If you’re walking around with dollars in your pocket, chances are you keep them nicely in your wallet. If you’re not accustomed to carrying around cash, then you probably keep your dollars stored at the bank and have a card in your wallet to spend those dollars.
The same idea applies to cryptocurrencies. If you’re going to hold digital currency, for example, Bitcoin, you’re going to need a wallet to store, send and receive your coins. Just like traditional methods of storing money, crypto wallets exist in different forms with different purposes.
Some wallets can simply be a software wallet running on your mobile device or desktop computer. Others exist as a hardware wallet, a flash drive or even just a piece of paper. Some digital currencies have their own dedicated wallets while others can support a multitude of different cryptos.
If you’re going to be buying, selling or trading cryptocurrencies, you will need at least one digital wallet for your assets. Owners also generally hold most of the responsibility for their wallet, meaning they can potentially lose their wallet and cryptocurrencies with no recourse. So it’s very important to understand how they work.
Let’s get started.
What is a cryptocurrency wallet?
Before getting too deep into the different types of wallets and which one is right for you, it’s important to understand what a crypto wallet is and how they work.
Let’s use Bitcoin as an easy example. Bitcoin transactions are recorded on the Bitcoin blockchain ledger, which tracks all of the wallet addresses, balances and transactions for Bitcoin. You can think of the blockchain as a huge database or spreadsheet that is shared with everyone on the Bitcoin network. Anyone with the updated blockchain ledger can review balances and transaction history associated with a specific wallet address.
If you want to send some Bitcoin from one wallet address to another, you need the private key associated with that address. This is because the crypto wallet doesn’t actually store the Bitcoin. Instead, the wallet stores the private key associated with the address. So if you have access to the wallet, you have the private key and can send Bitcoin from that address.
So let’s assume you own one Bitcoin and have it stored in a wallet. The wallet holds the private key to your wallet address that has the one Bitcoin recorded on the blockchain ledger. When you go to transfer the one Bitcoin, the wallet simply gives you access to the private key, essentially unlocking the Bitcoin in order to be sent to another wallet address.
The wallet address is the public key that is available for anyone to see and send cryptocurrency to. It’s basically the account number for the wallet. If someone wants to send you Bitcoin, they use your public key or public address.
So the public key is something that anyone can access, while the private key is the top secret number that unlocks all the crypto assets in your wallet. It’s incredibly important to keep the private key safe, secure and hidden. Anyone with access to the private key has access to your cryptocurrency.
Hot vs. cold wallets
Cryptocurrency wallets are usually either referred to as ‘hot’ or ‘cold.’
A hot wallet means that it’s connected to the Internet. Two of the most popular examples of hot wallets are Jaxx and Exodus. Hot wallets are either hosted on your mobile device or desktop computer. So if someone gains access to your phone or computer, they might be able to access your hot wallet and steal your crypto assets.
However, hot wallets are super convenient because you have access to the wallet at your fingertips. With the amount of activity done through mobile devices these days, it’s natural to have access to your money, wallets, currencies or other assets through your phone or laptop. It makes it easy for users to buy, sell and trade cryptocurrencies, and make payments using crypto.
Hot wallets are generally used for keeping a smaller amount of cryptocurrency on hand for frequent transactions or trading. It can be thought of as a checking account for crypto assets. It’s easily accessible and convenient for fast transactions but there is more security risk associated.
Cold wallets are not connected to the Internet and are instead stored offline. Having a cold wallet just means the private keys are stored offline and are not accessible at all through the Internet. So if someone ever gained access to your mobile devices or computers, there is no way they would be able to access your cold wallet.
A“cold” wallet is stored offline. This can be in the form of a paper wallet, a hardware wallet (like Trezor), or even on a USB stick. “Cold” just means that your private keys are stored completely offline. So if someone hacked or stole your mobile or desktop, there’s NO WAY they could access your crypto assets. Two of the more popular examples of cold wallets are Trezor and Ledger.
Cold wallets are often used for storing larger holdings of cryptocurrencies to keep them offline and off exchanges. They are basically like a savings account for your crypto assets. It requires a bit more effort to access and transact using crypto assets on a cold wallet, but there is much less risk of theft.
Besides the hot and cold, or online and offline wallets, there are several various types of wallets to choose from for your cryptocurrencies.
