When you own cryptocurrency, only you can access it — in theory.
Technically, the currency itself lives on the blockchain on the internet using public addresses anyone can see. The rightful owners of the digital currency have coordinating private keys they use to access their coins. Unfortunately, anyone with access to your private keys could use your cryptocurrency, so keeping your crypto safe is essential.
Cryptocurrency wallets are one option you can use, but what is a crypto wallet? Here’s what you should know about different cryptocurrency wallet options to help you decide which is best to help you securely store your private keys.
What is a crypto wallet?
Crypto wallets are tools you can use to securely store the private keys to your digital currency. When you’re ready to transact with your cryptocurrency, you access the keys in your wallet and use them to transfer the currency.
You need a crypto wallet to store your private keys because the keys themselves are complex and insanely difficult to remember. They can come in many forms but are often a 256-character binary code, a 64-digit hexadecimal code, a QR code, or a similarly complex format.
Why a crypto wallet is important
Private keys with their random strings of numbers, letters, or images aren’t something people can easily memorize. Instead, you need to securely store them so you can use them when you’re ready to use your cryptocurrency.
If you misplace your private key, there is no way to recover the cryptocurrency associated with them. This is one of the surprising facts about crypto many people don’t understand. If you lose access to your wallet with your private keys, you’ve essentially thrown away your crypto.
This has actually happened before. In 2013, A British man threw away a hard drive with the keys to 7,500 bitcoins, now worth hundreds of millions of dollars. He has been attempting to persuade his city to let him excavate the landfill, but so far they haven’t allowed it. And he isn’t alone. Chainalysis estimates 20% of the world’s Bitcoin is lost based on the fact that it hasn’t moved from its current address in five years or longer.
Different wallets offer different levels of security depending on the form you use. This allows you to safely store your private keys for a later date when you want to trade your cryptocurrency. Crypto wallets may be able to store private keys for other digital assets, such as non-fungible tokens (NFTs), too.
Keep in mind, your Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), or whichever coin you own still exists on the blockchain’s public address. Only your private key is kept offline in your wallet.
How crypto wallets work
There are several types of cryptocurrency wallets you can use to store your private keys. Each works in different ways.
The most simple “wallet” you can have is a paper wallet. Technically, this is just a piece of paper with your private and public keys printed on it. The good news about paper wallets is they can’t be hacked. Whoever controls the piece of paper has full control of the cryptocurrency.
The process of generating and printing the cryptocurrency keys is still subject to hacking, though. If the computer or printer you use to print the keys have malware on them, hackers can still take control of your cryptocurrency.
You must be careful if you choose a paper wallet for other reasons, too. Anything that destroys the paper or makes it illegible essentially makes your cryptocurrency inaccessible. You could securely store your paper wallet at home, but a flood or fire could destroy it. Another option is keeping your paper wallet in a safety deposit box at a bank, but even that comes with risk.
Due to these risks, you may want redundancy. That means having both a paper wallet and another type of wallet. Alternatively, you may make multiple copies of your paper wallet and store them at different secure locations to mitigate any risk.
Hot storage wallets
Hot storage wallets are wallets connected to the internet in some way. Examples of these online wallets are:
- A mobile wallet that is an app on your mobile device, such as Mycelium
- A desktop wallet in the form of a program on your desktop computer, such as Electrum
- A web-based wallet, such as Exodus, that you access through a website or cryptocurrency exchange
These kinds of hot wallets are also sometimes known as software wallets, and the main benefit of them is the ease of transacting with your cryptocurrency. You don’t have to bother messing with a paper or cold storage wallet and inputting relevant keys to trade. Your internet-connected wallet can make the trades for you. This allows you to make fast trades when cryptocurrency prices are in highly volatile periods.
Of course, anything connected to the internet is subject to getting hacked. Your wallet is only as safe as the security procedures in place. This varies from hot wallet to hot wallet, depending on the company running it.
Another weak link in this chain is accessing the hot wallet. While many hot wallets use passwords and two-factor authentication for log-ins, these can be compromised. If someone finds your password and gets access to your mobile phone, a hacker might be able to take control of your hot wallet. This risk is higher if you reuse passwords across several websites.
Cold storage wallets
Cold storage wallets fall in between paper wallets and hot storage wallets. These wallets are not always connected to the internet. They’re usually electronic in form but do not have to be. They can be a hardware wallet, such as a hard drive or USB drive. But technically, even paper wallets are cold storage due to their lack of internet connectivity.
