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What is a cryptocurrency wallet?
Every novice user of cryptocurrencies must have faced the questions "Where to store coins? Which wallet is better?". The concept of "best" in this situation is very relative, because it all depends on your goals and objectives that you set for your wallet.
Each wallet has two unique identifiers: an address and a private key.
The address is public and is used to receive coins. You can share the address with those who want to send you cryptocurrency. Technically, the wallet does not store coins on the device, all funds are on the blockchain.
The private key allows you to access and manage the coins, so it is very important to keep the private key in a safe place and under no circumstances give it to strangers. You can read more about this in our article How to avoid scams and theft of your crypto?
Currently, there are a huge number of wallets that can be classified according to various features. In this article, we will look at the types of wallets according to their ways of storing cryptocurrencies and private keys, as well as the advantages and disadvantages of the main varieties of cryptocurrency wallets.
1. Types of wallets according to the method of storing cryptocurrencies. Hot and cold wallets
Hot Wallet is a program with a permanent internet connection. This category includes wallets of exchanges and online services, mobile and some desktop wallets.
Benefits of hot wallets
- Easy to set up and comfortable for regular use.
- Provide a fast way to send and receive coins.
- Many wallets have additional features besides storing cryptocurrencies. For example, a wallet may allow you to exchange coins or withdraw funds in fiat currencies.
Disadvantages of hot wallets
- Vulnerable to hacker attacks. If attackers manage to gain access to your device through viruses or software utilities, you will lose your funds. There is a big risk that you will never be able to get them back.
Cold Wallet is a physical medium that stores keys offline and is not connected to the internet. A hot wallet is required to send transactions. But even if your device containing the hot wallet is compromised or infected with a virus, scammers will not be able to use your funds without access to your cold wallet.
Benefits of cold wallets
- Provide the highest possible secure storage of cryptocurrencies.
- Great for long-term coin storage.
Disadvantages of cold wallets
- Not very convenient for active transactions, since transactions require additional use of a hot wallet.
2. Types of wallets according to the method of storing private keys. Custodial and non-custodial wallets
Custodial wallets are similar to bank deposits. You entrust your funds for storage to a trusted person who acts as a guarantor of their safety. Typically, such a proxy is cryptocurrency exchanges, marketplaces, and some mobile and desktop wallets. The main distinguishing feature of custodial wallets is that users do not have full control over their funds, since the private keys are stored by the operator (custodian).
Benefits of custodial wallets
- Instead of a private key and a mnemonic phrase, the user has a username and password. If the user loses them, he can always restore access to the wallet.
- Many custodial wallets offer their users favorable conditions. For example, low commissions or their complete absence within their ecosystem.
Disadvantages of custodial wallets
- Users do not have full control over the storage of their funds. If the service has a reason, it can block the user's account. Also, no one can give guarantees that one day the service will not appropriate user funds.
- The crypto-currency community has already repeatedly faced hacks of major exchanges, which caused users to lose their funds.
- Users cannot manage funds during maintenance.
- If for some reason the custodian has problems and the exchange is closed by the decision of the authorities or the court, users may lose their funds.
Non-custodial wallets are under the full control of users. The user has full ownership of the keys and his funds. The non-custodial wallet provider does not have the ability to manage or freeze coins in any way.
Benefits of non-custodial wallets
- The user is in complete control of his funds. The responsibility for the safety of coins lies solely with the user.
- The user can remain anonymous as the non-custodial wallet does not request personal data from its clients.
Disadvantages of non-custodial wallets
- If the user loses the seed phrase, no one will be able to help him recover it, which entails the risk of losing coins forever.
- Non-custodial wallets do not boast great deals or no fees.
3. Varieties of wallets
3.1. Mobile Wallets
Mobile wallet is a program developed as an application for a smartphone. Such a wallet allows you to access funds anywhere and anytime. Since smartphones do not have a large amount of memory, blockchain data is taken from the application server. Thanks to this, users do not need to download large amounts of data to their devices.
Benefits of mobile wallets
- A mobile wallet provides quick access to funds.
- Most of these wallets are easy to use and intuitive even for beginners.
- It is convenient to send transactions by QR code.
Disadvantages of mobile wallets
- If the smartphone is lost or broken, it may be difficult to restore the wallet.
- Smartphones are vulnerable to viruses and malware.
3.2. Desktop Wallets
Desktop wallets are programs that are installed on a computer. After installing the wallet, a file will appear on the computer that will store information about the key. Therefore, it is very important to make sure that the computer is free of viruses and malware before using the wallet. It is also recommended to set a personal password for security reasons.
