There are many types of cryptocurrency wallets available, but the 2 main types are hot and cold wallets. Any other type falls between these 2. Some are more secure than the others. Also, the one to choose will be determined by your trading or investment strategy. You will learn all about crypto wallets and how to choose the best type for your trading or investment strategy.
Types of Bitcoin Wallets
Here are the various types of crypto wallets:
Online Bitcoin Wallets
There is no easier way to get started with Bitcoin investing than to setup an online wallet. You can setup a free Bitcoin online wallet even if you have no Bitcoins right now. Cryptocurrency exchanges like Coinbase, Binance, Kucoin, Gate, etc. will provide you with an online wallet and you can get one at Blockchain.com as well.
When you are just starting out then an online wallet is a good thing to use. But you would not want to keep a sizeable Bitcoin inventory in an online wallet. Yes it is great that you can access your online wallet from anywhere in the world but so can thieves and cyber criminals!
An online wallet is a “hot” wallet because all you need to access it is an Internet connection. The problem is that most online wallets end up storing your private keys on their servers and if these get hacked you can say goodbye to your Bitcoins.
Another issue is that servers can and do have technical problems and if they suffer a catastrophic issue then your private keys could disappear forever. Some online wallet platforms will limit or suspend accounts for terms of service infractions and you may even have your account shut down permanently and you lose your private keys.
We strongly recommend that if you have a significant amount of Bitcoins that you move them to a cold wallet which is offline. Don’t take the chance of not being in control of your Bitcoins.
Online wallets are not all bad. Yes there are security and other risks but if you intend to make frequent Bitcoin transactions then they are useful. You can hold a small amount of Bitcoins in your online wallet for those regular transactions and then move the rest to a more secure wallet.
Mobile Bitcoin Wallets
A mobile wallet is another form of hot online wallet. With a mobile wallet you can access it using your mobile device when you connect to the Internet. If you have a smartphone or tablet that you take around with you wherever you go then this is a very convenient type of Bitcoin wallet.
With a mobile wallet you can make Bitcoin payments to a vendor either online or offline. If you have a Blockchain.com or Coinbase online wallet, then there is a mobile counterpart synchronized to your main wallet.
Despite being very convenient, there are issues with mobile wallets. Cyber criminals and hackers can still get hold of your private keys if they are saved on your mobile device or remote servers.
A lot of people lose their mobile phones or have them stolen. Also a lot of mobile phones suffer damage. If you don’t make copies of your private keys then you could potentially lose all of your Bitcoins in these scenarios.
To get the best use out of a mobile wallet we recommend that you transfer just what you need to it from a more secure wallet. Then if you lose your phone or it becomes unusable you will still have your private keys safely stored in the secure wallet.
Desktop Computer Bitcoin Wallet
Another choice for you is the desktop wallet. It is a much safer choice than an online or mobile wallet as you download an app for your computer or laptop and you store your private keys in it. One of the most popular desktop wallets is Bitcoin Core. In our opinion this is not the most practical choice. The reason is that Bitcoin Core will actually download the complete blockchain so you will need at least 150 GB of spare disk space to make this work.
The good news is that there are alternative desktop wallets that you can use which do not require you to download the blockchain for Bitcoin. Instead they use simple payment verification (SPV) technology. Some good examples are:
- Bither, etc.
Desktop wallets are simple to use and so much safer than online or mobile wallets. With a desktop wallet you can disconnect your computer from the Internet to prevent hackers from accessing your private keys. While it is true that a desktop wallet does not have the convenience of an online wallet, you will have control over your private keys. You can also make a backup in case your laptop or computer spoils or is stolen.
Paper Bitcoin Wallet
This may seem a strange thing to try and store your Bitcoins on paper as they do not seem to be a very good match. But paper wallets are another cold storage option as it is impossible for even the most competent cyber criminals to hack a piece of paper!
Of course if you do not take care of a paper wallet in the real world then people can steal it. So if you choose this option then don’t leave it lying around. You also need to protect paper wallets from damage as well so use a water resistant container to store them.
A paper wallet definitely does not have the convenience of an online wallet but they are a lot safer. All you need to do is to print off your private and public keys and store the paper somewhere secure such as a safety deposit box. It is recommended you store them in multiple safe locations.
