Cryptocurrency wallets are much more than virtual storage spaces where you can accommodate your digital assets. They’re essential components of trading Bitcoin and other cryptocurrencies.
Cryptocurrencies run on public and decentralized ledgers called blockchains that don’t collect credentials from users to verify their identity. On the contrary, the only identification you have on the blockchain is a cryptographic string generated by your crypto wallet, also called a private key. The private key enables you to access your digital assets on the blockchain. Thus, regardless of whether you mine, buy, sell, or receive crypto as a gift, you need an active crypto wallet to initiate or respond to a transaction.
That’s why you must make every effort to get a reliable crypto wallet before engaging with cryptocurrencies. But in this abundance of crypto products, is it even possible to find the best one? Well, we can’t single out a specific model as the choice ultimately depends on your personal preferences, but there is definitely one model that’s considered most secure — the hardware wallet.
What Is a Cryptocurrency Wallet?
Crypto wallets are software programs or devices that enable you to store, send, and receive cryptocurrencies. The program generates two main elements unique for each user — a public key and a private key. The first one serves as an address or a username under which other participants can find you. Remember that a single wallet can generate as many public addresses as the user needs.
The private key, on the other hand, is the most sensitive part of the wallet. In simplest terms — everyone who has the user’s private key has access to the coins. The private key functions as a digital signature for transferring and assigning your funds to somebody else and anyone who has it can easily steal your funds.
Main Features of Crypto Wallets
Fortunately, today’s crypto wallets tend to be user-friendly and don’t require specific tech skills for sending and receiving cryptocurrencies and monitoring your balance in real-time.
That said, some advanced wallet solutions include additional functionalities such as token swaps, staking, fiat payments, or direct access to dApps built on Ethereum.
Multi-Currency Crypto Wallets
The majority of popular wallets tend to be multi-currency wallets, supporting a broad range of different blockchains. But there is also a great number of wallet brands that target a specific blockchain. Ethereum (ETH) and Ethereum-based cryptocurrencies like ERC20 are typical examples of tokens that usually operate within a closed DeFi ecosystem. Their native networks have a unique utility that allows developers to build dApps on top of them and hence, the Ethereum community sticks to Ethereum-exclusive wallets such as MetaMask and MEW (MyEtherWallet).
However, as an unrivalled market cap leader in the crypto industry, Bitcoin holds the number one spot in the crypto wallet industry. Nowadays, most Bitcoin wallets are lightweight software packages as they don’t usually store the entire history of Bitcoin transactions, which has grown in size to over 300 GB.
HD (Hierarchical Deterministic) Wallets
As mentioned in the previous section, there are no limits on the number of addresses you can create under a single wallet. This convenience is supported by the ability of modern wallets to implement an advanced feature known as an HD (hierarchical deterministic) wallet, used mainly by Bitcoin and its derivatives, such as Bitcoin Cash (BCH) and Litecoin (LTC). This system changes your public address every time you receive funds to make your address less traceable for security reasons.
The main distinction between crypto wallets is whether they operate online or offline. This leads us to the two main categories of digital wallets: software wallers or hot storage (web, mobile, and desktop wallets) and cold storage (hardware and paper wallets).
Software Wallets
Software or hot wallets are a diverse group of crypto wallets that share two key features:
- They require an internet connection to access your funds;
- They feature an intuitive interface and allow easy access to your funds.
We can discuss software wallets from two perspectives — whether they’re custodians of your funds or not and the mediums you can access them.
Hosted Wallets
Novices usually turn to centralized crypto exchanges when they buy crypto for the first time. Centralized crypto exchanges mimic mainstream e-commerce platforms allowing users to make a fiat-to-crypto purchase in a few clicks. Almost without exception, this type of marketplace offers an in-exchange wallet that comes together with the user account. At first glance, this looks like the safest option for beginners since they don’t have to transfer their newly-acquired coins to a separate wallet system they have little knowledge of.
The main caveat to these built-in wallets is that the exchange takes the role of a full custodian immediately after you purchase the cryptocurrencies. This means that you don’t have control of your private keys as they reside on the online servers of your cryptocurrency exchange. This means you have no means to protect your funds if hack attacks or internal frauds take place on the exchange.
Non-Custodial Crypto Wallets
Desktop or mobile apps are software storage solutions that allow you to keep your private key on your own. Once you download the wallet app, you also download your private keys to your device. This situation gives you a bigger responsibility as the safety of your crypto savings depends on how you take care of your device, which might get stolen, damaged, or infected.