- Desktop: Desktop wallets are hot wallets. The wallet is software that’s downloaded and installed on your computer and should work for either Windows, Mac or Linux. Desktop wallets are pretty secure for hot wallets, but of course, it’s only as secure as the computer you host the wallet on. If your computer has malware and viruses running in the background, or there is no password to protect anyone from accessing it, then the wallet might be easily compromised.
- Mobile: Mobile wallets are hot wallets. This wallet is an app you download from the app store on your iPhone, Android or Windows device. These mobile app wallets are pretty similar to a desktop wallet and many crypto wallet providers will offer both desktop and mobile versions. Mobile wallets are more convenient than desktop wallets because you have access to send or transfer crypto on the go from your mobile device.
- Cloud: Cloud wallets are hot wallets. This wallet stores the private key online in a cloud-as-a-service solution. This allows users to access their crypto wallet from any computing device, which makes this wallet super convenient. However, just as with the other hot wallets, your private keys are stored online and controlled by a third party, making them at more risk of hacking and online theft.
- Hardware: Hardware wallets are cold wallets. These types of wallets are small physical hardware devices that store the private key to access your cryptocurrency. Hardware wallets usually plug into your computer’s USB. Using a simple internet browser allows you to access the information stored on the wallet and send or transfer crypto. Hardware wallets are much less convenient for everyday transactions, or payments made on the fly. However, they provide much more security against hacking or theft. You just need to make sure you keep the hardware device in a safe spot.
- Paper: Paper wallets are cold wallets. It might sound rudimentary, but paper wallets can be effective. A paper wallet is simply a written document with your public and private keys on it. Instead of relying on software, a mobile app, or a flash drive to store your private key information, you can write it down on a piece of paper so no one else can access it. This is commonly referred to as ‘cold storage,’ as the private key is offline on the piece of paper. But again, this method is only secure if you properly store the paper and keep it safe.
- Exchange: Exchange wallets are hot wallets. Exchange wallets are how you keep your cryptocurrency on a crypto exchange in order to trade between coins. You can have an exchange wallet on either a fiat-crypto exchange or a crypto to crypto exchange. In order to access your exchange wallet, you would log in to the exchange and access the funds. They make your public key and wallet address available so you can send funds to the wallet and trade cryptos on their exchange. The exchange hosts the private key for you so you can access your cryptocurrency and trade or withdraw coins.
However, that means your private keys are in the hands of the exchange, and they have the responsibility for the safety of your cryptocurrency. It’s usually a good idea to only keep a small amount of crypto on exchange wallets that you plan to trade. Otherwise, if the exchange is hacked, your cryptocurrency could be stolen with no recourse available.
Are cryptocurrency wallets anonymous?
Many people are attracted to cryptocurrencies because of the private nature of the blockchain and the anonymity they can potentially provide. So that begs the question regarding crypto wallets, are they also anonymous?
Wallets themselves are considered pseudonymous. They are not inherently connected to the user’s identity. Your name, birthdate, and address won’t be found in your crypto wallet. However, simple data like your wallet address can be traced back to your identity. With transactions being publicly stored on the blockchain, someone could potentially link your wallet and financial transactions back to you.
Certain cryptocurrencies aim to give users full privacy and anonymity. Monero is a popular example of a cryptocurrency that includes several features to hide the identity of senders and receivers, as well as mask the transaction amount.
Which cryptocurrency wallet is right for you?
Now you know there are various types of wallets to store your cryptocurrency, each with their pros and cons when it comes to convenience and security. The key question is, which crypto wallet is right for you. And that entirely depends on… you.
In order to choose a suitable crypto wallet, you need to gauge your objective when it comes to cryptocurrencies. Here are a few questions to ask yourself to help you decide:
- Which cryptocurrencies do you want to trade? Just Bitcoin? ERC20 coins? A multitude of altcoins? How diversified do you want your crypto profile to be?
- Are you a short-term trader or a long-term holder?
- How secure are the tools and devices you’re using to trade cryptocurrency? What is the security history of the wallet you are looking to use?
- Are there any costs associated with the wallet you are looking to use?
- Is the wallet’s user interface intuitive and user-friendly? Are you going to have issues using the wallet and transferring cryptocurrency?
- Do you need to access your cryptocurrency on the go? Do you need a convenient mobile wallet app?
- Does the wallet allow you to make quick and easy transactions? Are you going to need to make quick purchases, sales, and coin trades?
