Wallet basics
Crypto wallets are generally described in two categories: hot or cold. Hot wallets are connected to the internet and have easier access to live markets for trade. Meanwhile, cold wallets are disconnected from the internet and are good for holding your assets long-term.
However, wallets are not simply divided into hot and cold. Within those categories, there are four main types of wallets: exchange, software, hardware, and paper. Each wallet type comes with its own distinct advantages and challenges .
Exchange Wallet
Think of an exchange wallet as a web-based wallet hosted by an exchange (like Bittrex) for all your crypto assets. A good exchange maintains both hot and cold wallets and manages the transfer of funds between them to create a quality customer experience.
The biggest advantage of an exchange wallet, is you can store many different cryptocurrencies on one account and access your crypto from anywhere, anytime. Because it’s web-based, you don’t need a physical device, app, or piece of paper to access an exchange wallet.
Additionally, you have a team of security experts from the exchange working to protect your funds and monitoring against network attacks and other malicious activity.
Software Wallet
A software wallet is a trusted app that you can download on your phone or use on your PC. The advantage of a good software wallet is that it lives on your smartphone and provides you with a convenient alternative to store funds longer term.
Bitpay and JAXX Liberty are examples of trusted software wallets. You can download the Bitpay app on your phone to store Bitcoin or the JAXX Liberty app to store Bitcoin, Ethereum, and ERC-20 based tokens. These wallets also provide you with a paper backup option in case you need to rebuild your wallet on a new device.
Hardware Wallet
A hardware wallet is a small device that plugs into your USB port and generates an offline private key while displaying a public key to allow for crypto transfers. Be sure to keep your private key secure, this gives direct access to your holdings, whereas a public key can be shared for transfers.
Hardware wallets can only be accessed by the person holding the device, however this also means you risk losing all your crypto if someone steals your hardware wallet. It’s very important, therefore, to keep the seed phrase (an extremely unique list of words) safe where you can quickly retrieve it.
While hardware wallets are cool to look at, when you consider the security implications of firmware updates or the possibility of breaking or losing the device, they can be quite risky. We normally don’t recommend them to first-time users of crypto as it’s much easier and safer to store your crypto through a trusted software wallet and a paper backup.
Paper Wallet
A paper wallet is simple; it’s a piece of paper. When you create a paper wallet, you are given a 12-word seed phrase that allows you to recreate the wallet in the event that you lose or reformat your device. This means, if you have $1000 worth of Bitcoin or any other crypto in your wallet, you can delete the wallet from your device and keep the 12-word seed phrase in a safe place. When you’re ready to recreate your wallet, you use the seed phrase and have renewed access to your wallet and crypto assets on your new device. The key to a paper wallet is knowing the exact words and order in which they appear in the 12-word seed phrase.
While some people feel paper wallets are among the most secure ways to store crypto,; it really depends on how you plan to store it.
Consider security
Choosing the right wallet for your needs will help protect your crypto assets, but the first line of defense is always you. When deciding on a wallet for storing your crypto, consider the following:
No matter where you store your crypto, upgrade your personal security immediately. Check out our article on Managing Your Online Security Like a Pro for some tips on how to do this.
Make sure you have a safe place to store your recovery seed phrase and/or the private key for your exchange account password. Using a password manager, for instance, is a safe way to store sensitive information without worrying about losing a piece of paper.
Following these security steps may seem like a lot, but it’s worth it to help keep your account secure. It’s also important to remember the most obvious, but sometimes overlooked, advice: never share your private key or seed phrase with anyone, ever.
So, what’s your digital wallet?
Deciding on a wallet (or wallets!) for your crypto is a first, important step in your journey, from novice trader to crypto master. Even better, as you develop more refined crypto knowledge, you’ll learn when and how to best leverage different wallet options to maximize both security and trading potential. No matter your level, though, understanding digital wallets is an essential element of adopting cryptocurrency.