Mobile wallet apps (available for iOS and Android devices) that come with the QR code functionality are very convenient if you’re planning on using your crypto for everyday transactions. Desktop wallets, on the other hand, better suit seasoned traders who appreciate a more sophisticated interface, with in-depth market insight and technical tools.
All types of hot wallets, however, fail to ensure impeccable security because of their immediate connection with the virtual world. The internet connection poses security risks to valuable crypto assets.
Hardware Wallets
Hardware crypto wallets are small physical devices that contain their own software system to sign transactions internally. With this ability, hardware wallets are undeniably the safest environment for your digital savings in the long haul.
In order to make a transaction, you’ll have to connect your wallet to a computer (or a mobile phone). The wallet screen (if any) isn’t enough, nor is it convenient for managing your cryptocurrencies. You can manage the digital assets on your hardware wallet through a browser-based interface or an app powered by the wallet manufacturer. Some cold wallets are compatible with third-party software wallets as well, providing a perfect combo of security and ease of use.
Hardware wallets aren’t difficult to navigate, especially if they are paired with a software extension. However, they require a specific setup to activate the device, which can be time-consuming and rather complicated for less-experienced traders.
The main downside of hardware wallets is that you have to pay for the wallet device. Prices usually vary from $50 to $350, depending on the brand model and functionalities. Hardware devices vary to a great extent in their design and functionality. Some of them feature a basic appearance, but some are real state-of-the-art gadgets offering features such as Bluetooth connection (instead of cable) and relatively large screens.
How Do Hardware Wallets Work?
All hardware wallets keep your private key within the device even when they are connected to your computer or mobile phone. Your desktop operating system may get infected with viruses, but that won’t affect your private keys. Similarly, the web interface used by your wallet device may be hacked, but hackers can’t track down your private key since the transaction approval takes place on the device itself.
Furthermore, the private keys in your hardware wallet are protected by a pin code. So, even if your wallet falls in the hands of someone else, they won’t be able to get anything without inserting the secret code. You can also find hardware wallets that provide 2FA (two-factor authentication) as an additional security layer against permissionless access.
But what if you damage or lose your hardware wallet? No hassle. Losing your wallet device doesn’t mean you’ve lost your private keys. The majority of hardware wallers employ a seed phrase feature that enables you to recover your private keys and hence, cryptocurrencies from another device. Unlike your pin code or wallet address, the recovery seed consists of meaningful words arranged in a specific order. Cybersecurity experts strongly recommend you avoid keeping the recovery phrase in a digital format.
Most Popular Cold Wallet for Bitcoin
At this point, three major players rule the crypto-wallet industry: Ledger, Trezor, and KeepKey. The first two have launched two different models, a basic and a more technologically advanced one, to reach a broader audience.
After going through their general features, you should get to learn how to compare their traits against your personal style of trading and portfolio management.
Ledger Wallets
Ledger Nano S is perhaps the most popular Bitcoin hardware wallet in the world, even though it is the less advanced model offered by Ledger. Apart from Bitcoin, it supports over 1,000 cryptocurrencies, features an elegant OLED display, and has a durable metal casing.
Launched in 2019, Ledger Nano X carries all of the core characteristics of its ancestor. In addition, it offers an improved chip architecture, an NFC option for contactless transactions, Bluetooth for sleek mobile phone connection and most importantly, a larger list of supported cryptocurrencies.
Both Ledger wallets are compatible with a range of crypto services, including top-rated wallets like MEW and Metamask, as well as decentralized exchanges like Kyber Network and the Binance DEX platform for direct token swaps.
Trezor Wallets
Trezor One is the most cost-efficient hardware wallet model Trezor offers. It features a basic OLED screen, and it’s compatible only with desktop devices. It supports over 1,050 different cryptocurrencies, including the most popular ones such as BTC, LTC, ETH, and a whole range of ERC-20 tokens and NFTs.
Contrarily, Trezor Model T is perhaps the most elegant hardware wallet available on the market. It offers quite stylish improvements to model One, such as an LCD screen, touchpad, and the ability to log in without a password.
The open-source Trezor wallet matches well with Electrum on desktop, Mycelium on your Android, and it has its own web-based interface called myTREZOR.
Other popular hardware wallets include KeepKey, SafePal, and SecuX.
A Few Words Before You Go…
Hardware wallets are the most secure storage option for both new investors and active traders dealing with large crypto amounts. The latter may not find the operational principles of cold storage convenient for day-to-day transactions, but they can pair hardware wallets with software wallets and have the best of both worlds.
Hardware wallets can be expensive, but leaving all your savings on private exchange servers may cost you a lot more than the hardware wallet investment. Investing in a proper hardware wallet gives you complete peace of mind, and you can trade without worrying about scams, malware software, and other digital threats.