Paper wallets are a good long term option. You can store large amount of Bitcoins in your paper wallet and then have a few available in an online wallet for regular transactions. It is definitely one to consider.
Hardware Bitcoin Wallet
Most Bitcoin experts will tell you that the most secure types of Bitcoin wallets are hardware wallets. We agree and if you are serious about Bitcoin investing then we strongly recommend that you invest in a hardware wallet. They are not cheap but they are worth it.
The majority of hardware wallets will enable you to store other cryptocurrencies as well as Bitcoin. A hardware wallet is usually in the form of a USB stick which you just insert into your computer when you want to make a Bitcoin transaction. Once you are done just remove the hardware wallet and then store it safely.
A really good security feature with hardware wallets is the ability to create private keys offline. You can carry your hardware wallet around with you wherever you go without the worry of having your private keys stolen.
It is really easy to setup and use a hardware wallet. With most hardware wallets you can set a password and PIN code and even add recovery seed words to authenticate access and to recover any stored Bitcoins if you lose your hardware wallet or it stops working.
We recommend that you write down all of your security details for your hardware wallet just in case you forget them. Hide these details in a place that only you know about. If these details fall into the wrong hands then you can lose all of your Bitcoins.
There is no chance of a hardware wallet being hacked so the only thing you have to do is to keep a backup of your security details in a safe place.
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Hot Wallet vs Cold Wallet
You might have seen another classification of cryptocurrency wallets as hot and cold wallets.
Hot wallets are all variants that use the internet. They allow you to use the advanced tools to manage your assets, and also to react fast to changes in value and also to take advantage of them. But they could be attacked by malicious software or hackers. Examples of hot wallets are online wallets and mobile wallet. Desktop wallet can also be considered as a hot wallet if the computer is connected to the internet.
Cold wallets don’t use the internet. Because they don’t connect to the internet, there are almost no possible means of hack, unless you misplaced the wallet or the device. Good examples of cold wallets are hardware wallet and paper wallet. Also desktop wallet may be considered as a cold wallet if the computer has no internet connection. So if you want a desktop wallet to serve as a cold wallet, never connect the computer where it is installed to the internet.
Custodial vs Non-Custodial Wallets
Although cryptocurrency wallets can be classified into hot wallets and cold wallets, there is another popular classification of cryptocurrency wallets; non-custodial and custodial wallets.
Hardware wallets (e.g. Ledger) are non-custodial wallets which keep private keys of a wallet offline and only the owner knows it. This is arguably the safest option for storage as the user has full ownership of the coins, but is likely the least convenient as it requires the user to operate additional hardware to spend/use the cryptocurrency.
Non-custodial software wallets (e.g. Trust Wallet, Atomic Wallet, Imtoken Wallet, etc.) is the next option in terms of safety compared to hardware wallets, although they are likely more convenient. The private keys are also owned by the user, but since the wallet is kept on an online device (e.g. the phone), there is a higher risk of losing the funds as hackers can access devices which are connected to the internet.
Lastly, arguably the most convenient yet risky storage method would be storing funds on custodial wallets (eg. on a centralized exchange such as Binance, Kucoin, Coinbase, etc.) as users do not own the private keys to the funds.
A hack on the storage location can potentially cause users to lose their funds. An example is what happened during the infamous 2014 Mt. Gox hack which recorded a massive loss of 850,000 BTC, most of which are customers’ funds.
In summary, you will probably need to use a combination of different wallets as you become a more serious Bitcoin investor. Hardware and paper wallets, also known as cold wallets are the best choice for long term storage. You can use a desktop wallet for medium term storage and an online wallet for those frequent short term Bitcoin transactions.
Main Classes Crypto Wallets
In summary, all crypto wallets can be classified into 2 major categories: Hot wallets and Cold wallets. All other types fall within these 2 categories.
- Types of Hot Wallets include: Desktop wallets, Web wallets and Mobile wallets.
- Types of Cold Wallets include: Paper wallets and Hardware wallets.
The image below summarizes all we have explained in this section:
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You have learnt all about the different types of cryptocurrency wallets, with their comparison: custodial vs non-custodial wallets, hot vs cold wallets. You also learnt how to discover the best wallet type for your trading or investment strategy. Feel free to choose the best option. You can drop your questions or contributions about crypto wallets in the comment section of this article. Enjoy!
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