THE DIFFERENT WALLET TYPES

There are several ways in which wallets can be categorised and differentiated from one another. For the purposes of this 101, we will focus on the varying levels of security as the main distinguishing factor between wallet types, whilst also taking into account functionality and ease of use. The way in which your keys are being stored is the core of what differentiates the following wallet types from one another.

Software wallets

First, there are software wallets, which run and store your keys on your preferred device. These usually come as desktop or mobile applications, but can also take the form of a browser extension. Software wallets generally offer the best ease of use, since they are always handy and ready to be used without any hassle. In this sense, they come closest to an actual wallet in terms of utility. On the flip side, when they are installed on devices that are actively being used and connected to the internet (which is also referred to as a hot wallet), software wallets can also be vulnerable to hack, which is why it is preferable to not store large amounts of valuable crypto-assets on them in the long term.

Hardware wallets

Second, there are hardware wallets. These are little devices, about the size of a usb stick, that store your private key on a designated chip, offline (which is also referred to as a cold wallet). They are considered the most secure way to store your crypto-assets. In terms of utility, a hardware wallet is less like an actual wallet and more like a little vault, as it first has to be connected to a computer and unlocked before any crypto transactions can be carried out. While these wallets also come with a software component and interface, there definitely is an added layer of complexity when it comes to everyday use, compared to software wallets. However, when it comes to securely storing assets of substantial value, they are very well worth these trade-offs, as well as their price tag.

Exchanges

And finally, we need to talk about exchanges. Platforms such as Coinbase, Bitstamp and Bitfinex, which allow you to conveniently buy and sell crypto-assets like Bitcoin or Ether. Crypto-assets you’ve traded can typically and quite conveniently be kept right on your exchange account. However, this is not the same as keeping them in a wallet. Exchanges keep these funds in their own wallets, and promise to transfer them to you when instructed to. Basically, you must trust the exchange to store your crypto-assets securely. As long as you don’t have your assets in a wallet of which you yourself hold the keys, you don’t really own them. Long story short, keeping all your crypto-wealth on an exchange is not recommended.