A Comprehensive Guide to Crypto Wallets: Different Types of Wallets Explained
Making an investment in cryptocurrencies is becoming more mainstream. A decade ago, only the informed few had known about Bitcoin and could find the tools to make an investment and store it safely. Today, there’s a wide selection and array of services where you can buy and sell crypto. How about storing it after the order is fulfilled?
This is where a lot of traders get overwhelmed and scared away from crypto investments. Since wallets are anonymous in the blockchain itself, it’s impossible to prove ownership of a certain wallet address and the funds inside of it. According to the New York Times report, around 20% of all Bitcoin in circulation is stored in lost and otherwise inactive wallets. This may be because the owner has forgotten or lost their private key that gains the access to the wallet. There’s also the ever-present threat of wallet service being hacked or having compromised security which can lead to the loss of funds.
If at the time of purchase of crypto the investors do thorough research, they will find an array of options for storage services with various levels of security and access methods. Funds can be stored safely and locked behind a fingerprint, 2-step authentication, or private keys code. As long as it’s written down or memorized, the funds will be accessible. Choosing the right type of crypto wallet depends on individual priorities: casual traders value ease of access while institutional investors will prioritize the utmost security and safety of their funds.
The Main Types of Crypto Wallets
- Ownership of the service: centralized / custodial and decentralized / non-custodial
- Connection to the Internet: hot and cold
- Type of installation: browser (Web), mobile, local (desktop), hardware, and paper
Taking a look at each category, users can find out how services differ and choose the one that suits their needs.
Ownership of the Service
Centralized or custodial wallets function similarly to a traditional bank: storage and custody of the funds are managed by a third party. This includes most major crypto wallets that are often related to crypto exchange like HitBTC wallet which is an app provided by HitBTC exchange.
The key characteristic of this type of wallet is that a third party owns the private keys and has access to funds. This requires a level of trust between the user and the platform so services by major exchanges that already have a trustworthy reputation are usually the most popular option.
Advantages of centralized wallets:
- Easy to access and use
- They often have high liquidity and offer a built-in exchange/swap option
- User support that can assist users in case of any issues
- KYC compliance allows to prove ownership of the funds in case access is lost
Disadvantages of centralized wallets:
- A third party holds the user’s private keys and has full control over the user’s assets
- KYC verification can be a complicated process depending on the user’s location and citizenship
The con of custodial service lies in the threat of the platform’s security being compromised. This is why choosing a reputable service is the most important step when choosing a custodial wallet.
If centralized wallets are similar to banks, decentralized wallets can be compared to having funds in cash. There is no third-party or financial institution involved and users are responsible for managing their own funds. An essential part of the Decentralized Finance (DeFi) ecosystem, decentralized wallets like MetaMask are usually accessible via web or desktop applications.
Advantages of decentralized wallets:
- Assets are stored without giving up the keys to a third-party
- Full independent control over the assets
- Better privacy since users don’t have to be verified by a service
- No threat of the platform being hacked or otherwise unavailable
Disadvantages of decentralized wallets:
- If the wallet credentials are lost, there is no service to assist in gaining access to the funds
- Storing and accessing funds requires more steps and a certain level of knowledge
- No built-in exchange
So the main disadvantage of non-custodial decentralized wallets is that there’s a higher level of responsibility. The user is required to know how to store funds safely on a device or external drive and save or remember their seed phrase. Also, since the wallet is not related to exchange, exchanging funds requires the use of an exchange service or agreement for a peer-to-peer transaction. This option is usually picked by experienced crypto users.
Connection to the Internet
Hot wallets are the wallets that are accessible online which includes most web, desktop, and mobile wallets. The private keys are stored on the program that is connected to the Internet. They can be used on-demand to access the funds and perform transactions.