The primary benefit of a cold wallet is the increased security from not being connected to the internet. This makes them less likely to be attacked by hackers, but it is still possible. The downside to using cold storage wallets is the extra steps you must take to access the wallet before transacting with your cryptocurrency. This extra step could slow down potential trades and result in missed opportunities for frequent traders.
Cold storage wallets aren’t invincible, either. You could misplace them just as you could a paper wallet. You could also forget the password or PIN you need to access the cold storage wallet. If this happens, you could get locked out permanently and lose access to your cryptocurrency forever.
Several companies make cold storage wallets. Each has its pros and cons. As you’d expect, they have varying price points depending on their features. Examples include wallets such as the Ledger Nano X and the Trezor Model T.
How to choose the right crypto wallet
So you’ve learned how to buy bitcoin, and now trying to pick the right crypto wallet can seem overwhelming. But you can simplify the process.
First, start by figuring out what your goal is for the cryptocurrency you have. A person investing money in cryptocurrency for the long-term has different needs than someone making daily bitcoin transactions.
Once you know how you plan to use your cryptocurrency, look at the pros and cons of each wallet type. Decide where you fit on the spectrum of security versus convenience to figure out which kind of wallet is best for you. Based on this information, you can evaluate which types of wallets, hot or cold, you want. Then, you can shop based on the prices and features that each specific brand of wallet offers.
When shopping for crypto wallets, consider which features are most important to you, such as:
- Security features
- Two-factor authentication
- Supported cryptocurrencies
- Whether a crypto exchange is built-in
- User interface
- Customer support offered
- Transaction fees
- Open-source vs. closed-source software
It’s important to note that not all wallets support all coins. Some wallets may exclusively be Bitcoin wallets, while other wallet providers support hundreds of different currencies. Make sure you pick a wallet — or wallets — that supports the coins you plan to own or trade.
There is a lot of debate on the internet, but whether or not the wallet you choose is based on open-source vs. closed-source software might also be a consideration. Some people consider open-source code to be a more secure route.
There are also multi-signature wallets available. These might require multiple private keys to be entered in order to increase security. They could also allow access to multiple single keys. For example, if multiple people in a household want to use the cryptocurrency, they might each get their own private key.
For people who want simplicity, you might want to consider using crypto exchanges that offer wallet services. For instance, Coinbase provides a hosted wallet within the Coinbase app that you use to trade cryptocurrency. They also offer a standalone Coinbase Wallet app if you prefer to use a wallet outside of the exchange itself.
For more details, read our Coinbase review.
You can have multiple wallets and split your cryptocurrency between them if they fit your needs. You can have a hot storage wallet for the cryptocurrency you plan to trade often and a cold storage wallet for long-term investments.
Do I need a crypto wallet?
Technically, any way you store your cryptocurrency keys could be considered a crypto wallet, so you likely have one even if you don’t know it. Both a physical wallet printed on paper and a digital wallet, such as a Word document, could store the keys necessary to access your cryptocurrency. Ideally, you would choose a wallet that you feel provides the right mix of security measures and convenience for the intended uses of your cryptocurrency.
Can crypto wallets be hacked?
Cryptocurrency wallets can be hacked to varying degrees depending on the type used. Paper wallets can be hacked when you initially receive and print your cryptocurrency keys. Hot wallets can be hacked due to the internet connectivity if there are security flaws or your password is compromised. Even cold wallets can be hacked if the PIN can be decoded or when they are connected to the internet to make transactions.
Which crypto wallet is best?
The best crypto wallet depends on your specific needs. For some people, a paper wallet may make the most sense. For others, a hot or cold wallet option may work better for you. You must analyze the benefits and risks of each option to find a combination you feel comfortable with.
Now you can answer the question “What is a crypto wallet?” confidently and explain the differences between the most common wallet options. If you’re learning how to buy cryptocurrency and plan to store it using one of these wallet options, it’s essential to understand the pros and cons of each.
- Paper wallets are a form of a cold wallet.
- Cold wallets are not connected to the internet. They are less convenient but provide more security.
- Hot wallets, such as mobile apps, are connected to the internet for convenience but pose greater security risks.
You can use this information to determine which option or options provide the security and convenience you need.