If you’re planning on opening an account on a cryptocurrency exchange to buy cryptocurrencies, or have already done so, you’ll need somewhere to hold them. Cryptocurrencies of course don’t have a physical form equivalent to cash. They only exist in lines of code which are kept safe, tradable, receivable or spendable through the public and private security ‘keys’ held by owners.
Cryptocurrency wallets are, therefore, absolutely integral to the blockchain technology cryptocurrencies are built upon. If you want to make any kind of cryptocurrency transaction, a wallet is not an option but a necessity.
That means stashing Bitcoin, Ether, or any other cryptocurrency under your mattress or buried at the bottom of the garden or in a field somewhere like a ‘the end of the world is nigh’ gold bug isn’t an option. You will hold your cryptocurrencies in a cryptocurrency wallet.
And therein lies another choice you have to make if you are getting started as a cryptocurrency investor or trader. You’ll have to set up one or more cryptocurrency wallets that will be the home for your digital currency. But there are many different kinds of cryptocurrency wallet and numerous providers or manufacturers that you will have to choose between.
So what are the different cryptocurrency wallet options available to you and their strengths and weaknesses?
Different kinds of cryptocurrency wallet can first be divided into two main groups that have their own sub-categories of wallet. That initial division is between ‘hot’ and ‘cold’ cryptocurrency wallets.
What ‘hot’ and ‘cold’ really mean is if the wallet is connected to the internet or not. Hot wallets are connected to the internet and cold wallets are not. The fact that cold wallets are not connected to the internet means that they are generally speaking securer. Hackers cannot get to them. The advantage of hot wallets is that transactions are faster and more convenient to make.
Of course, at some point you’ll have to connect even a cold wallet to the internet to make any kind of cryptocurrency transaction. But because this is for a very short period of time, it is extremely unlikely that any hacker would be ready and waiting to pounce at that precise moment.
The general rule of thumb is that cryptocurrency holders tend to use hot wallets for small amounts of cryptocurrencies they want to have at hand to make transactions. Or will transfer cryptocurrencies from a cold wallet to a hot one for a short period of time to make transactions. Or connect a usually cold wallet to the internet to make a transaction. During that period the cold cryptocurrency wallet will temporarily be a ‘hot’ one.
Cryptocurrency Exchange-Hosted Wallet: when you trade cryptocurrencies over an exchange, either between cryptos or from fiat currency to cryptocurrency, you need to do so from your account. That account will contain a cryptocurrency wallet as you need somewhere to transfer out of and receive into. You won’t have to set it up separately as it will come with the account. It will also support all of the cryptocurrencies the exchange itself does.
Advantages of a cryptocurrency exchange-hosted wallet is there is no additional set up involved, it’s convenient to use for trading on the exchange or converting cryptocurrencies back into fiat for a withdrawal.
Disadvantages of an exchange hosted cryptocurrency wallet is they can be vulnerable to hackers, who particularly target exchanges. Different exchanges have different levels of security in place and wallets can be held in cold storage when transactions are not being made. But enough major exchanges have been hacked and coins stolen from client wallets to make security a legitimate concern. Some exchanges do now insure cryptocurrencies held in wallets they host, which is a major plus. Nonetheless, if a hack is bad enough there is no absolute guarantee the company will have the financial resources to meet that insurance commitment.
It’s also often not possible to make other kinds of crypto transactions not involving buying and selling on the exchange from a wallet hosted there. You also won’t be able to use it to store any cryptos not traded on that particular exchange.
pretty much the same as an online cryptocurrency exchange-hosted wallet but independently hosted by a third-party provider, of which there is a wide range of choice.
Advantages: the advantage of using a non-exchange-hosted online wallet is that you will be able to use it to make pretty much any kind of transfer including to and from an exchange wallet or buying and selling goods or services in cryptocurrencies. You’ll also be able to access it from any connected device with an internet browser.
Disadvantages: security is again a disadvantage to this kind of online cryptocurrency wallet. Different providers offer different levels of security, some more robust than others. However, ultimately, these wallets are ‘hot’ and are potentially vulnerable to skilled hackers and have been known to be broken into.
Also, while there are free online cryptocurrency wallet options, third party-hosted services that offer strong security will charge users a fee. This is usually annualised or can be broken down into monthly payments for a slight premium.
Desktop and Mobile Cryptocurrency Wallets: the last kind of ‘hot’ or online cryptocurrency wallet is a desktop or mobile wallet. The difference is basically whether the wallet is an Android or iOS app or a normal desktop/laptop Windows, iOS or Linux app. These are generally considered safer than online wallets as they only connect to the internet when you are making a transaction.
Advantages: less vulnerable to hackers who might try to access your wallet via the internet and convenient to use. There are plenty of options so you’ll easily be able to find one to host all of the cryptocurrencies you want to hold.
Disadvantages: some charge a small initial fee to buy the wallet software. The big drawback is that as the wallet is installed on a desktop or mobile device, if that device is lost, stolen or damaged beyond repair the wallet and its contents goes with it. Desktop and mobile wallets can usually be backed up across more than one device but that does add one more security vulnerability.
A further security concern with desktop and mobile cryptocurrency wallets is if the device they are installed on becomes infected by a virus or malware.
Kinds of ‘Cold’/Offline Cryptocurrency Wallet
Hardware Cryptocurrency Wallets: these are a piece of hardware you attach to your computer when you want to access your cryptocurrencies to make a transaction but are otherwise held offline. They resemble, and basically are with cryptocurrency wallet software installed, small external hard drives.
Advantages: hardware cryptocurrency wallets are highly secure with the window of exception of when they are connected to a computer and through it the internet. However, it is rare for a security breach to happen at this particular moment in time. Different wallets can host a varying range of cryptocurrencies. You will also almost always be able to install more than one wallet on one piece of wallet hardware so can add new wallets that can support additional cryptos you want to acquire.
Disadvantages: hardware cryptocurrency wallets come at a wide range of price points so you don’t have to spend a small fortune but will have to pay something. Cheaper models can start at around $20 or $30. Hardware wallets can also be infected by viruses if a device they are connected to already is. And if they break are lost or damaged your cryptocurrency stash could be lost. You can mitigate this by copying your wallets across more than one device.
Paper Cryptocurrency Wallets: paper wallets are basically a print out of the public and private keys for your cryptocurrencies. If you want to sell or trade them you copy those keys into another wallet at the moment you wish to do so.
Advantages: the safest option to protect your cryptocurrencies from any digital or electronic threat. A piece of paper can’t be hacked, get a virus, or malfunction.
Disadvantages: if you lose your paper wallet or leave it in your pocket when you throw your jeans in the washing machine bye-bye cryptocurrencies. Another minor disadvantage is you’ll have to manually transfer all of your public and private keys to a hot wallet of some kind before you can do anything with them.