Different Types Of Crypto Wallets – Explained

by Mar 22, 2023Blockchain Technology, Defi0 comments

Numerous exchanges and wallet providers have entered the market as users’ demand for new ways to spend, swap, and store their cryptocurrency continues to grow. As a result, users of cryptocurrencies now have a wide range of options for managing their holdings. It can be challenging to determine which set of characteristics best fits your crypto usage style, given the wide variety of crypto wallets available. You should be better able to choose by reading our breakdown of the various wallet types currently on the market. A cryptocurrency wallet is what it sounds like.

Users can store and use cryptocurrency with software or hardware known as a crypto wallet. With cryptocurrencies, there isn’t any physical money to carry in a wallet or purse. The only physical manifestation of cryptocurrency a user can touch is on the blockchain. However, just as a bank account shows a bank balance, it is still important for people and organizations to understand who owns cryptocurrency assets and how much is held.

A user can verify an account balance through a cryptocurrency wallet, giving users access to information about how much cryptocurrency they currently own. Users can send and receive cryptocurrency transactions through crypto wallets, using a similar method to how a traditional bank account works. A crypto wallet is the main method for managing cryptocurrency balances for many users.

Different kinds of crypto wallets

crypto wallets

Hot and cold wallets are the two categories of blockchain wallets that rely on private keys. Hot wallets are simple to use and are just like the regular wallets we use for daily transactions. Similar to a vault, cold wallets securely store cryptocurrencies.

Both hot and cold wallets exist.

Hot wallets are online wallets that allow for quick cryptocurrency transfers. They are accessible online. Examples include Blockchain.info and Coinbase. Digital offline wallets, known as “cold wallets,” allow transactions to be signed offline before being disclosed online. They are maintained offline rather than in the cloud on the internet for high security. Trezor and Ledger serve as examples of cold wallets.

For quicker transfers, hot wallets store private keys in the cloud. In cold wallets, private keys are kept on a paper document or in separate hardware not linked to the internet or the cloud. Hot wallets are accessible online around the clock and on both desktop and mobile devices, but they run the risk of theft that cannot be recovered if hacked. The transactional method used with cold wallets aids in securing the wallet from unauthorized access (hacking and other online vulnerabilities).

Wallets can be divided into three categories further:

1. the use of software wallets.

2. hardware wallets that you attach to your USB drive; and.

3. typical paper wallets, where you print out your public and private keys on a piece of paper and store them somewhere safe.

Software Wallets

A software wallet is an application downloaded onto a computer, a mobile device, or a web-based wallet that can be accessed online. Popular software wallets include BreadWallet, Jaxx, and Copay. Software wallets can also be divided into desktop, online (web), and mobile categories.

Wallets for desktops

These are operating system-specific software packs that can be installed, and they are becoming more significant over time. Antivirus is necessary because a system connected to the Internet presents serious security risks. Desktop bitcoin wallets should be used rather than keeping cryptocurrency on an exchange. They are the best option for cold storage in a completely clean system and the third most secure way to store cryptocurrencies. They provide privacy and anonymity, are simple to use, and don’t involve any outside parties. The computer needs to be regularly backed up. Exodus, Bitcoin core, Electrum, and other well-known desktop crypto wallets exist.

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Smartphone wallets

Wallets designed for smartphones are similar to desktop wallets. They are very practical because transactions are made using QR codes. Though they can be used for routine tasks, they are prone to malware infection. Mobile wallet encryption is required. Although they are convenient and portable, they are vulnerable to viruses. Mycelium and Coinomi are two examples of mobile crypto wallets.

Web wallets

Internet browsers are used to access these wallets, as the name would imply. Some web wallets that store private keys are vulnerable to DDOS attacks and store them there. You can host them or not. The preference is for non-hosted because money is always in charge. The least secure wallets are those. They are not equivalent to hot crypto wallets. They allow for speedy transactions and are perfect for small investments. MetaMask and Coinbase are two of these.

Hardware wallets

The fundamentals of creating a cold wallet, however, are truly defined by hardware wallets. They provide security by preventing private keys from ever being made public online. Hardware wallets function like flash drives and store private keys on a physical device offline. Since they can be easily connected to computers or any other device using a USB drive, hardware wallets are among the most user-friendly cold storage crypto wallet types.

The private key stays on the device even when it is online. The transaction would be finished when the device received the transactional information request and provided data validation. Transaction details are then sent to the online network, where they are recorded. Trezor, Ledger, and many other hardware wallets from various manufacturers are some of the well-known models currently in use.

