A look into the different types of crypto wallets

Ah, the age-old question: which type of cryptocurrency wallet should you choose?. Where do you even begin?

Desktop or mobile? 

Hold or cold wallet? 

Online or offline? 

Software or hardware? 

Custodial or non-custodial? 

And we haven’t even begun looking at wallets for different blockchains yet!

Overwhelmed? It doesn’t have to be this way. This guide will get you up to speed on the different types of crypto wallets in simple language.

After reading you’ll know exactly which type of crypto wallet is best for your situation. And then you’ll be able to start investing with confidence, knowing your tokens are safe.

Note: read on carefully because choosing the wrong type of wallet has serious consequences.

Crypto Wallets: The Terminology

Understand this terminology and you’ll understand crypto wallets forever

Custodial vs Self-Custody

Every cryptocurrency wallet has something called a private key. He (or she) who holds the private key controls the cryptocurrency. Think if your private keys like the key to your safety deposit box. We’ll talk more about private keys later.

Have you heard the quote “not your keys, not your crypto”? This is referring to private keys.

A custodial wallet means you trust a 3rd party to control your private key. A self-custody wallet means you control your private key. 

If you leave your cryptocurrency on an exchange, or use a crypto company like BlockFI, you are using a custodial wallet. Though convenient, the company controls your crypto, and given the ethos behind crypto (decentralization and all) not everyone feels great about this.

When using self-custody wallets such as Ledger or MetaMask you control your wallet’s private keys. Or in other words; you have ultimate control of your crypto. But you also have ultimate responsibility which can be a downside depending on how organized you are because keeping your private key safe can be a little stressful.

We won’t explore the full range of pros and cons for custodial vs non-custodial wallets but here is a summary: 

Custodial crypto wallet:

• Easy to use and convenient 
• No need to manage security of your private key (the company handles it for you)
• Custodian risk (Do you trust the company controlling your crypto? What if they get hacked? If their assets are seized will they pay you back?) 
• Can’t interact with DeFi applications 

Self-custody crypto wallet:

• You control your private keys, and hence cryptocurrencies
• You are responsible for keeping your private keys safe. You are your own security department.
• You can participate  DeFi applications

Hot wallets vs cold wallets

A hot wallet is one that can connect to the internet, a cold wallet is one that cannot.

Hot wallets can be custodial or self-custody and are often free, fast to set up, and easy to use. They come in a few versions; website, desktop software, web-browser add-on, or mobile app. 

You’ll seamlessly send crypto with a few clicks of your mouse using a hot wallet. So convenient! But hot wallets come with greater security risk because they connect to the internet, and the internet is where scams, viruses, malware and fraud happens. 

Cold wallets can only be self-custody wallets because they store your private key offline and can’t connect to the internet. They are a little less convenient to use when compared to hot wallets, but much more secure. The fact that cold wallets can’t connect to the internet is a security feature, not a limitation. 

Cold wallets can be broken down further into hardware wallets, which look like USB devices, or paper wallets which are less popular but do still have a use case.

Hot wallets carry more risk but this doesn’t mean you should completely avoid them, but rather use them safely as part of a tiered crypto wallet system.

Public address 

Your public address is your wallet’s way to receive cryptocurrency. A public address is made up of a random string of upper and lowercase letters and numbers. Yes, it’s a public address meaning you can share it publicly. 

You’re already familiar with this concept. To receive payments at your bank, you share your bank account number. To receive mail at your home, you share your address. And to receive crypto payments, you share your wallet’s public address.

But just because you can share your public address, doesn’t mean you should. 

Sharing your public address isn’t a security concern but it can be a privacy concern, because loss of privacy can lead to loss of security.

The blockchain is public and auditable, so if someone with questionable morals discovers your public address and ties it to your identity, they can see all transactions and holdings you control. If you hold a large amount of wealth, you’re more likely to become a target of real world crypto crime.

