In this article, we will discuss different types of crypto wallets and what you need for safe storage of your precious cryptocurrency. We will explore reasons for using digital wallets, how they differ, and which wallet type is best suited to your needs.
If you are new to the world of crypto, you might be shocked at the number of wallet options at your disposal. To the layman, Bitcoin and other digital assets occupy a mysterious, shadowy realm — but there’s a reason why major fintech firms are pledging their support and making it easier for users to manage digital assets like Bitcoin.
What Is a Bitcoin Wallet and Why Is it Necessary?
Bitcoin wallets have been compared to having a Swiss bank account in your pocket. They provide a storage facility for your digital assets, whether that be Bitcoin, Ethereum, XRP or other digital assets.
It’s important to grasp that a crypto wallet does not literally store your coins inside it, but retains the private keys required to transfer or spend them. The coins themselves actually exist on the blockchain — a distributed record of digital asset transactions.
Within a wallet, you can dispatch crypto to friends, family or merchants, receive tokens from others, view the value of your portfolio, and often swap between one asset and another. Some wallets enable you to buy crypto using various payment methods, too.
Blockchain Wallets for Bitcoin and Other Cryptocurrencies
Let’s consider a few possibilities for securely storing your crypto.
Wallet Type 1: Noncustodial wallets
With a noncustodial wallet you’ll receive a private key that you must store in your own safe keeping – offline rather than on your computer. Provided you own the private key and don’t share it with anyone, the corresponding assets are yours to control and spend.
This means there’s no risk of losing your coins even if you misplace your phone or laptop or delete the software in question — as long as you have your private key!
Noncustodial wallets include:
- Paper wallets have a QR code or the full private key literally printed out onto a piece of paper.
- Metal wallets are typically a playing card size piece of metal (such as Titanium) on which the private key is engraved for a more durable approach to protecting your precious access to digital assets that you own.
- Digital hardware wallets are the most popular form of noncustodial wallet. These are small electronic devices which connect via USB or bluetooth. Impervious to computer viruses and malware (since they live offline), these devices typically offer additional security such as a PIN code and two-factor authentication (2FA). Your private keys are cryptographically secured on the hardware wallet and never exposed to being hacked or copied, and all transactions are verified via the wallet rather than online.
With noncustodial wallets, your crypto is considered safe unless a malicious actor somehow comes across your keys, or you happen to lose your private key by misplacing it, or losing it from a flood or fire… or you are tricked into downloading a phony wallet that gives thieving scoundrels access.
Due to the decentralized nature of cryptocurrency, by having full control over the private keys of your crypto wallet, no one can break in to steal your funds (at least not with today’s standards in cryptography).
However this comes with a drawback. If you lose your private keys, there is no ‘password reset’ or company, bank or agent who can retrieve it for you.
That’s why a large majority of cryptocurrency owners choose to use an independent custodial service such as Kriptomat to private secure wallets with the benefit of password protection. That is, by proving your identity, you can gain access to your Kriptomat wallet to access your cryptocurrency.
Wallet Type 2: Custodial wallets
With custodial crypto wallets, the user does not receive a private key. Instead, the custodian – usually an exchange – acts much like a bank by protecting your crypto via various security mechanisms such as offline storage, “cold” wallets, vaults, and firewalls.
This is a convenient option for people who fear losing their private keys and thus access to their digital assets.
Although exchanges have been hacked over the years and users have lost funds, reputable crypto companies use highly secure cold storage to protect users’ assets.
Advantages and Disadvantages of Different Types of Wallets
Hot wallets (Online, Mobile)
Advantages: These wallets are usually implemented on various online services that also allow you to trade cryptocurrencies. As a result, you can perform a virtually unlimited number of transactions quickly and easily. Online and software wallets are usually cheap or even free (because they are often open-source). Mobile wallets can be convenient because most people have smartphones. They are easy to use when making transactions because you can use your phone camera to scan the QR code of a receiving crypto wallet address.
Disadvantages: A wallet that is permanently connected to the internet has an obvious weakness: it can be susceptible to hacking attacks. As such, it isn’t suited for long-term storage unless you really trust the owners of the service that offers the wallet.