Custody vs. wallets that are not kept in custody.

crypto wallets

Wallets can also be divided into custodial and non-custodial types in addition to the categories mentioned above.

Wallets for custodial use

Custodial wallets make up the majority of web-based crypto wallets. These wallets, typically available on cryptocurrency exchanges, are renowned for their practicality and usability and are particularly well-liked by novice and seasoned day traders.

The primary distinction between custodial wallets and those previously mentioned is that users no longer have complete control over their tokens. The exchange is the only party with access to the private keys required to sign transactions.

The implication is that users must have faith in the service provider to store their tokens securely and implement robust security measures to prevent unauthorized access. Some security precautions include two-factor authentication (2FA), email confirmation, and biometric authentication, such as fingerprint or facial recognition. Many exchanges won’t permit a user to conduct transactions until these security precautions are correctly configured.

Suppliers frequently go above and beyond to further ensure the security of users’ tokens, exchanges, and custodial wallets. As an illustration, a portion of the money is typically moved to the business’s cold wallet, which is secure from online hackers.

To ensure the security of customer funds, Crypto. Com has implemented numerous security measures. Crypto. Com is the first cryptocurrency company in the world to have obtained ISO/IEC 27701:2019, ISO22301:2019, ISO27001:2013, and PCI: DSS 3.2 after thorough security audits by a team of cybersecurity and compliance experts. Service Organization Control (SOC) 2 compliance, Level 1 compliance with NIST Cybersecurity and Privacy Frameworks, and independently assessed at Tier 4, the highest level.

The business has also set aside US$360 million for insurance protection of customer funds.

A non-custodial wallet.

However, because the user keeps the private key locally, non-custodial wallets enable the user to maintain complete control over their money.

The user is required to record and securely store a list of 12 randomly generated words, also referred to as a “recovery,” “seed,” or “mnemonic” phrase, when opening a non-custodial wallet. The user’s public and private keys can be generated from this phrase. If the user loses access to their device, this serves as a backup or recovery mechanism.

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Anyone with access to the seed phrase can take full control of the money stored in that wallet. The user also loses access to their funds if the seed phrase is lost. Therefore, it is essential to keep the mnemonic phrase in a secure location and avoid storing a digital copy anywhere. Do not photograph it or print it out at a public printer.

Keep in mind that because private keys are kept on the hardware wallet, it is inherently non-custodial. There are also software-based non-custodial wallets available, like Crypto.Com DeFi Wallet. The fact that the user has complete control over the private keys and the money is a recurring theme. Not your keys, not your coins! It is a catchphrase used frequently in the cryptocurrency community.

On the other hand, this implies that users must be in charge of their security about storing passwords and seed phrases. Because they are typically not stored on third-party servers, recovery in the event of any loss may be challenging or impossible.

crypto wallets

Which are preferable between custody and non-custody wallets?

Both custody-based and non-custodial wallets have advantages and disadvantages that suit various user types.

•Use of a custodial wallet makes sense for those who frequently lose their devices and passwords because an exchange or custodian will likely have better security procedures and backup options. It’s a well-liked choice for newcomers who have little to no experience trading cryptocurrency because of this. Furthermore, transaction costs when using a custodial wallet are frequently lower or nonexistent.

•However, if you’d rather keep total control of your money, you might want to think about using a non-custodial wallet.

In the end, everything comes down to personal preference.

The best wallet available

MetaMask is the best web wallet.

Metamask

Because of its user-friendly interface and quick and simple access to the tens of thousands of tokens and decentralized applications that make up the Ethereum network, MetaMask was selected as the best cryptocurrency wallet for Ethereum.

MetaMask is one of the most widely used Ethereum wallets, with over 30 million monthly active users. This might be because it’s accessible and simple to use; for example, new investors looking to store and send cryptocurrencies compatible with Ethereum and engage with decentralized applications (dApps) will find the wallet’s design appealing and uncomplicated.

Another noteworthy quality of MetaMask is that it works with other blockchain solutions. Almost any blockchain network can be added to the app by users. Popular Web3 networks like Avalanche, Polygon, and Binance Smart Chain are all fully supported by the wallet. By connecting them directly to the wallet, users can also access well-known NFT marketplaces like OpenSea and trade a variety of collectibles.

The wallet can be downloaded as an extension for Google Chrome, Microsoft Edge, Mozilla Firefox users, or Brave browsers. The MetaMask app is also available for download for Apple and Android mobile phones.