- Can you monitor a physical wallet? Is it difficult to keep it safe, or is it easy to lose?
- These questions will help guide you as you look into various wallet types and find which one works best for you. Now we’ll dive into a few quality crypto wallet examples and discuss the pros and cons for each.
Single currency vs. multiple currency wallets
Single currency wallets
A single currency wallet means that the wallet is designed to support a specific cryptocurrency. Usually, the single currency wallet is developed by the cryptocurrency’s development team in order to support their native token.
Generally, the currency’s official wallet is a good option for storing your coins. The currency’s development team has the most knowledge of the coin, and will most likely keep the wallet’s software up to date. Official wallets are generally easy to find on a cryptocurrency’s website.
Here are some examples of the official wallets supporting the major cryptocurrencies:
- Bitcoin: Bitcoin Core Wallet
- Ethereum: Ethereum Wallet
- Litecoin: Litecoin-QT
- Monero: Monero Wallets
- Dash: Dash Core
Many people get started in cryptocurrencies by buying Bitcoin, which is by far the most popular crypto. However, it usually doesn’t take long before people start trading those initial Bitcoin for other cryptocurrencies or altcoins. At this point, there are 1,500+ different cryptocurrencies, which can make owning a diversified portfolio difficult when having to maintain several different crypto wallets.
The good news is that you don’t need to set up a different wallet for each cryptocurrency you purchase. There are plenty of wallets available that allow you to store and transfer several currencies from the same wallet and address.
Multi-currency wallet examples
Let’s take a look at some of the various wallets and discuss the pros and cons for each:
Exodus is a great desktop wallet and supports a plethora of coins like Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Dash, EOS, Dogecoin, and many more. The user interface is very easy to use and intuitive for new users. Exodus provides users with a simple guide to help them back up their wallet. One neat feature with Exodus is that they’ve built Shapeshift exchange into the wallet so users can trade between Bitcoin and other cryptocurrencies without ever having to leave the wallet.
Pros: Beginner-friendly, intuitive and easy to use, in-wallet trading, multiple currencies supported, good security and user privacy, free and open source software.
Cons: Hot wallet, private keys stored online, no web interface, no mobile app.
Jaxx is a crypto wallet software originally created in 2014 by Ethereum’s co-founder Anthony Diiorio. The wallet supports a wide range of cryptocurrencies, including Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Dash, DAO, Zcash and dozens more. Jaxx is available on a wide variety of platforms for desktop (Windows, Mac OS, Linux), mobile (iOS and Android), and web browser extensions (Chrome and Firefox). Jaxx also supports in-wallet conversion between Bitcoin, Ethereum and DAO currencies through Shapeshift and imported Ethereum paper wallets.
Pros: Ability to link wallet across multiple platforms, good user support, a multitude of useful features, user-friendly and easy to use, good security and user privacy, free.
Cons: Not open source code, loading times can be slow.
MyEtherWallet, also commonly known as MEW, is a web interface that supports Ethereum and ERC20 token storage. Many cryptocurrencies are built on top of the Ethereum blockchain and are referred to as ERC20 tokens. MEW allows users to store all their ERC20 tokens in one easy to use wallet on the Ethereum blockchain. MEW is also compatible with other common wallets like Jaxx, or hardware wallets like Trezor or Ledger. MEW can be thought of as a type of paper wallet because you need to provide the private key in order to access the wallet’s web interface. So you can write the private key on a piece of paper, or store the private key in a multitude of other ways. MEW allows the user to determine the security level of their private key.
Pros: Supports all ERC20 tokens, ability to link wallet across multiple platforms or exchanges, simple to use, good security and user privacy, free.
Cons: Doesn’t support common coins like Bitcoin, only accessible as a web interface, built on Ethereum blockchain which can be slow.
Mycelium is a good Bitcoin mobile wallet for more savvy or advanced users. It allows users to send and receive Bitcoin using their iPhone or Android. Mycelium has tons of great features for users to take advantage of and get acquainted with the possibilities of Bitcoin. The wallet hosts a local trader exchange to facilitate buyers and sellers of Bitcoin, provides user privacy by never storing the private key, and allows for securely encrypted chat using your Bitcoin keys. They also provide top-notch security with hardware capabilities, encrypted PDF backups, and an integrated QR-code scanner.
