In today’s article we will define and explain the four types of crypto-wallets, how they function, what features they should have and what crypto-wallet is best for you. Sounds good? Then read on.
Crypto-wallets: What they are and how they work
Cryptocurrency tokens are purely digital in nature, hence also stored digitally in crypto wallets. These wallets are accessed and utilized by a pair of public and private key. The public key is also known as the “wallet address” and can be likened to a bank account number. To receive money in your wallet, the sender must transfer it to this wallet address.
Your crypto tokens are managed and represented by private keys. You need this private key to prove ownership of the tokens. Loss or theft of the private key results in a loss of these tokens.
This private key can either be stored with a wallet provider (custodial wallet) or directly with the crypto wallet (non-custodial wallet).
- Custodial wallets are crypto-wallets where the provider manages the private key for the user.
- Non-custodial wallets are crypto-wallets where the user themselves (and only them) have access to and manage their private keys.
It is important to distinguish single currency and multi-currency wallets. A single currency wallet, for example a Bitcoin wallet, can only store tokens of one single specific cryptocurrency. Multi-currency wallets consist of multiple sub-wallets that each hold a single cryptocurrency, like e.g. the web wallet MetaMask which supports Ethereum and all ERC-20-tokens (different types of coins can be sent to a single wallet address).
4 types of crypto wallets
There are four different types of crypto wallets: desktop wallet, mobile wallet, web wallet, hardware wallet. They differ in aspects like usage, user friendliness, flexibility, security and use case. We describe them in detail and discuss them with their use cases and pros and cons.
Web wallets are crypto wallets accessed using a web browser. This is typically done on a Desktop device, but can likewise be done via Browser on a mobile device. Whether custodial or non-custodial wallet: users have to login with their account credentials or seedphrase to be able to access the wallet.
- Easy access on a browser on any device (Desktop or mobile)
- Great user experience, as most web wallets are very easy to use
- High level of security through measures like a separate PIN or 2-factor-authentication (2FA)
- High risk of hacks or exploits through malware on Desktop or mobile device.
- Specifically targeted by crypto-hackers that try to hack web wallets, fake web wallet login pages to gain access to login data and seedphrases or exploit wallet browser plugins.
The web wallet is kind of like carrying your usual debit card – technically you can use it almost anywhere, as long as it is accepted or an ATM closeby to withdraw cash from.
Desktop wallets are installed locally as software on a Desktop device (Windows, Mac, Linux) and run as programs that need an internet connection to link to the blockchain. Desktop wallets store cryptocurrencies and details on the local device and are therefore of non-custodial type.
Users that employ desktop wallets must – by all means – have state-of-the-art and updated anti-virus software and firewall installed.
- User friendliness in most cases, as desktop wallets offer great user experience and intuitive interfaces.
- Higher level of security with crypto assets being stored on the local device instead of online, yet risk of hacks and exploits. Anti-virus software and firewall necessary!
- Risk of hacks and exploits through locally installed malware or targeted hacker attacks.
- Damage or malfunction of the Desktop device could prevent access to the crypto-wallet and even lead to a loss of funds.
- Low usability as desktop wallets can’t be used on-the-go to spend cryptocurrencies with local retailers etc. as means of payment.
It is for all these reasons that desktop wallets, while interesting in theory, are the most rarely used. They are like keeping all your cash in a piggy bank – hard to carry and use but easy to steal if someone breaks into your house.
Mobile wallets are app-based crypto wallets installed and run on smartphones for iOS and Android. As the most widely used wallet type, they are available as both custodial and non-custodial wallets.
- Ease of use through intuitive and user-friendly interfaces and QR code scanning for wallet addresses.
- Availability – use anywhere, anytime via web connection.
- Use case – general use cases plus wallet for payment at retailers, etc.
- Security risk with theft or defect of smartphone that could lead to loss of funds.
- Vast selection on the market with many mobile wallets lacking essential security features, careful selection is essential.