Desktop wallets can be divided into two groups: heavy and light.
Heavy wallets require a large amount of memory on the computer (200 GB or more), as they store the entire blockchain and update information about it. They have a wider functionality suitable for advanced users.
Light desktop wallets are similar to mobile wallets. They do not store the entire blockchain on the device, but receive information from wallet servers, and have limited functionality.
Benefits of desktop wallets
- Full synchronization with the blockchain is possible, which increases the reliability and security of the wallet.
- Users have full control over their funds and are solely responsible for their safety.
- If you want to use your wallet away from your computer, you can export your private key or seed phrase in advance and access your funds on other devices.
Disadvantages of desktop wallets
- If the user loses the file in which the key information is encrypted, or forgets the password, he will lose access to his funds. Therefore, it is recommended that you always make a backup copy of the file and keep it in a safe place.
- Computers are vulnerable to viruses and malware.
- Heavy wallets are constantly updated and require a large amount of free memory.
3.3. Web Wallets
Web wallets provide access to the blockchain through a browser interface. There are also browser extensions that have the functionality of a cryptocurrency wallet, which is necessary for storing, receiving and sending funds.
Depending on the wallet, the keys are either stored on the server, or users get the ability to manage the keys in full or through general control using multi-signature.
Benefits of web wallets
- The user has access from any device connected to the Internet.
- Most web wallets have an easy interface and allow you to quickly create an account, which is so attractive to newcomers to the crypto community.
- Suitable for frequent sending of transactions for small amounts.
Disadvantages of web wallets
- Low security. Users often inadvertently compromise their data, which is why they lose their funds.
- The number of fake web wallets and browser extensions that steal private keys, mnemonic phrases and other user data is growing every day.
- It is not recommended to use such wallets for storing large amounts. In the event of a data breach, fraudsters will take possession of funds that will most likely never be returned.
3.4. Hardware Wallets
Hardware wallet is an electronic device designed to create and store public and private keys. It is also cold as it does not connect to the internet. At the beginning of working with the wallet, the user is given a seed phrase, which should be written down and hidden in a safe place. It is also possible to set a code that will need to be entered every time you work with the device.
To work with cryptocurrency, the user will still have to use a hot wallet on a smartphone or computer. Hardware wallets are able to connect to the device via both USB and Bluetooth. Due to the fact that such wallets do not connect to the Internet on their own, they are considered one of the most secure cryptocurrency wallets.
Benefits of hardware wallets
- High level of security. Private keys are stored only in the hardware wallet and are not available to the device it is connected to.
- The transaction will not be sent until the user confirms it on the hardware wallet. If attackers gain access to your hot wallet, they will not be able to use your funds without access to the hardware wallet.
- Great for long term storage.
Disadvantages of hardware wallets
- If a user needs to send transactions frequently and quickly, a hardware wallet may not be suitable for such purposes.
- Possible firmware failure. But if the user has securely saved the seed phrase, it will not be difficult for him to access the funds.
3.5. Paper Wallets
Paper wallet is a sheet of paper on which an address and a private key are printed in the form of QR codes. Once a wallet is created, the owner can receive transactions by sharing their address with others. To send a transaction, you need to import the key into any wallet that supports the desired currency.
Benefits of paper wallets
- Suitable for those who do not trust electronic devices.
- Not susceptible to viruses and malware.
Disadvantages of paper wallets
- It is impossible to recover funds if the wallet is lost or seriously damaged.
- Designed solely for storage, has no other functions.
- If during the generation of the wallet your device was infected with a virus or malware, there is a risk that all the information got to the attackers.
Tips for choosing a cryptocurrency wallet
- Determine the purposes for which you need a wallet. If you plan to store funds and rarely use them, desktop and cold wallets are perfect. If it is important for you to have quick access to coins, you should pay attention to mobile wallets.
- Be careful when choosing a wallet. Especially if your choice fell on a custodial wallet. Study the user reviews and reputation of the company, service or exchange where you are considering holding funds. After all, you trust them with your money.
- If you choose a non-custodial wallet, take care to store your seed phrase securely. After all, if you lose it or an outsider gains access to it, you may lose funds. You can also set up regular backups.
- If you are just starting to use cryptocurrency, choose a wallet for yourself with a simple and intuitive interface. So you adapt faster, understand the principle of the wallet and be able to master new functions.
FixedFloat is a non-custodial exchange. Our service does not store our users' funds. We cannot recommend specific wallets to you as we cannot be held responsible for their security. But we hope that this article will help you understand the differences between wallets, their advantages and disadvantages.