The number of cryptocurrency wallets available has increased along with the adoption of cryptocurrencies. Over the past few years, dozens, if not hundreds, of new wallets have emerged, making it challenging for cryptocurrency owners to decide which is best for them.
To help you better grasp the technology and decide how to protect your digital riches, this article will outline the most popular wallet types and their benefits and drawbacks.
Wallet: What Is It?
A wallet is a piece of information that lets you send, receive, and store cryptocurrency.
A wallet’s fundamental component comprises two strings of numbers and letters: a public key and a private key. You may compare the private key to a password and the public key to an email address. Although it’s a little more complicated, we can leave it there for the time being unless you feel like diving deep into the technical details.
A transaction must be “signed” with the private key to send Bitcoin or any other cryptocurrency. This signature lets the network check that you own the address without you having to give out your private key.
Numerous wallets also come with other features, such as ways to monitor your transaction history, controls for handling transaction fees, tools for managing addresses, and the capacity to sign and send transactions.
Wallets: Custodial vs. Non-Custodial
The two types of wallets are custodial and non-custodial, respectively.
A non-custodial wallet, in essence, means that your private key is entirely in your control and that no one has “custody” of your money. This gives you more control because there is no danger that your account will be frozen due to false fraud notifications. However, you also have to protect your money.
Contrarily, if you carry a custodial wallet, you are putting your key in someone else’s hands. Although trustworthy websites’ custody wallets are typically safe and simple, many bitcoin users despise them for various reasons. One of the most common worries is that funds could be frozen or taken by the government because of hacking or possible rule changes.
Numerous bitcoin exchanges have experienced cyberattacks, sometimes leaving their customers with significant losses. Even though security measures are improving, many people still prefer to control their keys.
Although a government seizure would seem unlikely, some supporters of cryptocurrencies cite numerous historical occasions where governments forcibly took gold from their populations. Hopefully, it won’t happen again, but many people are drawn to cryptocurrencies because they think it’ll be harder for corrupt or authoritarian governments to seize.
While some people are prepared to do the work necessary to secure their cryptocurrency and choose non-custodial wallets, others are willing to place their trust in a reliable third party.
Seed Words
You will often be issued a seed phrase if you utilize a non-custodial wallet. For example, if your wallet is stolen or destroyed, you can still get your keys by using seed phrases, which are algorithmically created sequences of 12 to 24 syllables. They are simpler to work with than a long string of numbers and letters since they are composed of words that are frequently used.
Engraving the seed phrase on a metal plate is a common method of protecting a wallet. This can be kept in a safe location and withstand disasters like fires and floods that would destroy paper seedlings.
Comparison of cold and hot wallets
Any wallet kept on a device with internet access is called a “hot wallet.” This might be a wallet on your phone, computer, browser, or a part of an online business or website.
Any wallet without a direct internet connection is called a “cold wallet.” Most people think cold wallets are safer than digital wallets because hackers can’t get into them digitally.
All cold wallets are non-custodial, but hot wallets can either be custodial or not. Although hot wallets are virtually always more practical than cold wallets due to the possibility of a hack, they are typically not advised for keeping significant amounts of cryptocurrency.
The most popular kinds of hot and cold wallets are broken down below.
Cold against a hot wallet? Which is more effective at protecting your cryptocurrency?
- Wallets Hot
Computer wallets
The first practical bitcoin wallet to be created as a desktop wallet. They store public and private keys on a computer’s hard drive and usually have a graphical user interface for sending and receiving cryptocurrencies.
For various currencies, several desktop wallets are available for Windows, MacOS, and Linux. Unfortunately, desktop wallets are typically not custodial.
Wallets for browser extensions
A wallet integrated into a web browser is known as a “browser extension wallet. Most of the time, these are used to talk to decentralized web apps, especially ones that use Ethereum.
For example, MetaMask, the most well-known browser extension wallet, offers a practical way to send and receive Ethereum to and from decentralized apps like NFT marketplaces or sponsored online games. Unfortunately, browser extension wallets are typically non-custodial, which means you must remember a seed phrase to get your money back if you misplace your keys.
Online wallets
Web wallets are often web-based services that offer their consumers custody services for cryptocurrencies. Usually, a web page is used to access a web wallet. Unfortunately, you often don’t have direct control over an online wallet and must put your trust in the company that hosts it to protect your money.
