Different Types of Crypto Wallets Explained

Why Do You Need A Crypto Wallet?

Many newcomers to the world of cryptocurrencies buy their crypto from an exchange such as Revolut or Coinbase and leave their crypto in wallets at the exchange. In doing so, they are actually trusting the exchange to look after their crypto. All exchanges are vulnerable to hacking and in recent years exchanges have lost millions to hackers.

Also of concern to those who leave their crypto in exchanges is the increasing strict requirements to withdraw. As governments around the world get to grips with the new cryptocurrency financial world, they are starting to apply strict regulations to crypto exchanges. For example Revolut now only allow their users to withdraw upto £10,000 of Crypto per month and with Bitcoin now over $40,000 it would take over 3 months to withdraw 1 whole Bitcoin from Revolut.

To have full control of your crypto you need to store it in your own secure wallet and keep the keys to your wallet extremely safe.

Understanding Crypto Wallets

A crypto wallet is an app, web script or device which offers a secure home for your crypto keys and key phrases. Basically, there are two main types of crypto wallets, “hot” wallets, which are normally apps, which are loaded onto phones, tablets and desktops etc, which are always connected to the internet, and “cold” wallets which are more secure as they function offline.

From just a little online research, you’ll find that there are multiple types of Wallets available including:

• Desktop Apps
• Mobile Apps
• Hardware Devices
• Paper

For those new to the world of crypto, the initial choice of which wallet to opt for, can be very confusing, so let’s look at the different types of crypto wallets in more detail.

What is a Crypto Wallet?

The main functions of a crypto wallet are to keep the wallet contents safe, and of course, for interaction with the blockchain in regards to sending and receiving cryptocurrency. Wallets don’t actually physically hold their users coins, wallets simply function as a gateway to the blockchain,  as each blockchain’s crypto currency is actual stored on the blockchain. And of course, each type of cryptocurrency, for example Bitcoin and Ethereum has its own blockchain.

Crypto Wallet Functions

The main functions of a crypto wallet are to securely hold the users keys, to act as a gateway for sending and receiving coins and for listing all transactions. What all wallets have in common are addresses, passwords and keys.

Wallet Address

Think of your wallets address as a bank account number. If someone is going to send you crypto currency then they’ll need your wallet address. Some wallets have a single address whereas others have multiple addresses.

Wallet Password

Each and every Wallet has a password which the user sets when installing the Wallet. If the password is lost then the Wallet can easily be recovered by using the wallet’s Keys Phrase.

Wallet Key Phrase

The wallet keyphrase is usually a set of 12 words or more which secure your coins on the blockchain. If you lose your wallet keyphrase then you lose access to your wallet.

Custodial & Non-Custodial Wallets

Before we move on to discuss hot and cold wallets let me first explain the difference between custodial and non-custodial wallets. The main difference is who is responsible for holding and securing the keys for the wallet. For a custodial wallet the keys are held by a third party such as an exchange whereas for non-custodial, the user holds the keys (self custody) and has complete control of the wallet.

Hot Wallets

There a 3 main types of hot wallets:

• Desktop Wallets
• Web Wallets
• Mobile Wallets

Desktop Wallets

Desktop wallets are ideal for users who frequently need access to their cryptocurrency. These wallets use advance encryption to protect the user’s private keys. In general, when the desktop is online, the wallet is online and available too. These types of Wallets are favoured by traders and indeed anybody who frequently needs to access their crypto funds. It’s good practice to keep funds stored in a desktop wallet to a minimum, as these types of wallets are open to attack from computer malware and viruses, plus of course, from anybody who has access to the desktop, as they could easily gain access to the desktop wallet.

Web Wallets

These wallets are normally provided by exchanges and online crypto banking companies, such as Revolut, and give users instant access to their crypto holdings through a web browser.  The exchange or bank holds the user’s keys, so the user has to trust that the company will remain solvent and hack free. Sadly, over the years many exchanges have either  folded or been hacked resulting in its users losing all of their funds.

As a general rule it’s advisable that funds stored in web wallets should be kept to a minimum and when buying crypto from an exchange, the crypto should be promptly moved to a secure wallet where the user holds the keys.

Mobile Wallets

Of all the different types of crypto wallets available, mobile wallets are the most popular. There are thousands of wallets that can be freely downloaded from Google Play and the Apple App Store. These wallets enable users to send, receive and trade crypto “on the go” with just a few taps of the device’s screen. Many also have the option for users to spend crypto too, a feature that I’m sure we are going to see much more of in the coming years.

But of course there are drawbacks of having crypto funds so accessible. Mobile wallets are prone to attacks from keyloggers, viruses and malware. And of course a mobile phone can be lost or stolen.

Cold Wallets

For those who want FULL control of their crypto funds and want to take the responsibility of the security of their funds too, then a cold wallet is prefered. There are basically two types of cold wallets, paper and hardware. As you can imagine paper wallets are ultra low-tech but can be extremely secure whilst hardware wallets are at the other end of the technology spectrum as they are high tech but also very secure.

Paper Wallets

A paper wallet can be as basic as a scrap of paper that simply contains the wallets seed phrase. The paper is simply stored in a safe place and is only needed when funds need to be moved out of the wallet. You don’t even need to access your paper wallet when transferring funds INTO your wallet as you can use an online blockchain explorer to check a wallet’s balance or simply to check the current balance. As the wallet is completely offline, paper wallets are ultra secure and cost nothing, although you will need just a little technical know-how to set one up.

Remember though, with a paper wallet, if you lose the seed phrase then you’ll lose access to your wallet, so you have to ensure that your paper wallet is safely stored!

Hardware Wallets

Hardware wallets look similar to a USB pen drives, the type you plug into your computer, phone or tablet to backup your photos and data. These wallets can be expensive with some models costing over $200. These devices store your keys offline, on the device, but also have an emergency backup protocol if For some reason the hardware wallet malfunctions or is lost.

For the non-technical user, setting up a hardware wallet can be challenging but with a little patience is easily doable For most.

My Favourite Wallet Type

Over the years I’ve used all types of crypto wallets, hot and cold. During the early days of crypto, I blindly left my funds on exchanges. After seeing one of the big exchanges go belly up, I moved my funds, initially to a web wallet, then later to mobile wallets, then to a hardware wallet before settling on good “old fashioned” low-tech paper wallets which I’ve now been using, trouble free for years. I do have a small amount of crypto at Revolut, which I use for trading, but the bulk of my holdings are safely stored on paper wallets.