Pros: Tons of great features, a mobile app for convenient usage, advanced security measures, good privacy practices, free and open source software.
Cons: Not user-friendly for Bitcoin beginners, hot wallet, no web interface, no desktop interface.
Trezor is a hardware wallet, referred to as Trezor wallet, that is perfect for storing large amounts of cryptocurrency, sort of like keeping your money in a savings account. Trezor wallets support Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Dash, Zcash and other ERC20 tokens. Trezor’s technology is open source with the larger Trezor community driving the technical decisions. The wallet’s interface is intuitive and easy to use, and it's available on desktop versions for Windows, Mac OS, and Linux. Trezor wallets never expose your private keys, so the security level is the same as carrying around paper money. In order to send currency, you must have the Trezor wallet physically with you. This makes it a great wallet solution for cryptocurrency investors that want to hold for the long term and keep their currency safe.
Pros: Cold storage, private keys are never exposed, intuitive and easy to use interface, beginner friendly, built in screen, open source software, good security, and user privacy.
Cons: Must physically have the device to send currency, costs $100.
Ledger Nano is a hardware wallet with a focus on security. Beginners should know that Ledger Nano two factor authentication to add a second security layer for extra protection of your cryptocurrencies. Ledger Nano wallets support Bitcoin, Ethereum and a majority of the other altcoins on the market. The wallet is a small USB flash drive that has the ability to recover the wallet’s seed without needing to connect to your computer.
Pros: Multi-currency support, cold storage, fairly easy to use the wallet, supports a variety of third-party apps, good security with two-factor authentication
Cons: No transaction labeling supported, lack of privacy and hidden accounts, no password manager, costs $65
Green Address is a Bitcoin wallet that’s easy to use for cryptocurrency beginners. The wallet supports versions for desktop and mobile for easy access. Green Address provides good security practices for users with two-factor authentication and a Green Address signature required for transactions. Hardware and paper wallet backups are supported as well.
Pros: Ability to access the wallet from multiple devices and platforms, user-friendly and intuitive for beginners, good security practices to protect user’s currency, free and open source software.
Cons: Hot wallet, moderate user privacy practices, Green Address is required to approve all payments.
Blockchain.info is one of the more popular Bitcoin wallets. Users can access this wallet through their browser or mobile device. Blockchain.info provides good security practices. Users can enable two-factor authentication in the browser version, while mobile users can require a pin code to access the wallet’s application each time it’s opened. Blockchain.info says they don’t have access to the private keys, but the wallet is still stored online and all transactions go through the company’s servers, so privacy is on the weaker side. Blockchain.info has served as a trusted wallet by many in the Bitcoin community and could be a good place for beginners to store their cryptocurrency.
Pros: Trusted and reputable company, user-friendly interface on both web browsers and mobile application, good security with extra authentication layers, free.
Cons: Hot wallet, weaker privacy, Blockchain.info required for all transactions, mild history of service outages.
Copay is a digital wallet created by Bitpay. The features of this wallet provide the user with the convenience and ease of use. Copay wallets are accessible with user-friendly interfaces and desktop, mobile and online versions. It’s simple to use for crypto beginners while having advanced features for more experienced users. The wallet also supports a multi-signature feature that allows multiple people to share funds in the wallet.
Pros: Support for multiple devices and platforms, support for multi-sig transactions, user-friendly interfaces, good security and user privacy, free and open source software.
Cons: Hot wallet, limited user support, history of slow usage and computing.
Coinbase / GDAX
Coinbase and GDAX are exchange wallets that allow users to store their cryptocurrency after exchanging their fiat to crypto. We’ve noted that keeping crypto stored in online and exchange wallets can be dangerous and risky, but Coinbase and GDAX are two of the safer options. These exchange wallets don’t support the multitude of coins like some of the other wallet options, but for new users, this can be a good solution until you get a more secure wallet set up. Cryptocurrency stored on these exchange wallets are insured, providing users peace of mind that they won’t lose their currency if the exchange is hacked and funds are stolen.
Pros: Easy to use and beginner-friendly, easily accessible funds for trading, funds stored in these wallets are insured, free
Cons: Hot wallet, risky security with exchange wallets
How to Keep Your Wallet Safe
Along with the many benefits associated with cryptocurrencies comes the responsibility of managing your own funds and money. This means the privacy and security of your currency and wallet are ultimately in your hands.