Think of it this way; your home address isn’t a secret, you share it with friends, family, and companies when ordering stuff online. You trust these parties, but you wouldn’t want your home address in the hands of a burglar. Especially if that burglar knew you had a large pot of gold somewhere in your home.

Pin or Password

You’ll access your wallet with a password or pin code. This works the same way as your pin code for your bank’s ATM. When you set up your bank account you choose a pin code. This pin code is then used to access your account. Don’t share your pin code with anyone. Duh.

Custodial wallets (your exchange; like Coinbase) come with a regular login (username and password) that can be used to access your account from any device, anywhere.

Self-custody wallets also have a pin or password, but this will only work on the device which you first set up your wallet on. If you want to access your wallet on another device you must restore it using your secret recovery phrase. This stops you from being robbed if someone guesses your password and tries to log into your wallet on their device. 

Private keys

Your private key is a long, awkward combination of numbers and letters that allows your wallet to create public addresses and more importantly send transactions.

Every wallet has a private key, but the custody type of the wallet determines who holds the private key. This is determined by the wallets custody type which we covered earlier.

Since your private key gives the whoever controls it the ability to send cryptocurrency transactions from your wallet it is and must remain TOP SECRET. Never, ever share it with anyone, and keep it safe, because if you lose it there is no ‘private key customer support’ to help you out.

You probably won’t ever physically see your private key though, because it’s usually encrypted and stored somewhere deep within your wallet or on the device through which your wallet is installed. The fact that your wallet’s private key is hard to access is a security feature. 

Sure, you could reveal your private key if you figured out how to export it, but do so with caution. What if you do so in a cafe and someone takes a photo? Or what if your device is hacked and someone is watching?  Whoever has your private key can access your crypto, so tread carefully.

Secret recovery seed phrase

Your private keys are used to restore your wallet onto a new device in the event it’s lost, damaged, or stolen. 

But we have a problem. Your private keys are sensitive so taking a photo or storing digitally is too risky. You couldn’t memorize a private key if you tried, so this leaves good ol’ pen and paper; but it’s so long and awkward so one in-eligible character would be catastrophic.

Enter: the secret recovery key phrase; a twelve to twenty-four combination of random words which represents your private key in a more approachable format. 

Your secret recovery phrase is created when setting your wallet up, and since it’s a representation of your private key it must be kept a secret at all costs. Whoever has your secret phrase essentially has your private key and hence your crypto. 

The different types of cryptocurrency wallets

Now that you’re caught up with basic crypto wallet terminology, let’s look at the different types of cryptocurrency wallets.

Online Wallets (web wallets)

Any wallet that lets you manage your cryptocurrency from a web browser is an online or web wallet.

Setting up a web wallet is easy; just create an account with a username and password, and verify your identity. 

If you own crypto, you already have an web wallet. Remember the cryptocurrency exchange you used to buy your tokens? Like Coinbase or Binance?. When you leave your cryptocurrency in the exchange you’re using the platform’s online wallet. Similarly if you hold cryptocurrency with a crypto company like BlockFi or Gemini you’re using an web wallet. These are custodial online wallets; you don’t control the private keys, the company does.

Web wallets are convenient. You probably already have one (your exchange) and you don’t need to manage a private key; just a regular login/password. If you lose your password, resetting it is as easy as resetting any other password; get in contact with customer support.

But since you don’t control your private keys you must trust the company holding your cryptocurrencies to do the right thing. If the company gets hacked (it happens) or they freeze your assets your only option is hope; and hope is not a strategy. Just like regular companies; if a crypto company can’t pay their debts they go bankrupt. If your crypto company goes bankrupt, you might lose your money.

That being said; web wallets do have their place so choose a wallet that invests heavily into security; don’t shop around based on price. Here are a few of the most secure cryptocurrency exchanges right now.

Don’t leave large amounts of your crypto in your online wallet. If you invest in crypto because you don’t trust banks can you trust a fintech startup that’s less than two years old? Keep enough in your online wallet as you would be comfortable keeping in your physical wallet and transfer the rest to a secure, self-custody wallet (which we’ll get to below).

