Cryptocurrency comes with a plethora of advantages, one of them being increased control and autonomy over your own finances.
But with this advantage comes a major drawback: security. Above all else, those new to the world of crypto will need to familiarise themselves with storing their funds in a safe wallet.
This article is going to explain the different cryptocurrency wallet types so you can choose the right one. Most customers will be looking for a cryptocurrency wallet that is safe but also convenient. There is always going to be a tradeoff.
What is the Cryptocurrency Wallet Anyway?
The cryptocurrency wallet is a place to store your cryptocurrency. Modern wallets will give you the option to store a vast range of cryptocurrencies, including:
- Bitcoin (BTC)
- Bitcoin Cash (BCH)
- Ethereum (ETH)
- Dash (DASH)
- Monero (XMR)
- Ripple (XRP)
- Stellar (XLM)
- Litecoin (LTC)
- Dogecoin (DOGE)
- EOS (EOS)
A cryptocurrency wallet will often allow you to store a number of the above coins. You can get a private key for each individual cryptocurrency or a general passphrase to recover all of your funds, depending on the wallet type.
Getting a private key for each coin is safer as only one of them will ever realistically be at risk, but it can be a little tricker to store and manage them all.
The single most important thing to remember is that the passphrase is basically the identifier for your funds. Keep it safe, because if you lose it you can’t recover the funds. The passphrase and the private keys provide the same function, as the passphrase is used to generate the private key to restore your funds.
There is no real consensus about the best way to store your private key or passphrase, but making at least one physical copy and storing it in a secure location is recommended.
The following are the different cryptocurrency wallet options available. While each has distinct advantages and disadvantages, the online and web wallets tend to be the most popular. They allow for the best mix of security and convenience.
#1 - The Crypto Exchange
Many people will purchase their cryptocurrency from large exchanges such as Coinbase, Binance, or Kraken. This is very useful in terms of convenience, especially as there will likely be a lot of storage options for multiple cryptocurrencies.
Unfortunately, it's a terrible place to actually store your crypto. Crypto exchanges have a history of being hacked and it's not really under your control. Plus, the exchange could seize your funds if you don’t comply with certain KYC procedures.
In many ways, the crypto exchange defeats the purpose of cryptocurrency. You no longer control your funds, and you have to adhere to the typical KYC procedures to do business. You might as well be trading fiat currency.
In any case, the crypto exchange is too convenient for use and funds should never be kept here except in small amounts. You don’t get any private keys passphrase because your funds are not really ‘yours’ when they are on an exchange.
#2 - The Online Wallet
The online wallet is much more popular and still very convenient in comparison to the exchange. It’s where the majority of experienced cryptocurrency users store their crypto.
You are not really ‘storing’ your crypto with a third party provider because only you have access to the private keys. The online provider does not actually have access to your funds. This is a key distinction setting the cryptocurrency ecosystem apart from the legacy banking system.
Should anything happen to the online provider, you can easily restore your funds once you have these private keys which are not shared with anyone.
In other words, there is practically nothing to worry about. You can login to a multipurpose online wallet for a variety of different cryptocurrencies and easily send them anywhere.
With the online wallet, you are entering your username and password every time, which can be a security threat. However, most online wallets will have the option to enable Two Factor Authentication (2FA).
This means that even in the unlikely event of a criminal getting your login details, they won’t gain access due to the 2FA and trade pin/password.
#3 - The Desktop Wallet
The desktop wallet is a very safe way to store your cryptocurrency. With the desktop wallet you are storing your funds locally (on your computer). When you enter your login details this is not broadcast over the web. A hacker ‘listening’ could take these details to gain access to the wallet.
However, as mentioned above, 2FA and trade passwords mitigate this to a large extent, so that even if your login details are compromised, your funds are still safe. So the desktop wallet and the online wallet are about the same when it comes to security.
Be careful to download official desktop wallets. You are downloading an executable file to your computer which does pose a risk. It’s also worth noting that desktop wallets are still ‘somewhat’ connected to the internet, in terms of retrieving information, but now with quite the same level of exposure as online wallets, sometimes called hot wallets.
#4 - The Hardware Wallet
The hardware wallet is undoubtedly the safest way to store your cryptocurrency funds. Hardware or cold storage wallets are tied to a physical device. Online, you are exposed to billions of people. The web exposes you to the world.
But a criminal actually has to know your location, take your hardware wallet, and even then they will need you to voluntarily give them the keycode. And they don’t know how much funds you have. In other words, hardware wallets are as safe as it gets.
You should use a hardware wallet if you are storing hundreds of thousands of dollars of cryptocurrency. Until then, the online and desktop wallets with correct protocols are more appropriate. The hardware wallet does not allow you much convenience and you will probably want to store it somewhere.
Might not be the nicest feeling if you leave your expensive hardware wallet at the nearest Starbucks!
#5 - Niche Wallet Options
Did you know that you can store billions of dollars of cryptocurrency on a piece of paper? In the early days of cryptocurrency, paper wallets were used. These were simply printed pieces of paper with the private keys on them. You generated a wallet and disconnected the printer from the internet while printing the code (so there would be no record).
These were known as cold storage paper wallets. But it is the alpha-numerical characters on the paper that count. This is essentially the key that unlocks the ‘location’ of your funds on a given blockchain. Paper wallets are not really used anymore as standalone wallets. They are too impractical.
You could also just remember this code without printing or saving. This is only recommended if you have some kind of photographic memory! You could and most likely will forget them.
Mobile wallets are typically online wallets that have been adapted for mobile. They are generally quite safe, though smartphones do not have the typical security features in comparison to desktop devices and tend to be targets for hacking specialists.
Mobile wallets can be online and/or local to the phone. With the number of innovations in the crypto security industry, the lines can easily become blurred between the various wallet categories. Regardless of what option you choose, guard your private keys.
What is the best way to secure my cryptocurrency?
While many might complain about the level of hacks and scams, the reality is that the loss of crypto funds is most heavily due to basic user error and mindlessness. If you follow the basic precautions your funds simply are not going to go missing.
Blockchain wallets almost never get hacked. Phishing scams and ICO fraud operations are a little different, but reputable blockchain wallet providers are rock solid when you enable 2FA and trade passwords. A far bigger threat is the cryptocurrency scam industry, where ‘investors’ are enticed to deposit their funds to a specific address. The senders often never hear from the con artists again.
Think about it. What are the chances that a criminal is going to break into your home, then find a piece of paper with a random series of words written onto it, and then log on to your online cryptocurrency account to download all the funds before you are made aware? It’s preposterous, and has probably never happened. But the chances of you losing your passcode are far, far higher. This has happened tens of thousands of times, if not more.
You can also self-encrypt your paper wallet, perhaps by inserting the real word every second word or writing it backwards. You can store the mechanism/methodology of encryption in a different location in your home - ‘Real XMR Passcode Every Second Word’. Don’t keep the mechanism of encryption in the same place as the wallet passcode!
As secure as this is, it might not be necessary. Pick a good wallet, take precautions, and you’re safe. User error is a much greater concern than wallet security, and people are typically tricked into sending their coins to the wrong address as opposed to being hacked.
The bottom line
The bottom line is that online wallets are the way to go when it comes to cryptocurrency wallets, though desktop wallets can also do a decent job. Hardware wallets are not worth it unless you have significant amounts of crypto and they incur an initial investment of about $100.
For maximum security, you could also consider splitting your funds between hardware and online wallets. This is a very sensible option that will allow you security and convenience.
You can simply transfer from your hardware to the online wallet as needed to enjoy the best of both worlds.