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Setting up a wallet is one of the first things you do when starting a crypto journey. However, it does not mean that it stops with the first step. Whether you are testing the waters or are confident enough to explore options, choosing the right tools makes a lot of difference. In this guide, we will review different types of digital currency wallets to help you choose where to store crypto.
Key Takeaways
- The two most commonly highlighted types of crypto wallet apps define whether they connect to the Internet. Hot wallets have online features while cold wallets keep private keys isolated from outside networks.
- Another classification of cryptocurrency wallet types tells users if a separate device that stores the private keys is involved. If yes, those are hardware wallets, while the opposite is software wallets. Although there is a major overlap, the difference here is not the same as between hot and cold wallets;
- Apps in which the provider takes care of the private keys and those that entrust them to the user are also different kinds of wallets. The former are called custodial or centralized and the latter are referred to as non-custodial, self-custodial, or decentralized.
Crypto Wallets Explained
Before diving into the different cryptocurrency wallet types and styles, let’s go over the crypto storage quickly. Cryptocurrencies are fully digital, but where do you store cryptocurrency then? Crypto assets that belong to you are tied to the blockchain address that is managed by the cryptographic key pair you own.
In crypto lingo, “wallet” can refer to a blockchain address or to an app that helps you manage one or multiple blockchain addresses.
For example, in the sentence To start the ETH - BTC conversion, enter the amount of ETH and click “Exchange”. Provide the BTC wallet address, ‘wallet’ refers to a unique BTC blockchain address. A crypto wallet example in this case would look like an alphanumeric string: bc1q8yj0herd4r4yxszw3nkfvt53433thk0f5qst4g
In this sentence ChangeHero will generate a separate deposit address for your ETH - BTC exchange, use your Wallet to send ETH there, ‘wallet’ means the application.
Some cryptocurrency wallet technology even allows you to have one key pair for many addresses on various blockchains. Nevertheless, keep in mind that the blockchain addresses for different coins and tokens are still unique.
Blockchain addresses generally work the same within the same network, with minor differences (e.g. watch-only addresses). This article will focus on the differences between the cryptocurrency wallet applications that help you use blockchain assets.
If you want to learn how to create a crypto wallet, read this guide! But before you open a crypto wallet, we recommend to finish reading this guide to be fully equipped with the knowledge of how to store crypto offline and online.
Cold Wallets vs Hot Wallets
When you start seriously choosing a crypto wallet, one of the first things you will have to settle on is a cold vs. hot wallet. How exactly are these types of digital wallets different other than the name?
The defining difference between these crypto wallet types is the Internet connection. It comes with both convenience and security risks, so either hot wallets vs. cold wallets have advantages and disadvantages.
What is a hot crypto wallet better at than its counterpart? The Internet connection allows your hot wallet to broadcast transactions instantly and see the network state in real-time. What is one potential risk associated with a cryptocurrency hot wallet? For one, hot wallets are more vulnerable to man-in-the-middle attacks and hacking.
How does a cold wallet work without an Internet connection? Due to the cryptographic nature of the blockchain, generating a new address and key pair is possible entirely offline. Usually, these types of Bitcoin wallets use different environments for broadcasting transactions and storing cryptographic keys, keeping them secure from interceptions. At the same time, this often requires some extra steps when using the cold wallet app.
Types of Hot Crypto Wallets
Hot crypto wallets are largely synonymous with software wallets. What is a software wallet? They can come as desktop and smartphone applications, browser extensions, and Web apps. This kind is usually the easy crypto wallet option, and most likely the first one.
The difference between these digital wallet types is mainly in the supported platform. A Bitcoin Web wallet needs to be opened in a browser, although those usually keep your private data on your device locally for security. To access the same Web crypto wallet from another device, you will need to import your wallet data first.
A crypto wallet for altcoins and BTC can also be a desktop or smartphone application. The latter type is especially popular for its convenience and accessibility on the go. Therefore, choosing the right hot wallet app is a huge task but the ChangeHero team may have some ideas for the best Bitcoin and crypto hot wallets to speed up the process.
Types of Cold Crypto Wallets
As we have mentioned before, the meaning behind the cold wallet is keeping keys offline. Like hot and software wallets, cold crypto wallets are often seen the same as an external crypto storage device or simply, hardware wallets. However, there is a nuance between cold wallet vs. hardware wallet.
How does a cold wallet work? It uses the cryptographic properties of a given protocol (e.g. Bitcoin) to create a pair of private and public keys without an Internet connection. You don’t necessarily need a special device for cold storage in a crypto wallet: keys can be generated with any device that stays offline or even printed on a piece of paper.
Hardware Crypto Wallets
Nevertheless, the most ubiquitous example of cold wallets for crypto is hardware devices (often referred to as hard wallets as well). They usually come in more sophisticated forms than a piece of paper and are tamper-proof devices with high-tech chips and security add-ons.
As a result, they come at an additional cost and are not free like the coin crypto wallet software. Those who opt for a cryptocurrency hardware wallet pay for the extra security of their funds. When weighing your options between a hard wallet vs. a cold wallet, consider the costs versus convenience and additional security measures.
