Different Types of Crypto Wallets Explained
Owning your private keys gives you all the power and control over your crypto, but it also comes with a great responsibility and the need to take care of their security. Many tools are available to manage your keys, generally referred to as “wallets”, but not all of them are as secure or convenient. There are 4 different type of wallets you could use to manage your assets: Online wallets, software wallets, hardware wallets and paper wallets. Crypto space can be quite confusing to a newcomer, so we will do our best to try and explain their benefits and differences as plainly as possible.
How do Different Types of Crypto Wallets Compare?
Online Wallets
Online wallets are online services that enable you to access your crypto assets from any browser that’s connected to the internet. When you leave your crypto assets on a cryptocurrency exchange platform, you’re actually using the platform’s online wallet.
The biggest advantage of online wallets is that they are easily accessible from any computer or other device with an internet connection, such as your phone.
Being online is also their biggest disadvantage as they can become targets for hackers, which is why it is extremely important to only use trustworthy crypto exchanges with good security practices and fundamentals.
Furthermore, in most of the cases, you do not keep control of your private keys: they are controlled by the wallet provider, so you technically do not own your crypto until you transfer it away.
PROS:
+ Free
+ Ease of access
+ Convenient
+ Assets can be traded without the need of an additional transfer (when stored on a crypto exchange)
CONS:
– Not your keys, not your coins
– Security: 2/5 (you trust someone else with the security of your coins and for the other reasons stated above)
Software Wallets
Software wallets are applications that manage cryptocurrencies. They can be installed on your computer or smartphone and provide both an ease of access as well as use.
You remain in control of your private keys. They are not shared with or controlled by a third party.
Unfortunately, since a software wallet is installed on your PC or smartphone, it is also connected to the internet and any program installed on that device which exposes your private keys to hackers and viruses.
Modern PCs and smartphones are vulnerable to attacks, and if you keep your private keys there it’s just a matter of time before you get hacked and lose everything.
PROS:
+ Free
+ Ease of use
+ Convenient
CONS:
– An online attacker or a simple virus can gain access to your wallets private keys and steal your crypto
– Security: 0/5 (you trust someone else with the security of your coins)
Paper Wallets
A paper wallet is an offline mechanism for storing crypto assets. As suggested by its name, the process simply involves printing the private keys and its corresponding addresses on a paper sheet.
This is a simple way to store your cryptocurrencies keys offline. It requires paying great attention and care to this paper.
If your paper wallet gets lost or destroyed, you will permanently lose the access to your crypto assets. Also, processing a transaction with a paper wallet can be tedious and unsafe: you will need to manually enter your keys in a transaction tool (time consuming), typically by using your computer’s internet browser which could expose the keys to an attack. If your computer or internet connection is compromised, the attacker can gain access to your keys once you make them digital. Hence, paper wallets are actually not as safe as people like to believe as it only makes your keys safe while they are in “cold storage” and not used.
PROS:
+ Free
+ Private keys are not stored digitally. But only works until you need to access your crypto.
CONS:
– Tedious and slow to access
– Paper can be lost or destroyed
– While safe while on paper, the keys are no longer safe once you need to input them digitally in order to access your crypto
– Security: 1/5 (for the reasons stated above)
Hardware Wallets
A hardware wallet is an offline storage option for private keys. This is a physical device that allows you to store the private keys in a secure offline storage that cannot be accessed by a hacker even while connected and used for transactions on a potentially compromised computer. The good ones like Ledger enable you to verify the transaction details on the device screen to make sure the address and details were not tampered with before agreeing to the transaction. They further require you to approve the transaction with a physical touch of a button, meaning that nobody without a physical access to your wallet (such as an online hacker) can conduct a transaction. Furthermore, the Ledger devices are secured by a pin code, so should a wrong person somehow get their hands on your device anyway, the entire wallet gets erased after 3 wrong tries. Not to worry though, even if lost, stolen or erased, you can easily restore your wallet and all its keys and balance on a new hardware wallet by using your 24 word recovery seed phrase that you keep stored somewhere safe.
With a hardware wallet, even if a hacker succeeds in getting control of your computer, he will not be able to steal your private keys and access your crypto assets. Your private key is kept offline and limits the risk of hacking.
As a result, hardware wallets are considered to be the most secure wallet option and fall under crypto security fundamentals.
PROS:
+ Private keys are stored on the physical wallet and cannot be accessed from another device or a program. The digital handshake happens on the hardware wallet itself, so at no point are the keys exposed to a potential attacker.
+ Security: 5/5 (for the reasons stated above)
CONS:
– You need to buy the device ($59+)
Which Type of Crypto Wallet Should I Get?
Unless you have a very solid reason to go for anything else, the clear answer is to get a hardware wallet. They are your safest choice (the only safe choice to be exact) and in terms of convenience they do not lag far behind the online wallets.
If you are looking for an affordable and extremely safe solution, Ledger Nano S would be our budget hardware wallet of choice.
If money is not an obstacle, then you might want to look at its bigger brother with encrypted wireless connectivity, Ledger Nano X.