Additional highlights include:

•Developed using open-source software, which enables developers and security professionals to examine the program and ensure its security.

Users have complete control over their private keys because account information is encrypted and stored locally rather than ever touching the MetaMask servers.

• Rapidly switch between Web3 layer one and layer two solutions.

Trust wallet is the best for mobile

Trust Wallet has the most supported assets on our list, the cleanest, scannable user interface, and built-in support for dApps and NFTs, and is, therefore, the best crypto wallet for mobile.

One of the top cryptocurrency exchanges in the world, Binance, has an official mobile app called Trust Wallet, a well-liked mobile online wallet for cryptocurrencies. The wallet is non-custodial, which means that it does not hold your private keys and that you are in charge of protecting them despite its connections to Binance. It can store the largest digital assets on our list—over 4.5 million coins and tokens—because it supports more than 65 blockchains.

Trust Wallet is a great mobile option for those who love NFT (or even NSFW NFTs) and decentralized apps. The wallet includes a built-in Web3 browser that enables users to access dApps and blockchain games directly from the app. With this function, buying NFTs is simple because users can browse, buy, and store tokens using the built-in decentralized exchange without leaving the app.

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Other noteworthy items are:

•Binance DEX integration enables users to make bulk purchases of tokens using a debit or credit card.

•Among the top-rated mobile wallets for cryptocurrencies on the Google and Apple app stores.

Ledger Nano S Plus is the ideal hardware crypto wallets

crypto wallets

Due to its broad support for assets, robust security measures, and trading capabilities via the built-in Ledger Live app, Ledger Nano S Plus was selected as the best crypto hardware wallet.

Ledger is among the most well-known companies in the cryptocurrency industry, and its hardware wallets are a favorite among users. Its products stand out because they incorporate a Secure Element component, a type of chip frequently found on passports, credit cards, and payment systems, to add a layer of security.

The Nano S Plus, which had an improved display, significantly more storage, and a USB-C cable port, replaced the company’s original wallet, the Nano S, in April 2022. Compared to its bigger brother, the Ledger Nano X, the Ledger Nano S, an already strong entry-level product, received this upgrade, making it even more alluring.

The wallet costs $86.98, a reasonable price that falls between less and more expensive options currently on the market. Furthermore, it is easier to carry around and cycle through your installed apps thanks to its 2.2×0.7×0.36-inch size and 128 x 64-pixel screen.

Further highlights include:

•The first and only hardware crypto wallets that have received security certification from a government body (in Ledger’s case, ANSSI, the French cyber security agency).

•The Ledger Live app can be used to track, lend, and stake cryptocurrency in addition to buying and selling digital assets.

How to create crypto wallets

Typically simple and only takes a few minutes, setting up a cryptocurrency wallet is not difficult. Choosing the type of cryptocurrency wallet you want is the first step because hot wallets and cold wallets require different setup procedures. Then, you must take the following action:

For hot wallets…

1. Get the wallet now. Before downloading any software, confirm the wallet’s legitimacy. Given the prevalence of cryptocurrency scams, it’s critical to confirm the legitimacy of a wallet’s developer. Ensure you are on a legitimate website and not a fake one created to steal your information when using web crypto wallets.

2. Create your account and its security features. This is when you will receive your private key, a seemingly random string of 12 to 24 words using a non-custodial wallet. Accessing your cryptocurrency will be lost if you misplace or forget them. You can enable additional security features like biometrics and two-factor authentication when setting up the system or later. You must go through the Know-Your-Customer (KYC) identity verification process to use custodial wallets, which is slightly more difficult.

3. Fund your cryptocurrency wallet. You might need to transfer cryptocurrency from another wallet to non-custodial wallets because some wallets don’t let you directly purchase cryptocurrency using fiat money. In some instances, you must first fund custodial wallets with a credit or debit card to buy cryptocurrency.

For cold wallets….

1. Online wallet purchase. Avoid third-party resellers when buying a cold wallet. Purchase the item directly from the developer to avoid problems like the device being tampered with beforehand.

2. Install the software for the device. Before using a hardware item, the brand-specific software for that brand must be installed. Ensure that you download the software from the business’s official website. Once you’ve created your crypto wallets, follow the instructions there.

3. Place a cryptocurrency deposit. To put cryptocurrency in your hardware wallet, you must first transfer it from somewhere else, like a cryptocurrency exchange. While the wallet is connected to your desktop computer or mobile device, you may be able to trade cryptocurrency through some wallets’ built-in exchange.

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