Which type of wallet should I use?
When first introduced to distributed technologies and cryptocurrencies, many people are curious about safe storage practices. Should I use a wallet or just leave my assets on an exchange? The safe answer is always the former over the latter, but the following question is not that simple. What type of wallet should I use? The following is a walkthrough of different types of wallets used to store your crypto.
Hot vs Cold
The first main distinction to be made when selecting a wallet is choosing hot vs. cold. Hot wallets include any wallet that is connected to the internet. Being connected to the internet is definitely convenient, but is not without risk. Some example of hot wallets covered below includes exchange accounts, web wallets, software wallets, and mobile wallets. Cold wallets, on the other hand, include wallets that are not connected to the internet. While these wallets lack the convenience of being connected to the internet, they make up for it with the added security of fewer attack vectors: hackers, server seizures, DDOS attacks, etc. Cold wallets can be physically possessed by the user and include hardware wallets and paper wallets.
Full vs Light
The second distinction is a full or light client. This is an important distinction because which wallet you want to use depends on your current disk space. Full Client wallets actually download the entire blockchain onto your device and allow you to run a full node. One big benefit of using a Full Client wallet is having the ability to validate transactions. Light Client wallets, on the other hand, reference a trusted full node’s copy of the blockchain. Thus, they allow the user to perform transactions on a respective blockchain without using all of the device’s disk space downloading the entire blockchain. Just like hot wallets, light clients are much more convenient to use than full clients but force you to put trust in the full node that is supporting your wallet.
Single vs Multiple Signature
The third distinction is to use a single or multiple signature wallet, also known as multisig wallets. This distinction is less common with single signature being the standard, but solutions that take the burden of responsibility off of the user are becoming increasingly welcomed as less technically savvy people enter into the space. A single signature wallet is one that only requires the signature of the wallet owner to initiate a transaction. Whereas, a multisig wallet requires more than one key to sign a transaction alleviating the burden of responsibility on the wallet holder and reducing the risk of error. While a single signature wallet holds true to the ideology of the space (you being in control and custody of what is yours), multisig wallets will provide institutions, organizations, and less confident individuals a safer on-ramp. Some examples of wallet providers that have multisig functionality include Coinbase, Electrum, and Xapo.
Now that these distinctions have been outlined. We plan to briefly walk you through the different type of wallets to help you determine which suit your needs.
In the physical world, you must have money before you purchase a physical wallet, or open a bank account. In the distributed, digital world this is not the case. You are able to download and create wallets before you have funds to store in them. For most new entrants this first “wallet” comes in the form of an exchange account: Coinbase, Bittrex, Gemini, Upbit, Bitfinex, Binance, etc..
Accounts are different than wallets, often not attached to dedicated wallets for each user. This means that you are not actually in possession of your assets, but instead, the exchange is in possession, and they provide you the right to withdraw those assets that are attributed to your account on their platform. This means that the transactions on their platform often times only exist on the platform with deposits and withdrawals actually being recorded on the blockchain. Holding crypto on an exchange is the most convenient solution: it is accessible from almost any device with internet connectivity and can be exchanged for another asset within seconds of logging in. This convenience is easily offset by security risks: insolvency, hackers, government seizure, server downtime, DDOS attacks, etc. Exchanges often times try an mitigate as many of these security risks as possible by separating funds across multiple wallets both hot and cold, but using your exchange account as your crypto wallet is definitely one of the riskier choices.
NOTE: Some exchanges do provide users dedicated wallets, or in the case of decentralized exchanges your account is your wallet (See our post on Centralized vs Decentralized exchanges to learn more)
Web wallets are the most common and easy to use cryptocurrency wallet. Web wallets are stored in the cloud or the host’s servers and can be accessed from multiple devices. As long as you have an internet connection and the wallets public/private key pair, you are able to access your wallet. The main benefits of using web wallets are not only for the convenience but also they are extremely fast to complete transactions by allowing the user to determine their own transaction fee. This type of hot wallet is ideal for traders that are only looking to hold small balances and make quick movements of assets. While all of these characteristics are positive, there are several risks you run when using web wallets. Primarily, you must ensure the website is reliable as there have been scam wallets periodically popping up and gaining temporary popularity. Web wallets are the most convenient “hot wallet”, but also carry all of the risks mentioned above. Two of the most popular web wallets are MyCrypto wallet and MyEtherWallet.
The next most common hot wallet is the software wallet. Here software is downloaded to an individual’s computer. Setting up one of these wallets is a bit more labor intensive as they need to be downloaded on an individual’s computer. These wallets are much less convenient than using a web wallet, or keeping your funds in your exchange account because you can only access your funds using the client that is downloaded on your computer. This carries the same risks as other hot wallets by being connected to the internet but gives users more control of their assets security by having the physical infrastructure hosting the wallet in your possession instead of in an inaccessible location (someone else’s server). The most popular examples of this type of wallet include Exodus wallet, Jaxx wallet, and the Electrum wallet.
Mobile-based wallets are definitely the easiest to use. One of the main benefits and why people like using mobile wallets — is that they allow you to have your cryptocurrency wallet in your pocket at all times. However, there are definitely several risks that a user must be cautious about. First, the user must ensure where the private keys are being stored. Additionally, phones are in general not extremely secure, so it is important to ensure backup and restore features. These wallets may be almost as convenient to use as web wallets, but with all of the same security risks of a “hot wallet” plus the increased risk coming from the insecurity of mobile phones from both technology and physical perspectives. Some examples of mobile wallets included Coinomi, Jaxx, Coinbase, and Abra.
Hardware wallets are the most expensive yet most secure cryptocurrency wallets. Typically in the form of a USB device, hardware wallets store the private keys on the device itself. Thus, most of the time these devices are offline and not vulnerable to attacks. Hardware wallets typically make use of a web interface where an API links the devices storing private keys to their respective public keys in order to complete transactions. An example of this is seen when using a hardware wallet to send ethereum tokens using web-based wallet platforms mycrypto.com or myetherwallet.com.
In this example, you are using the “hot wallet” web platform, but have created a buffer between the internet and your private keys giving you the convenience of a web wallet, but taking away the security risk associated with “hot wallets”. While the use of a hardware wallet may be a little more complicated for the average investor, they are generally recommended for long-term storage of large balances. Ledger and Trezor are the most popular.
Paper wallets are widely touted as currently the most secure and safe wallet in cryptocurrency. However, these wallets are really only recommended for advanced users. Paper wallets include a physical copy of generated public and private keys, typically on a piece of paper. While they may be the most secure from a cyber risk perspective; if an individual loses their copy of their private keys, then their funds are no longer accessible.
There is no right or wrong choice when choosing a wallet. It is all a matter of personal preference and technical comfort. None of the wallet examples provided above are either a recommendation nor endorsement.
Everest makes use of a web-based cloud wallet, EverWallet. We believe that we have resolved the most common attack vectors faced by most “hot wallets” through storing users private keys in their unique Datagrams, hosted in user-controlled IPFS storage lockers, secured by each user’s unique biometric identifiers and knowledge-based locks. This makes EverWallet the best of both worlds: Secure and Convenient.
Visit Everest.org to learn more