The most basic wallet functionality allows users to send, receive, and store cryptocurrencies. However, wallets also offer various other types of functionality and integrations that can help users to choose the right wallet.
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Types of Crypto Wallets
The first step to choosing a cryptocurrency wallet is knowing the various types of wallets available.
The term “hot wallets” refers to software-based wallets that rely on a readily available internet connection to function. They are generally considered more user-friendly since they allow users to send and receive crypto with few barriers. However, the fact that they are online makes them more vulnerable to attack.
There are three broad categories of hot wallets: browser wallets, mobile wallets, and desktop wallets.
Browser wallets, like MetaMask and Phantom, operate as browser extensions that have become popular over recent years thanks to their ease of use and integration with DeFi and Web3 applications.
Some providers, including Brave and Opera, have developed wallet and Web3 capabilities as an integral product included within their browsers.
Browser wallets offer the most flexibility, accessibility, and ease of use, but since they’re online, they can be more vulnerable to hacks and fraud.
Mobile wallets are also highly popular since they’re available as mobile versions of browser and desktop wallets, allowing users to access their funds across multiple devices. Wallets such as MetaMask offer a mobile app alongside the browser version, while some wallets, such as Edge, are mobile-only services.
Mobile wallets share many of the same characteristics as browser wallets, making them accessible yet potentially more vulnerable to attacks.
Desktop wallets operate as computer desktop applications. While browser and mobile wallets are hot wallets prized for their accessibility and connectivity, desktop wallets offer a compromise between the online capabilities of a hot wallet and offline cold storage. Typically, the wallet application will connect to the internet for necessary functions such as sending or receiving transactions, but otherwise, the app remains offline. Desktop wallets are also more likely to support functionality such as MultiSig.
Examples of desktop wallets include Exodus and Coinomi.
Wallets that store funds offline and only require an internet connection for certain transaction approvals are called cold wallets. However, cold wallets can still receive payments without connecting to the internet. Cold wallets are generally considered more secure than hot wallets as their offline nature means they’re more difficult to attack. However, since they require the user to establish an internet connection to initiate transactions, they are more cumbersome to use.
There are two types of cold wallets – hardware wallets and paper wallets.
Hardware wallets are physical devices used to store cryptocurrencies and private keys offline. They may have a USB connection to connect to a device with online connectivity for sending and receiving transactions; however, some newer models can connect to dapps when needed. Hardware wallets rely on the hardware device being physically present to transact, making them very difficult to hack remotely.
Ledger and Trezor are two long-established hardware wallet providers, but newer competitors include NGRAVE and KeepKey.
A paper wallet is simply a paper printout of the public and private key associated with the wallet. Users can import their key pair into a wallet with online connectivity to send transactions.
While inherently offline (and protected from attacks), they come with some risks. For example, any attempt to introduce redundancy by printing more than one copy of the wallet keys introduces the risk of theft. Further, having only one paper copy means that funds may become unrecoverable if the copy is lost or damaged.
Paper wallets require specialized expertise to use securely and as a result are not widely adopted. Security experts do not recommend paper wallets for typical unsophisticated users. Bitaddress is one example of a paper wallet provider.
Factors to Consider When Choosing a Wallet
There are many factors that users may want to consider when choosing a wallet.
Security vs. convenience
The primary factor in choosing a crypto wallet is the intended purpose – long-term storage or everyday transactions. Offline cold storage is the most secure, but it means that funds are not instantly accessible when needed. Furthermore, offline wallets can’t interact with Web3 applications.
This is similar to keeping your money in a checking versus a savings account, where funds in your checking account are much easier to access than those in your savings account.
Therefore, cold storage is better for secure, long-term storage of funds, whereas hot wallets are a better choice for everyday transactions and funds for short-term use.
Hot wallets, like browser and mobile ones, are preferable for users seeking Web3 and DeFi integrations as well as for everyday transactions.
Supported blockchains, apps, and tokens
It’s rare, or even impossible, to find a wallet that supports all blockchains, apps, and tokens.
Some wallets, such as MetaMask or Keplr, were conceived for use with specific blockchain ecosystems and are purpose-built for Web3 applications on Ethereum and Cosmos, respectively. Other wallets, such as Edge, are designed to support a variety of blockchains and tokens but won’t necessarily offer all Web3 capabilities.
Therefore, along with its intended purpose, the wallet’s blockchain support is also a strong consideration when choosing a crypto wallet.
Development and support
The cryptocurrency wallet landscape has become more crowded over time, and invariably, many smaller wallet projects may end up becoming defunct. Therefore, choosing a wallet that is well-established and well-developed should be a consideration. Wallets that aren’t updated regularly will likely become targets for hackers and will eventually become obsolete as other infrastructures, such as app stores or even blockchain network upgrades, may not continue supporting unmaintained projects.
Well-developed wallets are also more likely to come with some degree of user support and a wider range of integrations, since more developers adopt them for use in their dapps.
Software and paper wallets are generally free, but hardware wallets are a device that must be purchased. Prices can range from around $75 up to around $500 for individual wallets, and enterprise wallets and custody solutions are generally much higher.
Many wallets come with additional features and functionality, such as token swaps, NFT support, portfolio analytics, and more. Users should consider whether these features support their needs when deciding between crypto wallets.
Pros and Cons of Different Wallet Types
The main advantage of cold wallets over hot wallets is security since cold wallets are offline whenever the user isn’t engaged in a transaction. This significantly reduces the chance of being hacked or otherwise compromised, as wallets generally need to be online for hackers to access them.
The main advantages of hot wallets compared to cold wallets are:
- Accessibility of funds.
- Ease of use, as there is no requirement to connect to an external device.
- Interactivity with Web3 apps and DeFi, and functionality like staking.
- Free of charge.
- No risk of losing a physical item.
Conversely, the main disadvantage of hot wallets is that they are more vulnerable to attacks.
The main disadvantages of cold wallets are:
- Cumbersome and slower to access crypto funds.
- Can be expensive to purchase the hardware.
- Risk of losing paper or physical device, although recovery may be an option with some hardware wallets.
How to Safely Store Your Private Keys
The most important part of wallet security is ensuring best practices around storing private keys. Here are a few tips for safer key storage:
- Never keep private keys online or in the cloud. Many security experts recommend writing it down, making one or two copies, and storing each in secure, separate locations.
- Set up any available recovery options offered through wallet providers.
- Some companies provide metal plates for embossing as a more permanent, fireproof means of storing private keys than on paper.
- For hardware devices, paper wallets, or any physical storage of private keys, consider using an additional layer of security, such as a fireproof safe or bank safety deposit box.
Wallet Security and Fraud Prevention
Implementing some basic cybersecurity measures can help keep your wallet secure against fraud and attack. These include:
- Update all apps and operating systems to the latest version. Updates can often include enhanced security measures and bug fixes.
- Use antivirus and anti-malware software and regularly scan your devices for suspicious activity.
- Don’t interact with unsolicited token airdrops, emails, or messages via social media.
- Learn how to spot crypto scams to avoid becoming the target of fraud.
Choosing the right crypto wallet essentials
- Crypto wallets offer either hot (online) or cold (offline) storage, with trade-offs between ease of use and accessibility of funds versus security.
- Hot wallets operate within web browsers or as apps for mobile and desktop, whereas cold wallets are either paper-based or hardware devices.
- Users should determine whether they need to use funds regularly or have them immediately accessible and then choose a crypto wallet that meets their requirements.