Unlike a bank account or physical wallet, your crypto isn’t in a wallet, it is on the blockchain. While your crypto is on the blockchain, you have the right to spend or receive crypto through blockchain wallets. A blockchain wallet is a digital wallet that allows you to manage your crypto. They are secured using cryptography and each wallet has a public key and a private key.
To receive funds, you give out your public key. It’s like giving someone your phone number or email to contact you. You share this public key with anyone who wants to send you funds. Just because someone has your public key or phone number, it does mean they can access your funds or send out messages using your phone number. To spend your funds, a private key is necessary, which is the password to your blockchain wallet. It’s like having the password to unlock your smartphone. With that password, someone could send out messages on your behalf. Keeping your private key secure and secure is very important, as someone with access to your private key could steal all your funds.
Billions of dollars of crypto have been stolen from CEX wallets, personal blockchain wallets, and company wallets due to a mischievous third party gaining access to someone else’s private key. Let’s review the different types of wallets in which you can manage your crypto.
Hot Wallets
Hot wallets are wallets that are downloaded and connected to the internet for access. You typically must type a spending password into the wallet to spend the funds. When creating the wallet, you are shown the secret recovery phrase password, or private key, which could be 12–24 words.
Hot wallets are one of the most risky and insecure options for storing your crypto. First, some people end up giving up their private keys by going to a site that impersonates a legitimate blockchain wallet. For example, with the popular hot wallet MetaMask many people have had their crypto stolen by going to a fake MetaMask site and giving their private key to a malicious site. The owner of the malicious site will restore their wallet using the private key and steal the funds.
Hot wallets are also risky because they are downloaded and used through the internet, meaning they are only as safe as your computer. Viruses, keyloggers, and clipboard loggers are among the tools a hacker can use to steal your private keys. Let’s review the types of hot wallets below.
- Desktop wallet — These wallets are applications that are downloaded to your laptop or desktop. The application generates files that hold the keys of your wallet. The wallets are generally considered safer than some other hot wallets. The risk of desktop wallets is that the private keys for these wallets may be stored locally on your computer, putting your funds at risk if your device is infected with malware or viruses. In addition, if your laptop or computer is physically stolen, your private keys could be at risk. You’ll have to ensure your computer is not compromised by updating antivirus software and staying up-to-date on other security practices. Examples of some desktop wallets include Daedalus, Electrum, and Exodus.
- Mobile Wallet —Wallets that are downloaded as applications from mobile application stores. These have similar risks to desktop wallets. Some mobile wallets include Eternl, Yoroi, and the Trust Wallet.
- Web Wallets —Wallets that are accessed through the internet browser and may be an add-on to a browser extension. These are very risky since they are connected to the internet and provide the lowest security. These wallets should only be used to store small amounts of money and for daily operations, not long-term holdings of a large amount. Some web wallets include MetaMask, Phantom, and Yoroi.
Cold Wallets
A cold wallet means that your private keys to the wallets are stored offline, or in “cold storage”. These offer much better security than hot wallets because to access the keys, physical access to the storage or private keys are required. However, there is a risk that if the physical private keys are lost, your funds could be lost as well. Generally, there are two types of cold wallets.
- Paper wallet — Your private keys are stored on physical pieces of paper or another physical device. They are not stored online or locally on your computer. While the security is strong, the loss of the paper or document with your private keys can be catastrophic. A fire, rain, or accident could destroy the document, leaving your funds locked forever. Some paper wallets include the Bitcoin paperwallet.com and Wallet Generator.net
- Hardware wallet — If you are looking for the best modern-day security for your crypto, hardware wallets offer great security by eliminating the online exposure of your private keys. Unlike some hot wallets, your private keys are kept on a physical device offline. To do a spending transaction, you’ll connect the physical device to the computer. The main benefit of hardware wallets is that your private keys never leave your hardware device, even when connected to your computer. Two of the most popular hardware wallets are Trezor and Ledger.
Conclusion — What’s the best wallet for me?
If you are looking for the most secure way to store your assets, you should consider getting a hardware wallet. Another benefit of hardware wallets like Trezor and Ledger is that they can integrate with most mainstream hot wallets such as Eternl, Yoroi, or MetaMask, allowing you to enjoy the functionality of hot wallets while having the security of cold storage. Do your own research on each wallet and select the best choice for your needs.