This has benefits because you won’t have to worry about maintaining your security. Still, bitcoin purists usually despise web wallets due to a lengthy history of consumers losing money from them. These losses have occasionally been the result of hacks. In other instances, people in charge of money vanish with user money.
Although less likely to occur with more reliable businesses, most bitcoin users avoid putting sizable balances in web wallets due to these concerns. However, web wallets also risk having your money blocked for several reasons, such as having a name that sounds like someone on a sanctions list or doing suspicious things with your money that cause it to be flagged.
An exchange wallet is the most popular web wallet, allowing users to store money while exchanging cryptocurrency for another. This is a web wallet if you’ve purchased any Bitcoin on stores like Coinbase.com. Exchange wallets are typically custodial, meaning your balance is kept on the server of a centralized exchange. However, with decentralized exchanges, even if you access the wallet through your browser, your keys may also be kept on your computer.
Most web wallets are custodial, but a few offer hybrid solutions to make things as easy and safe as possible.
Wallets: cold vs. hot
Fusion Wallets
In hybrid wallets, the information needed to access funds is divided between a web service and a device under your control. This means that, like any web wallet, you must use a web service to send a transaction, but the service has no authority over your money.
This way, only you can withdraw money. With less danger than regular web wallets, hybrid wallets can provide a better level of ease.
Phone Wallets
Any wallet kept on an Apple or Android smartphone is called a mobile wallet. Even though they are easier to use when you are on the go and send transactions, they are the same as desktop wallets.
For instance, most mobile wallets are equipped with QR code scanners, making it simple to send money to a friend by scanning his address with your phone’s camera.
Banana Wallets
The most basic type of bitcoin wallet is a paper one. They consist merely of a piece of paper with a public address and a private key inscribed.
Paper wallets are a straightforward but incredibly secure method of cold storage. However, to send a transaction, you must carefully upload your private key to a device, which is not convenient.
Paper wallets are susceptible to house fires and water damage.
Mental Wallets
Like a paper wallet, a brain wallet stores information in your brain instead of on a physical medium. Using an algorithm, most brain wallets use complicated, one-of-a-kind passphrases to construct the wallet’s private key and public address. Doing so would be incredibly challenging with a standard private key. After a seed phrase has been learned and paired with a wallet, the wallet can also be deleted or destroyed.
Because you must first translate your passphrase into the address and private key and then use it to send transactions just like you would with a paper wallet, brain wallets are even more cumbersome than paper wallets. But since they only exist in your thoughts, brain wallets provide excellent theft protection.
Naturally, there are some hazards involved with this. For example, you might lose your password if you suffer a head injury, and your heirs might lose their inheritance if you pass away suddenly. These factors make brain wallet usage extremely uncommon.
Device Wallets
Hardware wallets strike a decent mix between convenience and security, making them one of the most widely used wallet options. Private keys are kept on a separate device with built-in security safeguards, fully offline.
You attach the device to a computer, use it to sign and broadcast a transaction, and then use it to access the funds saved on your addresses. So your private keys won’t be accessible to hackers, even if your computer is compromised.
The hardware wallet market is a source of competition for an ever-expanding number of businesses. Trezor and Ledger are two of the most well-known brands.
Some con artists sell fake hardware wallets meant to steal people’s money, so it is important to carefully check the wallet’s legitimacy before buying it.
Numerous-signature wallets
Multi-signature wallets could be a suitable choice if you’re concerned about putting “all of your eggs in one basket.” Multiple users must sign a transaction in a multi-signature wallet before it can be sent.
For instance, a wallet may be created with three keys and demand that at least two of them be used to send transactions. In this manner, a family or company can assign different people different parts of the task of raising money. The wallet can still be found if one individual misplaces their keys.
Multi-signature configurations can be set up for both cold and hot wallets.
Selecting the Best Wallet
There is a clear trade-off between convenience and security with these wallet options—the handier, the less safe.
Many people decide to divide their money among several different kinds of wallets. For instance, people save a modest amount of money for daily use in mobile or desktop wallets while keeping most of their bitcoin in a paper or hardware wallet.
Due to their combination of ease and security, hardware wallets have become one of the most popular choices. Nonetheless, their biggest disadvantage is cost. A basic hardware wallet could cost between $50 and $ 200, depending on the number of features you want.
On your own, you can obtain a comparable level of security and convenience, but it will take more effort to get to know the software through and through. In any case, using wallets is the best way to learn about them.
Start by sending tiny amounts of cryptocurrency back and forth between various wallet types. This will allow you to discover what suits you the most.