Storing Crypto
Before you buy crypto, you need a way to store it. There are different options you can choose from but what are their use cases and which one should you choose?
Getting a wallet is the first thing you need to do when investing in cryptocurrencies. Since you cannot touch or hold a bitcoin, you cannot own it without having a place to store it. Wallets come in various shapes and forms. In this lesson, you will learn:
- What different types of wallets exist
- The use cases and (dis)advantages of each type
- Key phrases about storing coins you need to know
Before diving into the wallets themselves, let's clarify a few key phrases to facilitate understanding the rest of the lesson.
What is a private key?
A private key is a cryptographic code you need for accessing your cryptocurrency and signing (authorising) transactions. It can be an alphanumeric code, a combination of words, or even a QR code. It is important to remember is that whoever has custody of the private key is technically the owner of the coins that belong to this key.
It is possible to own crypto and not be in control of the private key. An example would be to store your coins in an exchange account. The equivalent of this would be having money in a bank account. Technically, the bank / exchange could confiscate all your money, so you are not really the owner. However, in normal circumstances, the assets attached to this account (or key) are yours.
Your private key is in your wallet, i.e., there is no need to remember a massive string of letters and numbers. When signing a transaction, you are not using the key directly but a password or a numerical login code. But you do receive a string of words to restore your wallet in case you lose your password. This is the seed phrase.
What is a seed phrase?
A seed phrase is a collection of words used to restore the password to your crypto wallet (and with it the private key). Usually, it's a string of 12 words you have to write down when opening a new wallet. Even if you lose access to your wallet, you can use these words to restore it and the coins it contains. Therefore, writing down and storing the seed phrase is of utmost importance, as it is the last failsafe you have for restoring your wallet.
What is custody?
Having custody of your coins refers to being in control of them. For instance, if your money is in a bank account, you don't have custody of it. The bank has; you only have a legal right to assert a claim to this money. Having cash stuffed in the mattress would be a non-custodial solution to storing money, but it might not be the most common one. Crypto wallets are divided into custodial and non-custodial wallets.
What is a hot wallet?
Besides custodial and non-custodial wallets, we can also divide them into hot and cold wallets. Hot wallets are always connected to the internet. Examples would be exchange wallets, software wallets, and mobile wallets. Hot wallets carry the risk of cyber theft, both custodial and non-custodial ones.
What is a cold wallet?
A cold wallet is a wallet that is not permanently online. Examples are hardware wallets - USB dongles designed explicitly for storing crypto, or anything that can contain a wallet's public and private key: a piece of paper or a ring or a coin with the details engraved.
A cold wallet is therefore more secure as it cant be accessed remotely without your knowledge by hackers for example, although it can be lost or physically damaged or stolen.
The different types of wallets
The two main categories we can divide wallets into are hot versus cold and custodial versus non-custodial. Let's look into each wallet on a case-by-case basis.
Exchange wallets
Attributes: custodial, hot wallet
Use case: having crypto ready for short-term transactions or speculation
An exchange wallet is likely the first solution you will use when you buy crypto. If you buy from an exchange, as most people do, your coins will be stored at the exchange by default. Exchange wallets are convenient and easy to use. You can send and receive coins as you would from a payment provider; the user experience is seamless. You also do not need to worry about losing your seed phrase (there is no seed phrase for this wallet) or the physical loss of your device. You give up all responsibility in exchange for convenience.
However, "not your keys, not your coins" is the mantra of the crypto ecosystem for a reason. If your exchange has the private key, it also possesses your coins. This may not be a big deal with most big and reputable exchanges unless there is some sort of security or liquidity/regulatory problem the exchange faces. Mount Gox is the infamous example cited in the crypto scene when it comes to coin security. Mount Gox was the biggest crypto exchange on the market in 2013 when a hacker stole a large amount of bitcoin, eventually resulting in the eventual closure of the exchange.
Therefore, you should always keep a minimum of your coins in an exchange wallet. A good rule of thumb would be only to keep the amount you need for short-term transactions, or that would not constitute a devastating loss in case of a security problem.
| Advantages | Disadvantages |
|---|---|
| Easy to use | Can get lost or hacked |
| Convenient | You are not in control |
| Web Access | |
| No need for seed phrase |
Mobile wallets
Attributes: non-custodial, hot wallet
Use case: having some crypto with you at all times
Mobile wallets are the next most probable solution crypto newcomers use. These are simple smartphone apps that allow you to open a wallet within a few minutes. You download the application, write down the seed phrase required for wallet restoral, set a numerical login code, and you're good to go.