Cold Wallets (Hardware, Paper, Software)
Advantages: These wallets aren’t connected to the internet, which makes them safe for long-term storage. An Internet connection is only needed when you’re sending cryptocurrencies. Establishing an Internet connection when receiving cryptocurrencies is not necessary because there is no need to confirm transactions as a receiving party. The transaction is carried out on the blockchain, where the entire transaction history of your wallet is stored. The sender only has to know your public address. This also makes cryptocurrencies ideal for donations. An additional advantage is that you can get a completely free Bitcoin wallet, especially if you use a paper wallet.
Disadvantages: Frozen foods have to be defrosted before you eat them. Cold wallets are similar because you must first connect them to the Internet. This makes the entire process a bit longer, and beginners may have some difficulties setting it up. Another potential disadvantage is that hardware wallets can be expensive, but the price is usually compensated with additional security.
Cold wallets are considered to be much safer, so they are usually recommended for storing large quantities of your digital assets. Hot wallets, on the other hand, are more suitable for frequent access to your assets and trading.
How Bitcoin Wallets Work
A Bitcoin wallet is made of two parts. The first part is the wallet’s public key (also called a public address), which can be shared with others. The second part is a private key, which must never be revealed publicly. You can compare a public Bitcoin address as your email address and a private key as your password.
A private key is used to encrypt transactions, while the public key is used for decryption. This is why the private key has to be kept safe. Anyone who has access to a private key is also the owner of the wallet. The public key is for sharing with third parties, and it is used as proof that you are the owner of the Bitcoin address.
The combination of private and public keys creates a digital signature. It’s a special type of digital cryptography that aims to create a secure digital reference on the identity of the wallet holder. Digital signatures prove ownership and allow you to control your assets.
This may come as a surprise, but a Bitcoin wallet can also be written on a piece of paper. It simply contains a public and private key written in plain text and with respective QR codes. That’s all you need for safe storage. Bitcoin can’t be stored in any one location, say as a digital file on a USB drive. All Bitcoin information is stored on a decentralized blockchain maintained by thousands of people around the world.
Private Keys and Master Seeds: Technical Details About Blockchain Wallet Security
The master seed is a list of words that in combination represent the encrypted version of your private key. In a sense, the master seed is the key that unlocks your cryptographic secrets, and it is not just a common password or PIN. It is a collection of randomly selected words generated by your device at the initial setup. If you lose access to your device, then you can unlock access to your assets on another device of the same type with this set of words.
The most often used standard is the BIP 39. As a result, your device uses a 2,048-word set to generate 2^256 different combinations of the master seed that consists of 24 words. If that number doesn’t seem high, or if you have a hard time imagining exponential numbers, then let’s take a look at 2^256 in its fully written form: 115,
That is approximately 1.158 x 10^77.
The chance of anyone guessing (or brute forcing) your master seed and thus gaining access to your assets is astronomically low.
The Kriptomat Wallet
Making things simple for anyone who is not a cryptology expert, Kriptomat gives you access to a user-friendly multi-currency wallet where you can safely store an increasing number of supported cryptocurrencies.
Bitcoin Wallet FAQ
How to Start
Your first Bitcoin wallet should be easy to use while providing a high level of security for your precious Bitcoin. As an EU licensed cryptocurrency exchange with ISO certification for Management Information Systems, Kriptomat wallets are both easy to use and secure.
Which Wallet Should I Choose?
Before choosing a crypto wallet you’ll need to consider the options in light of our wallet overview above. Questions to consider include: Do you prefer to use a mobile phone or a computer? Are you comfortable with an external USB device? Are you buying for long-term storage, or will you use cryptocurrencies for payments on a regular basis? The best Bitcoin wallet will be the one that provides the best user experience based on your exact needs.
Which Type of Bitcoin Wallet is Best For Me?
Cryptocurrency is precious. So is the wallet you use to store it. Do your research and choose a solution that balances security with accessibility. With the right digital wallet safeguarding your assets, you’ll sleep better at night. If you’re quite new to cryptocurrency, the easiest way to get started is to rely on a custodial account with the familiarity of password protection that can be reset depending on ID verification, similar to your bank. Begin with Kriptomat’s own user-friendly custodial crypto wallet.
This text is informative in nature and should not be considered an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, and past returns are not a guarantee of future returns. Risk only assets that you are willing to lose.