In What is a Cryptocurrency Wallet? Part 1, we took a deep dive into crypto wallets to understand how they work and their utility beyond cryptocurrency exchange. With that foundation, we are ready to examine the different types of wallets available!

Types of Wallets

There are a variety of wallets available when it comes to cryptocurrency and other assets, such as NFTs. Most often, they are split into two main categories, Hot (web-connected) or Cold (not web-connected), but there are several other sub-categories as well. Each type of wallet has its benefits and drawbacks. 

Hot Wallets vs. Cold Wallets

The main difference between hot and cold wallets is internet connectivity. Generally speaking, most people use a combination of hot and cold wallets, using hot wallets to store smaller amounts for daily trading, and cold wallets for storing large or long-term holdings.

Hot wallets:
  • Connected to the internet at all times
  • Make it easy to access your assets quickly and conduct transactions
  • Decreased security, more prone to hackers
  • Look for options that require 2-factor identification
Cold wallets:
  • Physical device or medium
  • Not connected to the internet
  • Increased security
  • Decreased convenience

Now let's break it down a bit further! 

Hot Wallet Sub-Categories

Web/Browser Extension Wallets:
  • Exist only online and are accessed through an internet browser
  • Increased susceptibility to hackers
  • Can be custodial (hosted) or non-custodial (non-hosted)
  • Non-Custodial (non-hosted) wallets
  • Website/platform generates private keys but eliminates record of them after they are given to the wallet owner.
  • Owner retains full control/ownership of assets
  • Examples: MetaMask, Trust Wallet
  • Custodial (hosted) wallets
  • Website/platform holds the private keys to the wallets 
  • User support available for account access
  • Sometimes offer perks for using their platform
  • Website/platform retains control/ownership of assets
  • This means if the platform was to declare bankruptcy suddenly, you are not technically the owner of the assets in your wallet. This has happened several times (Once to me! See Decentralized Diary Entry II for the details). 
  • This type of wallet is what spurred the saying, “Not your keys, not your crypto.” Even though they are convenient, placing minimal funds on a custodial wallet is recommended.
  • Examples: BitGo, Freewallet, Voyager (☠️RIP)
Mobile Wallet:
  • Smartphone applications
  • Can use QR codes to conduct transactions
  • Susceptible to malware/viruses
  • Look for apps that offer encryption
  • Examples: Mycelium, Trust Wallet, MetaMask
Desktop Wallet:
  • Installable software operated locally on your computer
  • Offer more security than Mobile/Web wallets
  • Anti-virus and regular computer back-ups are recommended
  • Examples: Exodus, BitCoin Core

Cold Wallet Sub-Categories

Hardware Wallet:
  • Physical, electronic devices (similar to USB drives)
  • The current gold standard for cold storage; Highly secure
  • More user-friendly than paper wallets but less convenient than other options
  • Increased cost compared to other options
  • Examples: Ledger Nano X, Trezor
Paper Wallet:
  • The OG of cold storage
  • QR Codes printed on paper that holds keys
  • You can generate your own keys or use a key generator (key generators online come with inherent risk, be aware!)
  • Highly secure yet flawed 
  • One and done wallets; re-use is highly discouraged
  • Unable to send partial transactions 
  • For example, if you had 2 Bitcoin in your paper wallet and wanted to send just 1 to a friend, there is no way to conduct the partial transaction. Only the entire balance can be sent. 
  • If you did proceed with the partial transaction, the remaining funds would be sent to a “change address.” If you failed to set this up before the transaction, the remaining funds would be lost.
  • It’s recommended to send the funds to another type of wallet you own and then make transactions as needed.

But wait… there’s more! 

Multi-signature Wallets

We couldn’t wrap up a crypto wallet exploration without including multisig wallets. Multi-signature (aka multisig wallets) require two or more private keys to unlock a wallet and conduct transactions. These come in handy for wallets that are not owned by an individual, such as the treasury of a DAO (learn more about DAOs in DAOs 101). They also prevent issues of accessing funds if someone cannot verify transactions for whatever reason (i.e., a tragic death or severe injury) since multiple parties can unlock the wallet and authorize transactions rather than a single individual. Multisig wallets also prevent a single bad actor from running off with the funds since multiple parties would have to verify a transaction before its execution. 

Here’s a quick example: Let’s say we have a group of 4 founders who are setting up a multi-signature wallet for their DAOs treasury. They decide that all members can unlock the wallet, and at least three signatures are needed to authorize every transaction. You might be thinking, why not just require all four signatures? Only requiring three out of four signatures acts as a fail-safe if someone cannot participate at any given time. On the other hand, requiring at least three signatures also acts as security so one member can steal the funds or push through an unwanted transaction.

Multisig wallets significantly increase the security of funds and are available in many of the above forms, hot and cold. Some naysayers complain about the user experience with such wallets, but like all of the above options, new technology is constantly being introduced to improve usability.

How to choose a Wallet

When selecting a wallet, you should consider your blockchain activities, why the wallet is needed and/or how you intend to use it, and what cryptocurrencies you plan to use. An important point to keep in mind is some wallets hold only one or specific types of cryptocurrency, and others offer the flexibility to hold many types. Typically, individuals take a hybrid approach and have more than 1 type of wallet. Personally, I have two hot wallets (Metamask and a custodial wallet) and a cold wallet, the Ledger Nano X. This combo has worked well for me thus far. But please don’t take my word for it! Be sure to do your own research to determine what will be best for you.

Resources:

https://101blockchains.com/types-of-crypto-wallets/

https://www.blockchain-council.org/blockchain/types-of-crypto-wallets-explained/

https://hobowithalaptop.com/crypto-wallets

https://academy.binance.com/en/articles/crypto-wallet-types-explained

https://www.coinbase.com/learn/crypto-basics/what-is-a-crypto-wallet

https://academy.binance.com/en/articles/custodial-vs-non-custodial-wallets-what-s-the-difference

https://www.gemini.com/cryptopedia/paper-wallet-crypto-cold-storage

https://www.coindesk.com/tech/2020/11/10/multisignature-wallets-can-keep-your-coins-safer-if-you-use-them-right/

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The content is for informational purposes only. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer of a security, token, or application. This is not investment or legal advice. Please do your own research.