Owning cryptocurrency is totally different compared to other assets. It is natively digital, so you can’t actually touch it. While traditional investments are usually kept in a bank or brokerage account, crypto investments are not the same: to store them, you need a “wallet”.
A cryptocurrency wallet is defined as a software program storing public and private keys of an investor. It consists of a private key and a public key. In order to store crypto and increase funds’ security level, investors can use cryptocurrency wallets. They have a higher level of protection in comparison with the crypto exchanges. The article provides an overview of different cryptocurrency wallets available and the advantages as well as disadvantages of each type for storing cryptocurrencies.
What Is a Cryptocurrency Wallet?
The easiest and most straightforward way to hold crypto is via a cryptocurrency exchange. Although this may be the path of least resistance, it’s also the least secure, as it makes you vulnerable to hackers. In fact, you do not have a private key to access your crypto, which means you do not technically “own” it.
That is the reason why Crypto owners need Cryptocurrency wallets. They can be opened with an exchange, or downloaded via a desktop or mobile app. Digital wallets let the owners hold on to those private keys themselves instead of relying on a third party. Also, they allow users to store, send, and receive their cryptocurrency. Each provider will have slightly different processes – but generally speaking, the users will be responsible for keeping that information safe somewhere on their own computers or other smart devices.
How does owning crypto actually work?
In owning cryptocurrency, you own an address (which has public and private keys) where coins can be stored on the blockchain.
The public key is an incoming-only address that can be freely shared so others know where to send coins or tokens. Think of it as your email address, but anonymous. Giving it to someone doesn’t let them send emails from it, only to it.
Otherwise, the private key can be compared as the password to your email address. You need it to access your crypto – i.e. when sending cryptocurrency out of an address, in order to authenticate the transaction.
What are types of Cryptocurrency wallets? Their Pros and Cons?
Online/Web Wallets — Hot Wallet
Some people call them online wallets, others call them web wallets. If you have ever stored your credit card information in your browser, you’re already using a web wallet. In fact, Cryptocurrency web wallets operate the same way, by running in your browser.
The big benefit of using a web wallet is convenience. An online wallet gives you access to your cryptocurrency from the internet, as long as you’re connected to the cloud. Online wallet providers automatically store your crypto private key onto their server, which makes it easy for you to access your cryptocurrency and make crypto-payments.
The fact that your private key is stored on your provider’s server is the security concern with online wallets. It’s more secure for you to store the private key. If the server gets hacked, your information is vulnerable. Furthermore, some online wallet companies operate on exchanges, and hackers are more likely to break into exchanges than anywhere else to steal cryptocurrency because you leave your information and your cryptocurrency vulnerable.
Generally, an online wallet is useful if you have a small amount of cryptocurrency. Storing large amounts of cryptocurrency in an online wallet causes a lot of security risks.
- Pros: Easy to use; good for on-the-go transacting
- Cons: Least secure method of storing cryptocurrency; risk of downloading viruses
Mobile Wallets — Hot Wallet
Mobile wallets can be utilized through an app on your smartphone. They work the same way as other mobile payment applications, like Apple Pay or Samsung Pay, which lets you pay for goods and services when being in physical retailers that accept cryptocurrency as a form of payment. This is a convenient option for anyone who is spending rather than saving cryptocurrency. While some online wallets have a mobile option, wallets that are specifically mobile wallets have added QR codes as a form of security.
However, there are some downsides to mobile wallets. First, any wallet that’s stored on your phone is at risk if you lose your phone. Additionally, they come with the risk of malware or mobile viruses, which is very common to other applications that’s tied to the internet.
- Pros: Easy to use for on-the-go transactions
- Cons: At risk for malware and viruses; can lose assets if you lose your phone
Desktop Wallet — Hot or Cold Wallet
Whether a desktop wallet is hot or cold depends on whether or not the desktop is (or ever has been) connected to the internet. That actually means a desktop wallet that never connects to the internet can be called a cold wallet.
To be more specific, desktop wallets are software packs created by wallet companies that you download directly to your desktop. They bring convenience since owners can access them from their own computers through the wallet program instead of through a browser. As you can transact offline, they’re safe from malware and virus threats. In addition, your private keys are not stored on a third-party server with desktop wallets. Instead, you control the encrypted key. Without losing it, your cryptocurrency is safe from hackers.
- Pros: Convenient if you trade on your computer; safer than online or mobile wallets
- Cons: Less convenient for on-the-go trading and usage; you need to back up your computer regularly
Paper Wallets — Cold Wallet
Paper wallets are cold wallets that have various reviews when it comes to see how secure they are. While generally cold wallets are more secure than hot wallets, there are several risks that come with paper wallets. Users need to print out their private and public keys (hence, paper) and then they can send funds a few ways. Initially, the owners can transfer money to their wallet’s public address. Also, they can send their cryptocurrency by scanning the paper wallet’s QR code or by entering their private key.
In order to ensure your security when generating your keys, you should unplug from the internet while your keys are being generated and then wipe your history after the keys have been created. Make sure to run a malware check before generating keys.
Because your key is stored without connecting to the Internet, paper wallets are considered cold wallets, which makes them more secure in comparison with other online wallets. Nobody can hack into your information, as long as you keep the printed paper wallet in a very secure location. However, you should be extremely careful when printing your key to make sure that no one can access your information before, during, or after printing.
- Pros: Not susceptible to hackers; you control your keys
- Cons: Printing can be tricky; if you lose your printout it can be very hard to access your money
Hardware Wallet — Cold Wallet
Hardware wallets are significantly safer than all of the above because they store your private keys on a separate device functioning basically like a USB drive. Users can still make online transactions as the kind of wallet has the convenience of an online wallet but with the added security of offline storage.
Hardware wallets work by generating a set of private keys, which you ought to keep safely offline. The wallet itself is secured by a PIN, and the device will erase after several failed access attempts, preventing physical theft. In addition, hardware wallets let you physically sign off on transactions, ensuring a further layer of security on each action you make.
The major drawback of hardware wallets is the cost. A mobile wallet or online wallet can be created for a relatively cheap price, sometimes as low as $10, while hardware wallets can cost at least $150. If the risk of losing cryptocurrency is extremely lower by using a hardware wallet, the upfront cost is worth purchasing. Hardware wallets are not as convenient as online or mobile wallets for making physical transactions, instead, they’re better for storing cryptocurrency than for spending it.
- Pros: Very secure; cold storage; good for storing large amounts of cryptocurrency; long-term storage of large crypto balances
- Cons: Most expensive type of cryptocurrency wallet; less convenient for on-the-go transactions