Bitcoin (BTC) is the most popular choice for keeping in a hardware cold wallet, although most popular devices support some altcoins as well. Check out our guide to hardware wallets for Bitcoin and cryptocurrencies to learn more about brands and manufacturers.
Software vs. Hardware Crypto Wallets
Whereas the difference between hot and cold wallets is in the Internet connectivity, when it comes to deciding between a crypto hardware wallet vs. a software wallet, it depends on the environment where the private keys are stored. After all, most hardware wallets for crypto still require some kind of software-based interface like a companion app to manage the transactions and view an address.
Moreover, some software wallets can double as an interface to interact with an external hardware wallet for crypto. For example, you can use the Bitcoin desktop wallet by Exodus on its own or with a key pair stored on a Ledger device.
Paper Wallets
Last but not least, there is one more type of cryptocurrency cold wallet that is often overlooked. A paper crypto wallet is simply a printout with cryptographic keys or a seed phrase that can be used as a backup. It is harder to make a paper Bitcoin wallet work as a fully-fledged crypto offline wallet because while you will be able to receive coins, it cannot broadcast transactions and spend coins.
Another obvious drawback of paper Bitcoin and crypto wallets is that paper is rather easy to damage. Over time, it has evolved to more sophisticated type of wallets like metal tablets to store a recovery or seed phrase instead of private keys.
Custodial vs Non-custodial Wallets
There is one more important way to categorize crypto wallets, which is arguably a more important issue to take into account when choosing a safe crypto wallet. Depending on who manages the private keys, wallets can be custodial and non-custodial.
There are fewer custodial crypto wallets in the market since it is a method of storage that requires trust in the provider. In that regard, it is not too different from traditional financial apps but for some, it provides a superior user experience compared to other crypto wallets.
A decentralized or non-custodial crypto wallet has the same meaning. The list of decentralized wallet apps is much longer than custodial solutions for a reason. This kind of cryptocurrency wallet gives the user full control over the cryptographic keys. While it ensures that they won’t lose access to their funds due to someone else’s fault, they must also bear full responsibility for its safety.
Custodial wallets are less widespread because users who do not rely on self-custody already store their funds in the custody of cryptocurrency exchanges. But is there a difference between keeping crypto in a wallet and on an exchange? What is the main argument in the debate over a crypto exchange vs. wallet? A lot of high-profile hacks and crashes such as Mt. Gox and FTX prove that your money is often safer in your hands.
Which Crypto Wallet Type is the Most Secure? Bottom Line
At the end of the day, what is the safest place to store crypto? Is the most secure crypto wallet cold and hardware?
Any kind of crypto wallet is susceptible to attacks and none guarantees complete safety and peace of mind. More often than not, the most vulnerable point to exploit and gain access to crypto funds is the users themselves. Even the most trusted and secure Bitcoin wallet can be exploited through social engineering or human error.
In this vein, the most secure crypto wallet would be one that is taken proper care of with all the necessary precautions. Cold and hardware wallets indeed have inherently better security properties but if handled carelessly, it would not mean much.
Did you find the guide useful to learn how to store crypto for your needs? Read and learn more from the ChangeHero blog! Let us know your thoughts on Telegram, X, and Facebook, and don’t forget to follow.
Frequently Asked Questions
What are the different types of crypto wallets?
When it comes to a fiat wallet vs a crypto wallet, the latter is not the place where funds are stored but an interface to interact with the blockchain. Cryptocurrency wallet apps can be hot and cold, software and hardware, custodial and non-custodial. What is a spot or fund wallet on an exchange? In this case, ‘wallet’ refers to an exchange subaccount that you can use to trade in the spot markets.
What is a centralized wallet?
A centralized wallet is the same as a custodial wallet. These applications manage users’ private keys on their behalf, requiring trust in the provider. As an upside, they can provide a familiar user experience and provide some recovery options if the user loses credentials.
Is there a difference between crypto wallets?
There are many types of cryptocurrency wallets depending on whether they allow Internet access, require an external device, or share private keys with the user.
What are the different cold wallets?
The best-known type of cold wallet for cryptocurrency is a hardware wallet, although a cold wallet can also be a printout or an isolated device with no Internet connection. What is a hard wallet? It is simply another way to refer to hardware wallets.
How are cryptocurrency hot wallets different from cold wallets?
Hot wallets create a digital signature and broadcast transactions in the same environment, potentially exposing private keys. Cold wallets create a digital signature from private keys in an isolated environment and then connect to the Internet to broadcast the transaction to the network.
How is a cryptocurrency exchange different from a cryptocurrency wallet?
A crypto wallet vs. exchange is a question of custody over your funds. If you keep cryptocurrency on an exchange, you entrust full control over it to them. To have full control and responsibility over your crypto, you should keep it in your own self-custody wallet.
How to store Bitcoin on USB?
There are a few tricks how to store bitcoins offline with a USB-connecting device. The simplest and most convenient is a special physical hardware USB Bitcoin wallet. Of course, you can keep an encrypted file with a backup on a dedicated USB device as well.
