As the cryptocurrency space matures, it’s to be expected that it will be the target of those looking to exploit the large amounts of money involved. For individual investors, this means being aware of attempts by bad actors to access your funds through scams, hacking attempts, and other forms of theft.
Storing cryptocurrency safely is therefore vital to make sure you don’t fall victim to such attempts. With several different options available to store and access your crypto, below is a breakdown of everything you need to know, with the benefits and downsides of each solution.
What are crypto wallets?
In order to interact with blockchains such as Ethereum and Bitcoin, you need a way to access your cryptocurrency.
While crypto wallets enable users to send, receive, and trade tokens, they are not actually used for storing cryptocurrency. This is because cryptocurrency never truly leaves its native blockchain.
Instead, crypto wallets keep the private keys safe that are used to access your fund’s unique blockchain address. Crypto wallets handle private keys differently, with varying benefits and risks to each.
How do crypto wallets work?
Crypto wallets are comprised of 3 main elements:
Public keys: You can think of your wallet’s public key like your bank account number.
Private keys: Your private key is essentially like your bank account’s pin number. Just as you would never share this with other people, you should also never share your private keys. Private keys are presented in a human-readable format when you create your crypto wallet and are typically 12-word phrases.
Wallet address: This is a hashed version of your public key and can be shared to receive or swap crypto tokens.
Different types of crypto wallet
There are three types of crypto wallet you can use: software, hardware, and “paper”.
Software crypto wallets
Software wallets are installed on your desktop computer, mobile phone, or used as a browser extension, such as Metamask.
A software wallet is considered “hot” because it is always connected to the internet with your public and private keys linked to make sending, receiving, and trading tokens more convenient.
Amongst software wallets, there is a distinction made between custodial and non-custodial wallets. Custodial wallets involve third parties having control of private keys, such as crypto-exchanges like Swyftx, and Coinbase. Non-custodial wallets like MetaMask, instead, leave users to be in full control of their funds with access to private keys.
While software wallets are generally considered safe, always being connected to the internet means a compromised device could reveal private keys to bad actors.
Software wallets are ideal for those who are regularly interacting with blockchains and need convenient, quick access to their funds.
Hardware crypto wallets
Hardware wallets do not expose your private keys to the internet and are considered a form of “cold storage”. Private keys are, instead, stored on devices that typically resemble USB memory sticks, such as the Ledger Nano X.
You use a hardware wallet by plugging it into your PC or connecting it to your phone via wire or Bluetooth. The device is then used to confirm transactions without your PC or phone ever exposing your private keys to the internet.
This means that even if your PC or phone was compromised, your private keys are safe.
Hardware wallets offer some of the convenience of software wallets but are not free. They are ideal for those who want to “store” larger amounts of crypto but still require semi-regular interaction with blockchains.
Paper crypto wallets
A paper wallet is the most secure form of storing cryptocurrency but is also the most inconvenient.
Paper wallets are physical representations of your private keys that are then stored securely somewhere such as a safe or bank deposit box. Users often simply write out the 12-word seed phrase on a piece of paper before safe storage or etch it into a metal sheet for added protection and longevity.
These are considered the most secure form of storing crypto as they do not involve any type of connection to the internet. While this is indeed safer, it is also more inconvenient with manual inputting of the seed phrase each and every time you need to access your cryptocurrency.
Paper wallets are ideal for those who plan on storing their crypto for a long time and do not require regular interaction with the blockchain. It is also important to keep your paper wallet safe as events such as house fires, floods, and loss of the wallet typically mean losing access to your funds forever.
Takeaway
Ultimately, which type of crypto wallet you choose depends on your aversion to risk and how often you will interact with blockchains.
For regular users who are not holding large amounts of crypto, software wallets are ideal. Hardware wallets are ideal for those who want to send, receive, and trade crypto regularly and don’t mind the cost and slight inconvenience. And paper wallets are suitable for those in it for the long haul and are simply looking for the most secure form of storage possible.
