Crypto wallets vary in terms of ease-of-use, convenience, security, and key ownership. Some wallets are more technical than others but offer better security and control. Other wallets are more convenient and user-friendly, but less secure and anonymous. Let’s take a look at how crypto wallets work and the different types you can find on the market.
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How Do Crypto Wallets Work?
Unlike regular wallets, crypto wallets don’t technically hold any currency. Your assets live on the blockchain and your crypto wallet credentials let you initiate blockchain transactions, i.e., buying, selling, and swapping.
Crypto Keys: Public & Private
Think of crypto wallets as a set of keys — that’s essentially what they are. Every new crypto wallet comes with a pair of cryptographic keys; one public key and one private key. You need both keys to complete blockchain transactions. Public keys are analogous to an International Bank Account Number (IBAN). Your private key is like a cryptographic signature.
It’s safe to share your public key with anyone who wants to send you money. You can even post your public key on your website or social media page. People with your public key can send you money and see your wallet balance.
By contrast, you should never share your private key without anyone. Private keys let you directly access your crypto assets and sign off transactions, so it’s extremely important to keep them to yourself.
Some wallets hold your private keys for you, so you never get direct access to them. This is a controversial issue among crypto users. While some are happy to let third parties hold their keys, others stick firmly to the “not your keys, not your crypto” mantra.
Keep your private keys from falling into the wrong hands. CyberGhost VPN encrypts your traffic and reroutes it through secure private servers so snoops on your network can’t see what you’re up to or intercept your private information.
Types of Crypto Wallets
It’s easy to get confused with so many types of crypto wallets out there. You might not know how to get started, or which crypto wallet is best for you. Making the right choice starts with knowing the benefits and drawbacks of each type.
Hardware, Paper & Software Wallets
Hardware wallets are the most common type of crypto wallet. They strike a balance between convenience and security. Hardware wallets store your private keys on a removable device resembling a USB drive. To make transactions, you just need to plug it into your computer.
The rest of the time, your hardware wallet sits as cold storage — disconnected and protected from cyberattacks. Hardware wallets can cost anywhere from $50 to $200.
Paper wallets are physical printouts containing your public and private keys. They often feature a QR code for easy accessibility. Paper wallets may seem old school, but they appeal to people who appreciate traditional pen and paper mediums.
Software wallets can be installed on personal computers, smartphones, or other electronic devices. They’re extremely convenient for viewing your balance and making transactions.
Most software wallets come as an integrated part of a cryptocurrency exchange. Exchanges like to keep their customers in one place. Just remember, since software wallets are always online, the risk of cyberattacks is always present.
Hot & Cold Wallets
Hot wallets are constantly connected to the internet — software wallets fit into this category. They’re often easier to use and more convenient, especially for newbies.
The “always-online” nature of hot wallets means they’re more accessible to cybercriminals. As such, they’re less suitable for storing large amounts of crypto. Here’s a list of the 3 different types of hot wallets.
- Desktop Wallets. You install desktop wallets on a computer or laptop. They give you full control over your private keys and funds. They’re generally considered more secure than web or mobile wallets and you can also use them for cold storage. You just need to ensure they’re offline and disconnected.
- Mobile Wallets. Mobile app wallets are designed for smartphones and tablets. This makes them extremely convenient and portable — fantastic for trading on the go. Mobile wallets can be either custodial or non-custodial. It depends on which you go for, always check first!
- Web Wallets. You access web wallets on any device through your web browser. This makes them an extremely convenient way to access funds and trade. All you need is an internet connection and you’re good to go!
If you’re security conscious, you may prefer cold storage, especially for large amounts of assets.
Cold wallets are, you guessed it, offline. They’re extremely secure for storing crypto but may require more technical know-how. The important thing is, cold wallets can’t be hacked (unless they’re stolen) because hackers need a live internet connection to infiltrate anything.
Custodial & Non-Custodial Wallets
This is where crypto users disagree a lot. If you’re control conscious, the distinction between custodial and non-custodial (a.k.a self-custodial) wallets becomes important. Ultimately, the choice involves a trade-off between control and security.
Custodial wallets involve third parties that hold your private keys for you. This can be an attractive option if you’re comfortable trusting a third party with your crypto assets. You get to piggyback on the security they provide. However, it’s important to know security is never guaranteed. Custodial wallets can get hacked or go bankrupt.
