Cryptocurrency wallets are reliant on cryptography that we saw in lesson one of this course. Cryptocurrency wallets keep your private keys, the alphanumeric codes that allow access to your cryptocurrencies and tokens, safe and accessible. Your private keys are what allow you to sign your cryptocurrency transactions and must not fall into the wrong hands. The security of the crypto wallet is of utmost importance or you may lose your holdings.
There are a number of wallet types and a few different ways to classify them. Wallets may be classified as hot - connected to the internet or cold - not connected to the internet. Wallets may also be classified as custodial - private keys are held by a third party or non-custodial - private keys are held by the owner.
Let’s examine the different types of cryptocurrency wallets and which classification each falls under:
Hardware wallets - non-custodial / cold
With hardware wallets such as Ledger and Trezor, your keys are stored in a thumb-drive device that is only connected to the internet when you want to use your crypto. Many consider hardware wallets to offer the best combination of security and convenience for storing your crypto private keys.
Mobile wallets - non-custodial / hot
When you use a mobile wallet, your private keys are stored within an app on your mobile device and are readily accessible for use. They are growing in popularity because of their ease-of-use and because of the perceived security of the latest mobile devices. They may be easier to use than hardware wallets, but they are not as secure.
Browser wallets - non-custodial / hot
Browser wallets are those that are downloaded and directly installed into your web browser such as Brave or Chrome. They present the highest level of risk that your wallet will be compromised and your funds will be lost through the numerous scams that plague the crypto space. It is often advised to use a hardware wallet in conjunction with a browser wallet.
Paper wallets - non-custodial / cold
People who write the alphanumeric phrase of their private key on paper or somewhere else securely offline are using ‘paper wallets’. These wallets are the most resistant to online theft; however, people who rely on them run the risk that they will misplace the private key and lose their funds forever. Paper wallets are better suited for long-term holders who do not plan to use their crypto often.
Exchange wallets - custodial / hot
“Not your keys, not your coins” is a common phrase heard throughout crypto. It means that when you store your crypto on a centralized exchange (CEX) you are not in possession of the keys yourself (i.e. you are at the mercy of the CEX). Crypto history is full of exchange hacks, closures and service interruptions that occur at the most inopportune times.
No matter which wallet suits your crypto needs best, remember to keep the seed phrase to your wallet safe in order to keep your cryptocurrencies secure.