Many people put their money in the bank rather than under the mattress because they trust the security of the bank over the security of their home. And this makes sense when banks have a history of good security and insured funds.
On top of that, most people keep their money in digital form by carrying around credit and debit cards. This gives them the convenience of having access to their funds with a single card they can keep in their wallet. This opens up obvious security risks as most people have had the scare of losing their card or having their card account hacked.
Keeping your cryptocurrency safe follows the same principles. You can achieve ultimate security of your crypto at the expense of having it available on hand for easy transactions. You can also have your crypto accessible through multiple devices and platforms to make everyday purchases but at the cost of properly securing your funds.
With the security vs. convenience tension in mind, let’s discuss some of the best ways to keep your wallet, and thus your cryptocurrency, safe and secure.
Create backups of your wallet
Creating multiple backup copies of your software wallet protects you from the worst case scenario, losing access to your wallet and currency. You never know when your computer software will fail, leaving you without access to the wallet and private key to unlock your crypto. Your computer or device might also be lost or stolen, meaning you could again lose access to your wallet and funds.
Different software wallets support different backup methods. Each wallet’s website should have a dedicated section to help guide you through creating a backup wallet and protect your currency.
Don’t keep too much currency on an exchange
We’ve discussed the dangers of keeping your crypto on an exchange and in their hosted wallets. But it’s worth repeating and covering here. Even though Coinbase or GDAX might seem like viable options, experienced crypto holders will agree that best practice is to get your currency off the exchange as soon as possible.
Over the past several years as Bitcoin has gained popularity, there are multiple accounts of exchanges being hacked, shut down, or simply disappearing… leaving users and customers bewildered and without their coins.
Best practice is to only keep the amount of cryptocurrency you are actively trading on the exchange. If you are a short-term trader, you need to keep some amount of coins on the exchange to trade, but anything past that is an unnecessary risk.
Use two-factor authentication whenever possible
Adding extra security layers is just simply data and computer security best practice. Many companies in the cryptocurrency space understand the push for maximum security, and in response have allowed or forced users to enable two-factor authentication techniques. This can include a security code sent to your mobile device through SMS message, a time-based Google authentication code, or a special PIN.
If the crypto wallet allows you to enable two-factor authentication, do it and use it. Protect your account with the best techniques. And if the wallet doesn’t offer two-factor authentication or an extra layer of authentication security, that should be a red flag and you should be concerned about their overall security practices.
On top of two-factor authentication, it’s worth noting that you should use a different strong password for each online account you have, especially your crypto wallets, exchanges and other related accounts. You don’t want a hacker that compromised your Facebook or email account to be able to access your crypto wallet and steal your funds.
Update your wallet software regularly
Software wallets frequently find bugs or security holes and fix the code in an update. Users should be aware of updates sent out by the wallet’s software or development team and update the wallet whenever an update is released or sent. Some companies don’t actively send out notifications when an update is available, so it’s best practice to periodically check for updated versions. Some companies will announce updates through social media, along with other important information. It’s a good idea to find and follow the company on those platforms.
Cryptocurrency wallets are a big deal and not something to take lightly. Most people buy nice physical wallets to store their cash and credit cards, treat them carefully, and basically protect them with their lives. They understand the importance of keeping their wallet out of the wrong hands and the dangers that could happen if it does end up lost or stolen.
However, crypto wallets are a bit more involved and there are many more factors to consider than size, fabric, and design of a wallet in your back pocket. Instead, you need to take note of the privacy and security features, the cryptos supported by the wallet’s software, how the private key is handled, how users can access the wallet, and how user-friendly is the wallet.
When buying Bitcoin for the first time, it’s common for people to sign up with Coinbase, plug in their credit card, purchase some Bitcoin, then leave it there and wait. The next step for users should be setting up a wallet and getting familiar with the process of sending and receiving Bitcoin or cryptocurrency. You want to make sure you understand the various features and shortcomings of your wallet, and if you might need multiple wallets to support your crypto activities.
The key questions above should help guide you to understanding your crypto wallet needs and put you in a position to review the various wallet options, as well as research others that are available. Getting a wallet setup might not sound like the most exciting task and you’re probably eager to start trading more coins than Bitcoin. But getting the fundamentals setup, like your first crypto wallet, are important steps that can’t be ignored if you want to become a successful trader and investor in the world of cryptocurrency.