Mobile wallets are best for users who spend crypto-tokens as payment for daily purchases or exchange tokens with friends. Yet, users should only store small amounts in their mobile wallets to limit any possible risks. The best analogy for a mobile wallet is your classical cash-filled purse you can carry with you anywhere in your pocket.
This type of wallet is crypto-storage on a special physical device, looking similar to a USB stick. Private keys are stored only on the device. Also referred to as “cold storage”, this wallet is not connected to the internet.
- Highest degree of security of any wallet type. With private keys offline, hacks and exploits through malware are eliminated.
- Additional security measures include implementation of a separate PIN and backup- and recovery-feature in case of theft or loss of device.
- Hardware wallets can be secured additionally by storing them with a notary or safety deposit box at a bank.
- High cost of hardware wallets, between 50-150 EUR vs. usually free other wallet types.
- Low user friendliness, complex and difficult to use with long and burdensome setup procedure.
- Storage – The physical device must be stored safely and secure, out of reach for any third person.
- Availability of funds for payment or trading is low, it takes hours to retrieve tokens from a hardware wallet and send or transfer it.
Given the high level of security but low availability and complicated usage, hardware wallets are an option for crypto holders that store large amounts of crypto-tokens for the long-term. If the desktop wallet is a piggy bank, the hardware wallet is the vault.
Factors to consider when choosing a wallet
So which of the four wallet types should you use? The answer: It depends. There is no “one single best wallet for everyone”, but there is the right wallet for each user and their needs.
When choosing a crypto-wallet, users need to consider the following factors and their importance: security, experience, use case, fees.
Obviously, security is of utmost importance to every crypto user. However, hardware wallets will always offer a certain edge in this area over mobile wallets or desktop wallets. Users should pick a wallet that offers additional PIN entry or 2FA for increased levels of security. The bigger the amount of crypto-tokens stored in the wallet for the long-term, the more important this factor must be.
How crypto-affine are you? How much experience do you have with sending and receiving cryptocurrencies? If you are only starting out, a mobile wallet will certainly be easier than using a desktop or hardware wallet. At a later stage, many experienced users switch to hardware wallets to store their grown crypto funds.
A critical consideration is what users intend to primarily use their crypto wallets for. Users who want to use Bitcoin as a means of payment or frequently send and receive tokens should opt for a mobile wallet. Hodlers who want to store funds for a long time are best off choosing a hardware wallet.
It can pay to pay a little higher transaction fees to ensure one’s transaction is processed quicker instead of being queued. Users with this priority should pick a wallet that allows them control over what amount of fees are paid to the blockchain network. Some crypto-wallets e.g. offer the option of three different heights of transaction fees for slow, average or fast transaction processing.
5 most important features you should know about
If you are a total newbie when it comes to crypto wallets: Don’t worry, we all were at some point. However, you must make sure that you know and understand these 5 essential wallet features:
2 factor authentication (2FA)
A high level of security is warranted if users need to provide two factors for login to their crypto wallet, e.g. a password and a PIN sent to their mobile phone number via text message.
Legacy address support
Blockchain networks like Bitcoin upgrade regularly, such upgrades can bring changes like new wallet address formats. Crypto wallets should be able to support legacy addresses, so tokens can be sent to and received from such legacy addresses even after upgrades have occurred as e.g. in case of the SegWit address format update on the Bitcoin blockchain.
Single currency wallets simply lack usability. Even most crypto beginners soon want to own and use more than just Bitcoin or Ethereum. A multi-currency wallet supports subwallets so overall numerous popular cryptocurrencies can be stored and saved.
Backup- and restore function
The best crypto wallets offer users the ability to generate and use a so-called “seed phrase” whereby a crypto-wallet and its funds can be restored at a later point (e.g. in case of theft or loss of a smartphone in case of a mobile wallet). This seed phrase (usually consisting of 12 words in particular order) must be noted down safely and stored out of reach for any third person.
Often overlooked, an important function in usability is the ability to display the total sum of all crypto tokens in a fiat currency of choosing. Great crypto wallets allow users to choose e.g. EUR or USD as display currency for the value of their crypto assets on the dashboard overview.