Different Types Of Wallets
You may have heard various types of wallets being referenced, like a paper wallet or a Ledger Nano S. So, how do you know which type of wallet to use to store your crypto? Here we explain the different types of wallet, and how and why you would use each one.
As a broad overview, there are two different types of wallets that you can choose from:
Hot wallet
A hot wallet is a wallet connected to the internet. There are pros and cons to storing your crypto in a hot wallet — the biggest pro being quick accessibility to take advantage of market shifts or to spend your crypto via the internet. But this accessibility is also a huge con — it means the funds stored in this wallet are more easily stolen. The best way to use a hot wallet is for some, but not all of your crypto — in the same way that you may keep some cash in your real wallet to pay for a coffee, cover tips to service staff, or grab a snack from a vending machine. It’s ok to carry around a little bit of cash, but not your whole paycheck for the month. Same with crypto.
If you have funds stored in Coinbase, or a wallet app like Greenbits on your phone, this is considered a hot wallet. Even a digital wallet such as Electrum that is stored on your laptop is a hot wallet, as your laptop is connected to the internet, thus vulnerable.
Cold wallet
A cold wallet is crypto storage that is not connected to the internet. If you have an amount of crypto that you consider to be more than small change, this is where you should store it.
This could be on a device such as an offline USB or hard drive, on paper, or a specialty offline hardware crypto wallet, such as a Trezor or Ledger Nano S. Because it’s not connected to the internet, no one can steal it over the internet — although you’ll have to keep the wallet in a physically secure place.
You need both a hot wallet and a cold wallet, if you are serious about crypto and not just testing the waters
Like real life, it pays to keep some cash on you and put the rest in a safe place, like a bank, transferring between the two as needed. The best combination of a hot wallet (or multiple hot wallets) and cold water (or multiple cold wallets) comes down to security features, which cryptocurrencies you are interested in trading, and personal choice.
Managing your crypto wallets
The most secure way to store crypto that you don’t want to touch often is actually a paper wallet, if used properly and stored in a secure location away from prying eyes — like in a lockbox or a safe. Properly setting up, managing, and transferring crypto from a paper wallet can be tricky. Paper wallets are best left for trying out later down the track once you’ve wrapped your head around all the concepts, for funds you don’t want to (or need to) touch for a while.
The easier option for cold storage that many people choose to use is a hardware wallet, like the Ledger Nano S or the Trezor. These hardware wallets are similar to a USB stick that you plug and unplug from your computer. Your private keys are stored on this device, with a simple software wallet interface to use on your computer for transactions. Do be aware that you need specific hardware wallets for specific cryptos — they have a fixed range of cyptocurrencies they can store.
In summary, a few cold storage wallets for your crypto plus some hot wallets for transactions is the winning combination to make trading easier while ensuring your crypto remains secure.
This article is part of our Getting Started with Crypto Series; follow Academy’s medium page for more articles like this.