Mobile wallets are highly convenient since they are portable and allow you to make transactions on the go. They also require pretty much no technical skills to use. In contrast to exchange wallets, mobile wallets do offer a custodial solution, so your coins on the phone are really in your possession. Also, you can buy bitcoin via credit card from most mobile wallets.
On the flip side, they are liable to hacks or physical loss of the phone. That's why keeping the seed phrase safe is just as important as not losing the phone in the first place.
Like exchange wallets, mobile wallets have their use case. They're likely the best solution for actual peer-to-peer transactions, i.e. when you want to send crypto to another person.
| Advantages | Disadvantages |
|---|---|
| Portable | Can get hacked or lost/stolen |
| Convenient | Need to remember seed phrase |
| You control | |
| Easy to use |
Desktop wallets
Attributes: non-custodial, hot wallet
Use case: storing crypto on your computer
Desktop wallets sit in the middle between mobile and hardware wallets. They offer many of the same benefits and downsides as the former but without the latter's security.
Desktop (software) wallets come as computer applications that are as straightforward to use as mobile wallets. However, they obviously are not as portable but equally (un)safe in terms of hacks. One upside of software wallets is that some offer direct integration with decentralized exchanges. However, so do hardware wallets (see below), and those have the added benefit of more security. Also, most crypto beginners will likely not use this function and prefer trading from a centralized exchange, if at all.
In conclusion, desktop wallets are kind of middle of the road when it comes to portability and security. That's why most crypto owners only use them as a compliment, if at all.
| Advantages | Disadvantages |
|---|---|
| Convenient | Not as secure as hardware wallets |
| You control | Less portable than mobile wallets |
| Easy to use | |
| Can trade from the wallet |
Hardware wallets
Attributes: non-custodial, cold wallet
Use case: long-term storage
Hardware wallets are the go-to solution for the long-term storage of crypto. These are little hardware devices that can be connected to your computer via USB or Bluetooth. They are specifically designed for storing cryptocurrency securely and safe from hacks or cybercrime. The most common brands in this space are Trezor and Ledger and come at around $100 per device.
Once you bought the device, you set it up with your smartphone or desktop and are good to go. Since transactions aren't possible while the device is offline, your only security risk is losing the device itself and the seed phrase/login code that goes with it.
Hardware wallets are best used for storing larger amounts of crypto for the long term. You do have the option to trade from your hardware wallet without giving up custody of your coins.
| Advantages | Disadvantages |
|---|---|
| Highly secure | Upfront cost |
| You control | Need to keep device physically safe |
| Can trade from wallet |
Web-based wallets
Attributes: non-custodial, hot wallet
Use case:buying altcoins, trading
Web-based wallets are often browser extensions that connect to Ethereum and other blockchains. The set-up process is similar to mobile wallets. After the installation, you must write down the seed phrase and start using your wallet afterward. In case of password loss, your seed phrase is the only way of restoring your coins.
Web-based wallets are widely used for trading and buying altcoins, i.e. coins other than bitcoin. You can connect to any decentralized exchange and start trading these altcoins. You do this on the Ethereum blockchain but also a few other blockchains (not Bitcoin though). Therefore, web-based wallets like Metamask and Trustwallet are widely used by intermediate and advanced cryptocurrency users.
However, it is not recommended to use these wallets for long-term storage or storing bigger sums of money. Unlike exchange wallets, they are non-custodial, but they are also liable to cybercrime.
| Advantages | Disadvantages |
|---|---|
| Easy to set up | Not suited for long-term storage |
| Specific use case | Not used for bitcoin |
| Can be used for custodial trading |
Paper/physical wallets
Attributes: non-custodial, cold wallet
Use case: gift, education
A paper wallet is basically that you write down your key or words on a piece of paper, being careful to get them right!
Paper wallets are a rare sight in practice since hardware wallets offer many of the same benefits and more. Though paper wallets cannot be hacked, they can be easily lost or stolen or damaged.
Paper wallets can be used as gifts or for educational purposes, such as illustrating the functionality of a wallet and its corresponding keys. They are not used for actual bitcoin storage.
| Advantages | Disadvantages |
|---|---|
| Easily generated | Easily lost or stolen |
| Cannot be hacked | Can get damaged |
Conclusion
There is no such thing as a perfect crypto wallet, only a wallet for each use case. In practice, crypto users have a combination of wallets they use for different purposes.