Advantages of hot wallets:
- Convenience of use
- Access to many features associated with classic financial instruments
Disadvantages of hot wallets:
- Vulnerable to loss of access if the entity responsible for storage is compromised
- Vulnerable to hacker attacks if login credentials are compromised
While the disadvantages of hot wallets are associated with security threats, online services offer additional security steps such as 2-step or fingerprint authentication, and sometimes even insurance in case of a hack. A lot of major exchanges that provide hot wallets also keep a certain percentage of user funds in cold storage.
Cold wallets are the wallets that store funds offline which includes most hardware and paper wallets. This is the safest way to store crypto since there is no access to the Internet, and, therefore, virtually no risk of hacking.
Advantages of cold wallets:
- Protection against hacking and server failures
- Safe long-term storage
- Ability to physically transfer the wallet to another user
Disadvantages of hot wallets:
- Can be more complicated to access and use as maintaining the security factor requires following the guidelines to reduce risks of the credentials being compromised
- If the physical carrier is lost and you have lost access to the seed phrase, there is no way to retrieve the information
Cold wallets are better for long-term storage since it prioritizes safety over convenience. Experienced crypto users often store most of their funds in cold wallets while keeping the small percentage of assets in a hot wallet for regular use.
Type of Installation
Web-based wallets are the easiest to use since they can be accessed via a browser and do not require software or blockchain data to be downloaded to the device. Web wallets offer intuitive interfaces and security features that protect user accounts. These services are most often custodial and utilize hot storage. Web wallets like MyEtherWallet are often also accessible via mobile applications.
Mobile wallets can be accessed via an application that is installed on a smartphone. Most app-based wallets like HitBTC Crypto Wallet are available for iOS and Android. These wallets are perfect for regular use because they work anywhere with access to the Internet. Mobile wallets can be custodial and non-custodial. In the case of the latter, the wallet information is saved on the device instead of a third-party service.
To protect from unauthorized access in case a user’s device is lost, custodial mobile wallets provide additional security features like fingerprint authorization or one-time code authentication.
A lot of crypto mobile wallets function as an extension of exchange like HitBTC. This makes buying and selling assets easy with built-in swap features. A wide range of currencies is available including fiat deposits and withdrawals.
Desktop wallets utilize local software to store and access the funds. Because these wallets are usually non-custodial, they offer a higher level of anonymity and security. Wallet keys are stored safely as a file on the device or the user is responsible for saving or memorizing the keys. No user verification or personal information is required, only the file or keys.
These applications can be difficult to install and navigate for casual crypto traders. A lot of the software for desktops such as Bitcoin Core also requires the user to download the blockchain data onto a computer’s internal drive in order to operate the wallet. This uses up a lot of storage and data, and, in some cases, slows down the performance of the computer’s operating system.
Hardware wallets are accessed via an external device similar to a flash drive and the funds are kept offline in cold storage. A network connection is only required in order to perform transactions, but it is done safely with the keys stored in the device’s local memory.
Major hardware wallet providers like Trezor, Ledger Nano S, sell devices that allow users to store digital assets on an external drive. They are usually used for major cryptocurrencies like Bitcoin but other currencies can be stored by installing additional programs on the device. This process can be very challenging for casual crypto users and the devices can be costly for small-time investors.
At the same time, this remains to be the safest way to store crypto assets and it’s not too hard to access when needed.
While not used as often, paper wallets were the first wallets that were used after the inception of Bitcoin. It essentially consists of the key on a physical piece of paper in the form of a digital-letter record or a QR code. This key is then used to access the wallet directly on the blockchain.
Paper wallets are called that for a reason but some crypto holders choose to transcribe their keys on wood or steel plates and keep it in a safe. As long as the object with the key is not lost or damaged, the funds can be accessed by the key holder. Using a paper wallet may not be associated with convenience or technological advancements but it can offer the peace of mind that can be needed when choosing a storage method for your assets.
So where does one store their crypto assets? As can be seen from the variety of types of crypto wallets, each user can make a decision based on their personal needs. Whether you value convenience or security, there are many options to keep assets safe and accessible.
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