The understanding of different types of crypto wallets is essential when investing seriously in cryptocurrencies. Just as you need a bank account to store your fiat money, you would also need a cryptocurrency wallet to store your cryptos and NFTs.
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There are different types of wallets. For each unique blockchain, you would need to have a different wallet with a different, unique wallet address. For example to store Ethereum (ETH), you would need a wallet that can hold tokens programmed for the ERC-20 standard—the Ethereum token standard as well as the ERC-721 and ERC-1155 standards for NFTs. If the NFTs are on a different blockchain such as WAX or FLOW you would need wallets that are made for those standards, but to keep it simple, we focus on Ethereum-compatible wallets.
It’s important to be aware that technically you never store your cryptos and NFTs in your MetaMask or hardware wallet in the real sense of the word “store”. They are always stored on a blockchain to a linked address. The wallet stores the keys, which you can access with your seed phrase. The seed phrase can be called the wallet since you will lose everything stored on that wallet if it's misplaced or lost.
Everything!
The wallet you use just filters out everything on the blockchain related to your address and gives you permission to transfer your assets.
Knowing the best kind of wallets and the safest is your best shot at keeping your crypto and NFTs safe for a very long time. There are two types of blockchain wallets: hot wallets and cold wallets. If a wallet is connected to the Internet, it is a hot wallet, otherwise, if it is not connected to the Internet, it is a cold wallet. You can decide to keep your digital assets in either of the two types of wallets or in a combination of hot and cold.
Types of Crypto / NFT wallets
Cold Wallets - The Safe Wallet
These wallets are offline, unlike hot wallets. They include hardware wallets and paper wallets. Cold wallets are the safest method of storing cryptos and NFTs. All your assets are stored offline and locked with a password.
Hardware Wallets
If you have to store your digital assets for a very long time, or you have very expensive ones, then you will need a trusted hardware wallet to secure your NFTs. Hardware wallets are usually special USB sticks you can purchase on the Internet. They offer the best security by completely avoiding the online exposure of your private keys because the private keys are saved on the physical device in an offline environment. Even if the device is connected to the Internet, the private key does not leave the device. The device would request the transaction details and provide validation for the data, thereby completing the transaction. The transaction details go to the online network to be stored on a blockchain.
Hardware wallets work just like flash drives and, of the cold wallets, are among the easiest-to-use crypto wallet because you can connect them at any time to computers by using a USB drive. Some of the popular hardware wallets that are in use presently include Trezor, Ledger, and many others from different manufacturers.
However, just because a wallet is a hardware wallet doesn’t mean that it is automatically safe. When buying NFT wallets, be mindful of which wallets you get. Never buy a second-hand hardware wallet or even a new one from marketplaces such as eBay or Amazon because the seller might have manipulated the wallet you buy. We highly recommend to buy your wallet directly from a company's official website to avoid buying an already compromised wallet. The best hardware wallet is Ledger, but other types that are safe for your NFTs are Trezor, BitBox, and Ngrave.
Ledger is the most popular of all hardware wallets because it can store more than 5500 coins and tokens. It comes with a stainless-steel body which giving it a more stylish look.
Trezor was the world's first hardware wallet, and is used by over a million satisfied customers all around the world. Trezor Hardware wallets store more than 1200 coins and tokens.
Paper Wallets
Paper wallets are cold wallets and nothing but physical pieces of paper. The paper must contain all the data you would need for accessing your cryptocurrency, which is a pair of private and public keys that you need to use in transactions. They are created using key generator programs and then printed on a sheet of paper. They consist of two-character strings and quick response codes (QR Codes).
Paper wallets are, of course, not connected to the Internet. It was once upon a time one of the best ways of storing cryptos or other digital assets. Their disadvantages are their more time-consuming handling and in the event of losing the paper document, the risk of losing the crypto assets in the wallet.
Hot Wallets - The Convenient Wallet
Hot wallets are basically software wallets that connect to the Internet, which results in less security because they are more vulnerable to online attacks. If so, why do people still use them? They use them because hot wallets offer better accessibility due to their connection to the Internet. Although less secure, hot wallets are very easy to use, making spending and trading cryptos or NFTs much easier. Even if hot wallets are vulnerable to fraudsters and hacker attacks, they are highly user-friendly. For example, it would be rather inconvenient to trade or buy something with cryptocurrency in your cold than in a mobile hot wallet. You would need to find a computer in which to plug your USB cold wallet, then move the required amount of cryptocurrency to a hot wallet, and then make your purchase.
Nevertheless, we do not recommend holding large amounts of cryptocurrency or valuable NFTs in a hot wallet. If you have a significant amount in a hot wallet, transfer it to a cold wallet (such as Ledger Nano S Plus or Trezor Model One) to keep it safe. Professional crypto investors leave the bulk of their crypto assets in cold wallets and allow some small amounts for trading in a hot wallet for easy withdrawals or directly on a crypto exchange wallet.
Cryptocurrency exchanges generally offer hot storage methods for their users. Their wallets are custodial because they hold your keys for you.
There are several types of hot wallets, and the most common ones include:
- Web-based wallets (= a website where you log in)
- Mobile wallets (= an app on tablets or phones, both android and iOS)
- Desktop wallets (= software or a browser extension on your desktop or laptop computer)
Web Wallets
Of the three kinds of hot wallets, a web-based wallet is the least safe but the most convenient. You can access the web wallets through a web browser without the need for downloading any specialized software or application. Because this wallet is Internet browser-based, you can access your crypto assets with your password from any location and any device as long as you can open a web browser. However, most of these web wallets would have ownership of the private keys to your crypto assets, which is a major negative point.
Mobile Wallets
The great advantage of mobile wallets is that they are portable, and you can access them even while sitting on, say, a train. Being portable, however, is also their greatest disadvantage, because you can easily forget your phone somewhere or worse, have it stolen. And then there are also cloud backups of your apps, so you never know who can see your data. There is always a solution, however, when there is a problem, although it isn’t 100% effective. Instead of using your mobile wallet on your main smartphone, you can buy a second, cheap smartphone that you never carry with you but instead leave at home. You only turn it on when you want to transfer or make transactions with your assets. If you intend to use this hot wallet, research the wallets, and ensure they are safe for you.
Desktop Wallets
Desktop wallets are safer than mobile and web-based wallets but are not as safe as hardware or cold wallets. There are wallets for Windows desktops, Mac OS, and Linux that you can install locally on your computer. After installing, you will receive your private keys and you should also create a secure password to access the wallet software. The main benefits of desktop wallets are that you are in charge of your private keys, like in mobile wallets. There is no need for an intermediary.
Popular desktop wallets are MetaMask, Atomic Wallet, and Exodus. There are often mobile wallet versions of desktop wallets.
An understanding of different types of crypto wallets is quite essential for investments in cryptocurrencies. As you can see, each of these types of crypto wallets has advantages and disadvantages. You need to decide which storage option for your cryptocurrencies offers you the right balance of functionality and security. We believe it is optimal to use a combination of a cold wallet to store your long-term holdings and a hot wallet to store the smaller amounts you use for crypto trading or payments.
