One of the first problems that newcomers to crypto world need to face is how and where to properly store their coins. While this may seem like an obvious first step to experienced investors and traders, it is not as obvious for new ones.
The first thing to make clear is that you do not actually store cryptos themselves. Instead, you store the private key that can allow you to access your digital currencies, and manage them as you like. Without it, your coins are lost, which is why keeping the private key safe is a top priority.
When it comes to how to store your funds, there are three methods, all of which include a type of crypto wallet. Those are custodial wallets, hardware wallets, and software wallets. In addition to that, it should be noted that storage can be hot (online wallets) or cold (offline wallets). Now that we know this, let's take a closer look at each type of wallet and see which of them is the best choice.
Types Of Crypto Wallets And How To Choose One
1) Custodial Wallets
Custodial wallets are likely among the first ones that newcomers to crypto space tend to use. After you make an account on crypto exchanges, you will likely store your coins within the account itself. This is what means to be using custodial wallets. In other words, a “custodial wallet” is just another way of saying that your private keys are kept by a third party that serves as your custodian. In most cases, these are the wallets that are always online, which is what we call hot wallets.
Using custodial wallets does have benefits to it. For example, if users happen to forget their login details, custodians can ensure that their funds are safe. More often than not, custodians tend to be more diligent when it comes to security than individuals. However, this also means that users are never in full control over their funds. Moving said funds cannot be done without custodian's permission, which means that the power over these coins actually lies elsewhere.
Another big downside to this wallet is the fact that custodians tend to be targeted by hackers. Considering that they can store large amounts of crypto belonging to other users, such attacks usually result in massive thefts where the users lose their coins.
2) Software Wallets
The second option includes software wallets. These are often considered to be the most accessible forms of storage for digital currencies. The name pretty much explains everything about these wallets — they are just a piece of software that you can run on your own hardware, such as computers or smartphones.
Your private keys are protected by the software itself, and these wallets are typically also hot. However, they do require a bit of work, especially since they can be downloaded for free. This includes things such as setting them up and generating an address before you can actually start receiving and sending coins. However, this is usually an easy thing to do, and most wallets will have at least some type of guide that will lead you through the process.
The downside of these wallets is that they are online, or hot, as mentioned above. This means that they can be accessed or hacked into by a third party. Clearly, this means that they are not as secure as users would want them to be. While the level of security varies from one wallet to another, the fact that they are hot is enough for a wallet to never be 100% safe.
Furthermore, users should always be on a lookout for fake wallets, as there is never a lack of scammers, hackers, and similar threats.
3) Hardware Wallets
Finally, there are hardware wallets, which are usually considered to be the safest method of storing crypto. Most hardware wallets are cold storage, meaning that they don't always have a direct connection to the internet. As such, they are impossible to hack, which means that they are mostly safe from hackers as long as they are not physically stolen.
As the name suggests, hardware wallets are a piece of hardware. Usually, they are small devices such as USB flash drives, but with small screens, and a few buttons. The only time that they actually get connected to the internet is when their owners wish to make transactions. This is also the only time when hardware wallets are vulnerable to online attacks. Luckily, they usually do not stay connected for long.
The fact that they are usually not connected is also one of their downsides, as they are not constantly ready to be used. However, most investors consider this inconvenience to be a small price to pay for having a piece of mind.
Even so, their users need to remain vigilant, as this kind of wallet is also not completely immune to attacks. They can still be infected with malware that can trick users and have them send their digital currency to scammers. There is also a possibility of buying a wallet that was tampered with, which might allow the third party to steal coins or send them to another address as soon as they are loaded.
Types Of Crypto Wallets Conclusion
There is no clear answer when it comes to which of these wallets you should choose. There are different factors that may influence your decision, but in the end, it all comes down to your personal choice. Some users do not have the patience to use hardware wallets, despite the fact that they are safer, while others fear that their software wallet will be robbed.
In the end, it will make sense for each user to choose a wallet that corresponds with the way they use crypto. Users with a lot of coins may use a combination of software and hardware wallets, with the majority of their coins being kept safe offline, while they keep those needed for trading in a hot storage. Such combinations are possible as well, and the final decision is for you, as a user, to make.