot & cold)
Desktop wallets are quite similar to mobile wallets. In this case, however, the wallet encrypts your keys on one particular desktop computer of your choice. And if your desktop wallet is installed on a computer without internet access, it can be used as cold storage.
While you lose some of the convenience of mobile wallets for transactions, a computer is a much safer environment than a smartphone.
With that being said, there’s still the risk of your computer being jeopardized by a keylogger or other phishing software that could get ahold of your data. To prevent this, it is essential to keep your device’s antivirus and firewall up to date at all times.
- Pros: convenient if connected to the internet, good security, can be used as cold storage.
- Cons: less convenient than mobile wallets, computer needs constant security updates.
- Best Desktop Wallets: Guarda, Exodus, Atomic Wallet.
Hardware wallets (cold)
Hardware wallets represent the most secure options in our crypto wallet guide. Using military-grade hardware, these USB-enabled devices were specifically engineered to safely store your keys offline.
Moreover, they usually come with a web interface, which allows you to make online transactions while simultaneously conserving the added security of offline storage.
There are, however, some caveats that come with these advantages:
- Price – unlike the other types of wallets in our crypto wallet guide, hardware wallets come at a cost. This “admission price” could dissuade some neophytes into acquiring one.
- Ledger breach – last December, hardware wallet manufacturer Ledger’s database was compromised during a data breach. It resulted in the details (names, phones, and addresses) of 272.000 customers being shared online. And while funds remained safe, users’ identities were exposed, making them a potential target for criminals.
- Pros: convenience, high security.
- Cons: entry price, sharing your personal info upon purchasing a wallet.
- Best Hardware Wallets: Ledger, Trezor.
Paper wallets (cold)
The last type that is worth mentioning in our crypto wallet guide is the paper wallet. These pieces of paper contain your private and public keys, which makes them the ultimate cold storage option.
With that said, there are some significant drawbacks to paper wallets:
- They not intended for daily usage as the entirety of the wallet needs to be transferred in a single transaction.
- They are prone to degradation and natural disasters such as floods or fires.
- Some of the websites used to create paper wallets may contain malware or backdoor access to your private keys. Only recently such a backdoor was discovered on popular paper wallet generator BitcoinPaperWallet, resulting in hundreds of stolen Bitcoin.
- They are limited to a single cryptocurrency.
So, if you wish to create cold storage and can’t afford a hardware wallet yet (or don’t have access to them), follow the guide below to create a bitcoin paper wallet securely.
Cryptocurrency wallet guide – Best practices
We have already covered some of the risks of investing in cryptocurrencies in a previous article. However, there is a number of best practices proper to crypto wallets that we need to cover in our crypto wallet guide as well.
- Use cold storage for large holdings or savings and hot storage for daily transactions.
- Be extra careful when using online services and beware of scams or phishing attacks.
- Never share your private key online.
- Back up your wallet private key and seed. Use multiple backups and secure locations to reduce the risks of losing your funds.
- Think of your legacy and share details of your wallets with your family. Otherwise, your crypto holdings might be lost forever if something happens to you.
- Keep all devices that handle crypto transactions up to date to ensure a safer environment for your funds.
- Use multi-factor authentication whenever possible.
- Double-check the receiving address, as a single error will result in loss of funds.
In this crypto wallet guide, we covered some of the most important aspects of these tools that help you handle your crypto, including:
- Their basic functions and the cryptography they are based upon.
- The differences between custodial and non-custodial wallets.
- The differences between cold and hot wallets.
- All the different crypto wallet types, their pros and cons, and some of the best options for each type.
- Some of the best practices you should follow to remain safe when handling cryptocurrencies.
To conclude, whether you are investing or trading cryptocurrencies, it is essential to avoid keeping your funds for extended periods of time on custodial wallets such as crypto exchanges or payment processors.
Hopefully, our crypto wallet guide gave you enough information to help you decide upon the type of wallet to use for any situation. However, if you are remotely serious about your cryptocurrency investments, we can’t recommend enough that you invest in a hardware wallet at some point in time.