What are the Different Types of Cryptocurrency Wallet?
What does it mean to own a crypto token? Unlike fiat currencies, you can’t physically hold your funds because digital assets are not tangible. Blockchain networks are unique because they’re decentralized, which means the custody of digital assets is a little different than it is for fiat or physical assets.
When you buy a cryptocurrency, the decentralized ledger shared across all blockchain nodes updates through a cryptographic consensus. Your new cryptocurrency doesn’t literally “move” when you buy it; this is because it exists in the form of an agreed-upon state of computer code across the blockchain network. The network is simply responsible for updating itself, and the nodes connected to it, regarding who owns what.
So you might be wondering, if your cryptocurrency isn’t really in your custody, what do you hold on to that proves the crypto is yours? The answer to that question is public and private keys. A public key identifies your wallet to the broader blockchain world — kind of like a street address that shows other crypto users where they should send funds. Private keys are algorithmically derived from public keys and need to be kept confidential by each user because private keys are your wallet’s digital “signature” that lets it interact (successful complete transactions) within the blockchain network.
That being said, a crypto wallet is just a public key that’s paired with a private key. However, not every wallet works the same way. To help us understand why, let’s take a closer look at the four major categories of cryptocurrency wallets: hardware, desktop, mobile, and online.
Hardware wallets are physical devices explicitly designed for secure storage — otherwise known as “cold storage” — of private crypto keys. Hardware wallets separate your private keys from the internet, and can only be used to transfer crypto when the wallet is plugged into a computer or connected to the internet in some other fashion.
Using a hardware wallet is slower and more cumbersome than other wallet options; this is because you [typically] can only access funds stored on a hardware wallet by physically accessing the device (unless you need to restore funds from a lost wallet using your recovery phrase). The pathway the wallet builds between your private keys and the blockchain network protects your keys from internet exposure but also adds more steps — and therefore, adds complexity — to the user experience.
In addition, the price of some hardware wallets may deter some crypto-holders from purchasing them. But all these drawbacks come with one huge benefit: hardware wallets are generally considered the safest digital crypto storage option out there and are often considered the best choice for longterm crypto storage.
Desktop wallets are applications crypto users can install on their laptop or desktop computer. The wallets interact with the blockchain network whenever users connect to the internet to initiate transfers. Desktop wallets offer a good balance of security and accessibility — it’s easy to transfer crypto from them, and they store private keys offline. Users who rely on desktop wallets still have to be conscious of security, though. It is important to look out for malware and other threats that can pull private keys from offline storage.
Mobile wallets work similarly to desktop wallets, however, they’re applications installed on your phone instead of your computer. Mobile wallets let you carry your blockchain wallet around in your pocket, which makes spending your cryptocurrency very easy — after all, almost everyone always carries their phone with them. Just be sure to watch out for physical theft and tampering or malware infection.
Online wallets store your private keys on a cloud-based server, so you can access them anywhere, anytime, as long as you have an internet-connected device. Online wallets are quick and easy to set up, and they’re perfect for anyone who needs to trade crypto from a wide range of devices. Most cryptocurrency exchanges require users to deposit crypto in an online wallet controlled by the exchange so that funds can move from owner to owner immediately. The trade-off is security; because online wallets need custody of your private keys to work, any security breaches on the exchanges end automatically put your funds at risk.
What Cryptocurrency Wallet should I use?
Which wallet is right for you? The answer depends on what you plan to do with your crypto. For many people, a combination of wallet types best suits their needs.
Due to their high security, hardware wallets are the best choice for large crypto nest eggs you want to protect. If you transfer or acquire crypto frequently but are still saving up a large amount, consider keeping most of your funds in a hardware wallet and making transfers to or from another wallet at regular intervals.
Online wallets are very flexible but their also your highest-risk option. That being said, it would be best to avoid keeping large amounts of crypto in an online wallet for a long time. However, online wallets let traders move crypto within crypto exchanges with very low latency; and in the volatile crypto market, many traders understandably place a premium on undelayed transactions — so that is something you should not look-over. However, it would probably be in your best interest to only keep the cryptocurrency you need on hand immediately in an online wallet.
If hardware and online wallets are the two extremes of cryptocurrency wallets when it comes to accessibility and security, then desktop and mobile wallets are located somewhere in the middle. Both store your keys offline, but live on devices that can easily connect to the internet, yet, contain all the security and accessibility advantages that will make your life easier.
If you need to use your crypto quickly and regularly but plan on using the same few devices to do so, then a desktop or mobile wallet lets you have quick access without losing control of your private keys — a mobile wallet can be especially helpful for crypto users who trade and spend funds on-the-go.
Each crypto user will most likely have different needs, but most will benefit from a combination of wallets rather than leaning heavily on one. No matter what your wallet configuration ultimately looks like, you should always implement good security practices. A combination of thoughtful wallet use and good security practices will help crypto users maximize the benefits of each wallet type.
