You don’t have to spend long learning about cryptocurrencies to come across the word ‘wallet’.
Given the way we use pocket wallets to store cash, you’d be forgiven for thinking that cryptocurrency wallets—or crypto wallets—are used for storing cryptocurrency. Turns out this is not what they are for. Yes, you read that right: Cryptocurrency wallets do not store cryptocurrency.
Cryptocurrency Wallets, Explained
Wait, so if cryptocurrencies aren’t stored in wallets, where are they stored? They are stored on the blockchain to which they are native. For example, the bitcoin (BTC) cryptocurrency is stored in addresses on the Bitcoin blockchain. Another popular cryptocurrency, ether (ETH), is stored in addresses on the Ethereum blockchain.
Then what’s the point of a cryptocurrency wallet? Cryptocurrency wallets have a super important job: To store and protect private keys.
When you have control of a private key, you are able to unlock the right to spend the associated cryptocurrencies. If someone else gets their hands on your private key, they can steal all of the associated cryptocurrencies and you won’t be able to do a thing about it.
This is why cryptocurrency wallets exist. They protect your private key and, by doing so, keep your cryptocurrency safe and secure.
Cryptocurrency Wallets Overview
You now have a basic understanding of what cryptocurrency wallets are and why they are important. Now, let’s cover the different types of wallets that are available to cryptocurrency owners.
Broadly speaking, a cryptocurrency wallet will belong to one of three categories: software, hardware, and paper.
Crypto software wallets
The crypto software wallet category is the most vibrant of the three categories mentioned above. Within this category, there are three sub-categories: web, desktop, and mobile.
A web wallet is a cryptocurrency wallet that is based on cloud technology. When you own a web wallet, you can access it from any device that is able to connect to the internet. Because of this, web wallets are highly convenient for those who perform cryptocurrency transactions on a frequent basis.
A desktop wallet is a program that can be downloaded and installed on your computer or laptop. (A program is just a set of instructions for a computer to execute. Microsoft Word and Adobe Photoshop are two examples of programs.)
Desktop wallets are generally considered to be more secure than web wallets. That is because you can only access a desktop wallet from the device that the program was installed to. That said, when compared to other wallet types like hardware and paper, desktop wallets are more prone to malware and other types of viruses.
Mobile wallets are generally viewed as the most convenient and user-friendly type of cryptocurrency wallet. As the name implies, they are wallets which are usable via an app that you can download on your phone. You’ll often see mobile wallets have an accompanying web or desktop version—and vice versa.
Crypto hardware wallets
As the name implies, hardware wallets are physical devices designed to store and protect private keys. Hardware wallets are far more secure than any type of crypto software wallet. Typically, people will buy a hardware wallet if they don’t intend on moving the cryptocurrency any time soon.
Most crypto hardware wallets give you the option of setting a PIN. The reason for setting a PIN on a hardware wallet is the same as a mobile phone: it prevents anyone from accessing your device. In the case of your wallet, the PIN has nothing to do with your seed phrase or private key.
(Learn more about storing cryptocurrency in crypto hardware wallets. This resource includes a description of some of the most popular hardware wallets.)
Crypto paper wallets
Paper wallets are literally a piece of paper that has the private key printed on it. Often, paper wallets will include the corresponding blockchain address. This is done for the sake of convenience and is not necessary.
Whilst comparatively inconvenient, paper wallets are generally considered a safe way to store your private keys. That’s mainly because they can be generated offline and never have to interact with a computer system. This means that paper wallet owners don’t have to worry about hackers, key loggers, and other online computer threats.
However, due to improvements made to hardware wallets over recent years, paper wallets have become a lot less popular.
Hot wallet vs cold wallet
Above, we broke crypto wallets up into three categories: software, hardware, and paper. However, there is another way you can think of crypto wallets. That is, in terms of ‘hot’ and ‘cold’.
A hot wallet is a crypto wallet that is not physical. They exist in the digital realm and require an internet connection to function. Because of this, hot wallets are typically used by people who value convenience over security.
Crypto wallet types that classify as hot wallets:
- Web wallets
- Desktop wallets
- Mobile wallets
A cold wallet is a physical crypto wallet. They typically remain offline and are much safer than hot wallets. Cold wallets will often have an online client that lets you manage your cryptocurrencies more easily.
Crypto wallets that classify as cold wallets:
- Hardware wallets
- Paper wallets
What crypto wallet is right for me?
In this resource, you have been introduced to several types of cryptocurrency wallets. Yes, having so many types can be confusing. However, it’s ultimately a good thing to have a selection. That means there is something for everyone.
Below are some questions you can ask yourself when deciding which crypto wallet type is best for you. (Note that it is common for people to have multiple crypto wallets. For example, one hardware wallet and one web wallet.)
- What do you need a wallet for? If you bought bitcoin on an exchange, for example. and want to hold it for multiple years, then a hardware wallet or paper wallet would be appropriate. If you are an enthusiast who transacts in cryptocurrencies most days, then a hot wallet would likely be the most suitable option.
- What do you value more, security or convenience? With crypto wallets, you will find that there is almost always a trade-off between security and convenience. If you value security above all else, a cold wallet is for you. If you prioritise convenience, then a hot wallet would be the way to go.
For more information on cryptocurrency wallets and key pairs, watch the below explainer video from the Nugget’s News YouTube channel.