Software wallets (desktop wallets)

While online wallets allow you to manage your cryptocurrency from the internet, software wallets allow you to manage your cryptocurrency directly from your computer. This means you’ll need to download a desktop software application. 

Every desktop wallet has a password that’s used to log in from your device and good desktop wallets are self-custodial so you’ll control your private keys. This means your wallet’s private key will be stored on your device, and you’ll create a secret recovery phrase in case you need to restore your wallet on another computer.

Controlling your private keys is a good thing, but the fact that they are stored on your device can be a security risk. If your computer is hacked or infected with virus/malware, the hacker can access your private keys. And if that happens, kiss your crypto goodbye.

This means your software wallet is only ever as secure as your device, so if using a software wallet it’s crucial you bolt on a few other layers of security. 

Avoid desktop wallets that don’t give you private keys, because these are just custody wallets and you might as well use an online wallet if you go down this route. If you don’t trust me, perhaps you’ll listen to the ‘Doge father’ himself: Elon Musk.

Any crypto wallet that won’t give you your private keys should be avoided at all costs

— Elon Musk (@elonmusk) February 10, 2021

Mobile wallets

Mobile wallets are just software wallets for your phone in the form of apps, therefore they share similar features.

If you choose a self-custody mobile wallet your private keys are stored on your device, so you’ll have a recovery phrase to manage. Please don’t store your recovery phrase on your phone.

Your wallet is only as secure as your phone, so security is essential. Phones are less likely to be infected with viruses when compared to computers. But less likely does not mean immune, so if using a mobile wallet be vigilant when it comes to your phone’s security.

Some crypto wallet brands like MetaMask offer both a software version for your desktop and an app version for your phone that you can sync together.

Hardware wallets (cold wallet)

A hardware wallet is a tiny simple computer that looks like USB devices. It has a small screen, a few buttons, and does two things only: stores private keys and signs transactions.

The simplicity of a hardware wallet gives it security; It’s practically impossible to hack or infect a hardware wallet with a virus because it cannot connect to the internet. But they need to connect to your computer and interact with a program called a ‘bridge’ which prepares transactions and broadcasts them to the blockchain network.

The most important thing to understand about hardware wallets is that your private keys are stored on and will never leave the hardware wallet. Private keys can’t leave your wallet; the only thing that gets transferred between your computer and wallet is unsigned and signed transactions.

Even if you connected your wallet to a computer that had a virus, you’d be safe. You just need to confirm the transaction you’re approving on the hardware wallet’s screen matches the transaction your bridge program is showing on your computer. 

Hardware wallets are incredibly secure but things can still go wrong. You could lock yourself out of your wallet. You could be forced to open your wallet at knifepoint. Maybe you fall for a fake hardware wallet scam. We explore what can go wrong with hardware wallets in this guide.

Paper wallets (cold wallet)

Paper wallets are like the DIY version of a hardware wallet, but more secure, less convenient and less durable. 

A paper wallet is literally a piece of paper that has your public address, private keys and a QR code printed on it. The public address and private keys are used as usual (receiving and sending crypto) and the QR code can be scanned to allow you to use the wallet.

Paper wallets are more secure than hardware wallets for two reasons. They can be created offline (reduces the risk of cyber attack) and there is no need to rely on the wellbeing of a piece of hardware.

You can set up your own paper wallet for free, but they are best suited for long term cold storage, and are inconvenient for situations requiring frequent transactions (like DeFi). 

Paper is perishable so if you choose a paper wallet, cover yourself by creating multiple copies or engraving your wallet details into steel using something like this.

Final Thoughts

And now you understand the 5 major types of crypto wallets, and when to use each.

As you might have gathered, you don’t need to stick to one type of wallet. In fact, using a multiple types of crypto wallets makes a lot of sense. And we’ll show you how and why in our next guide Why you need a tiered crypto wallet system (for DeFi).