For example, in 2022, popular crypto exchange FTX filed for bankruptcy, and billions of dollars worth of its customers’ crypto went missing. Many advocates of the “not your keys, not your crypto” adage began with the I-told-you-sos. Quite a few reconsidered self-custodial hard wallets and other storage options.
Non-custodial wallets give you sole responsibility for your private keys. As long as you don’t share your key with anyone else, only you can access your assets.
The downside of self-custodial wallets is the lack of recovery options. If you happen to lose your keys, it’s kind of game over. Non-custodial wallets are also less user-friendly than custodial wallets. They’re often built specifically to attract newbies.
Popular Crypto Wallets
Which crypto wallet you choose is going to depend on your priorities. Here’s a list of the most popular crypto wallets:
- Crypto.co DeFi Wallet
Crypto and Cybercrime
As cryptocurrency’s popularity has grown, so have cyberattacks against it. Cryptocurrency theft is attractive to threat actors because of its decentralized nature and inherent anonymity, which makes it harder for law enforcement to track the criminals down.
When criminals steal directly from a person’s bank account, the risk of transactions being traced back to them is high.They don’t really have to worry about that with cryptocurrency, as blockchain transactions are much more anonymous and it’s easy for a cybercriminal to remain unidentified as they transact with stolen crypto.
Tips for Using Crypto Safely
If you’re using crypto, it’s important to keep your assets secure. Here are some tips to keep in mind.
Be Alert to Crypto Scams
Crypto scams can come in many shapes and sizes, including pump-and-dumps, investment schemes, and romance scams.
It can often be difficult to tell the real deal from a hoax. Always do your research before buying new coins, and don’t get involved in investment schemes with people you meet online. Read our article on common types of crypto scams for more information and tips.
Avoid Public Wi-Fi
Connecting to public Wi-Fi is one of the worst things you can do from a cybersecurity perspective. When you share a network with strangers, you give them an entry point into your device. They can see your IP address and send malicious traffic to your device. You never know who you’re sharing a connection with, so it’s better to not take chances.
This doesn’t mean you should never use free Wi-Fi again. Sometimes it’s the only option! Luckily, you can stay protected on shared Wi-Fi networks with a VPN.
Keep Your Devices Safe
Whether you’re trading on an iPhone or Android, you’ll want to protect your device with all your might. Your defenses should be both physical and digital. Keep a close eye on your phone and use strong passwords or biometric authentication.
Install a reliable anti-malware system and run regular scans. Don’t click on links from suspicious emails and texts, and know how to spot phishing. It also helps to use a VPN to mask your IP address, encrypt your connection, and reroute your traffic through secure private servers.
Choosing the Right Wallet For You
Cryptocurrency can be intimidating when you first get started, especially with so many types of crypto wallets to choose from. The most important thing is to know what you’re signing up for and make sure the wallet you choose matches your needs.
If you want full control over your crypto assets and don’t mind taking full responsibility for your private keys, non-custodial wallets might be a better option for you. On the other hand, if you’re looking for user-friendliness, loss-recovery options, and don’t mind trusting third parties, custodial wallets may be the way to go.
Whichever wallet you go for, I hope this article has helped familiarize you with the risks and advantages of each type of wallet and given you some tips to keep your assets safe.
The main types of crypto wallets are hardware wallets, paper wallets, and software wallets. They can also come as custodial or non-custodial wallets. Custodial wallets mean a third party holds your private crypto keys. Non-custodial wallets let you control your private keys yourself. Then you get hot and cold wallets. Hot wallets only work online, while cold wallets are not connected to the internet.
Custodial wallets involve third parties that hold your private keys for you. As such, you’ll never have direct access to your assets. Non-custodial wallets give you full responsibility and access to your private keys. The downside is, if you lose your private keys, you won’t be able to recover them. Find out how to secure your crypto transactions in 3 simple steps.
Hardware wallets are the most secure as once they’re disconnected from the internet, they can’t be hacked. As long as you trust yourself to take care of your hardware wallet device, you won’t have to worry about cybercriminals stealing your crypto.
If you prefer a software wallet, add an extra layer of security to your crypto transactions with a VPN. CyberGhost VPN reroutes your traffic through our secure servers, making it harder for anyone to intercept your data. If they do, our encryption ensures they can’t make sense of it.
Custodial wallets are often considered less secure than self-custodial wallets. However, many still favor them for their convenience and password recovery options. It’s important to keep in mind custodial wallets are always at risk of hacks or worse, bankruptcy, as happened to FTX.