Different Types Of Digital Wallets & How to Choose The Best Digital Wallet For Your Cryptocurrency.
Make an informed decision by understanding what each digital wallet offers you (and your needs).
Choosing the best digital wallet is important to safeguard your cryptocurrencies.
What exactly is a Digital Wallet?
A digital wallet is a program designed to send, receive, as well as store, and monitor cryptocurrency balances.
Digital wallets help you manage your cryptocurrencies.
A defining feature of a digital wallet is how its private key is stored.
A digital wallet’s core function is the creation, storage, and use of the private key.
What is a Private Key?
A private key is a very long string of numbers and letters that accesses the password to your wallet.
You can think of your private keys as secret cryptic coordinates for locating your digital currencies.
It’s important to keep your private keys safe because whoever has access to your private keys will have access to your cryptocurrencies.
What is an Address?
Your private key is also used to generate your public cryptocurrency address. This type of address operates like an email address. It is your digital public address for sending and receiving cryptocurrency.
This means you can share it openly and freely with people who want to send cryptocurrency to you.
Types of Wallets
HD
Hot Wallets — (Mobile, Web & Desktop Wallets)
Cold Wallets — (Hardware, Paper & Brain Wallets)
Multi-sig Wallets
HD — Hierarchical Deterministic Wallets
HD wallets generate an initial phrase known as the seed or pneumonic phrase. The seed is a string of common words (which you can memorize/keep), instead of the long and confusing private key.
If your wallet gets destroyed, lost, or stolen, you can enter the seed phrase in order to reconstruct the private key.
Additionally, an HD wallet can create multiple crypto addresses from the same seed phrase.
All of the transactions sent to addresses created by the same seed will be part of the same wallet.
Private keys and seeds should be kept secret and safe. Don’t lose them!
Hot Wallets:
A hot wallet is a crypto wallet that is connected in some way to the internet.
This can be a wallet connected to a web service or a wallet installed on a computer that is connected to the internet, or even a wallet installed on your mobile phone, assuming you have data transferred to and from your phone.
Hot wallets, although most popular, are less secure because they need to be connected to the internet and so your transaction can be compromised if your internet is not secure.
Web Wallets
Although web wallets are highly convenient because they allow you to buy, sell and transfer cryptocurrency at a moment’s notice. These wallets are considered to be less secure because you don’t have access to your private keys.
With these wallets, you’re basically entrusting a third party with your cryptocurrencies.
Web wallets are also more vulnerable to hackers since they can have many loopholes along the way. From the website in question, to the device you’re using to connect to the website, and the internet connection, which could be (hacked) monitored to steal your cryptocurrencies.
With web wallets, you’re forced to rely on the website operator’s honesty and security practices. In the event of internet fraud or external hacking, you could lose all your digital currency.
Competent web wallets will provide multi-factor authentication to validate your account log-in, in order to safeguard against external hackers.
Desktop Wallets
These types of Hot wallets store your private key on your computer. So as long as your computer is free from malware or any security weaknesses, your bitcoins are safe.
Desktop wallets connected to the internet are a valuable target for hackers, making them vulnerable.
Mobile wallets
Mobile wallets are accessible via mobile apps, with private keys stored on your mobile phone.
Mobile wallets are typically password protected, with multi-factor authentication recommended because of how easy it is to break, lose a phone or have your phone stolen.
It’s best to create a private key backup for your mobile wallets.
Mobile wallets are highly convenient and are usually designed to provide as much security as possible in an insecure environment.
Nonetheless, it is recommended to not store substantial sums of cryptocurrencies on your mobile wallet unless used in tandem with a hardware wallet.
However convenient, mobile wallets offer relatively low security and low privacy.
Cold Storage Wallets
Cold wallets refer to any type of wallet that is independent of any internet connection and therefore cannot be hacked remotely.
Some examples of cold storage wallets are hardware wallets, paper wallets, and brain wallets.
Hardware wallets
These are physical devices like a trezor or ledger hardware wallet that safely store your private key, such that it cannot be hacked even if your device is compromised by malware. (They are also a form of cold wallet)
You can even use your hardware wallet with a public computer you don’t trust.
Most hardware wallets provide a seed backup in the event that the device itself is lost or stolen. To send your cryptocurrency to someone with a hardware wallet, you’ll need to have your hardware wallet connected to a computer and use some sort of webpage that allows control over the wallet.
Hardware wallets are safe and easy to use. Their only limitation is you need to keep your hardware wallet on you at all times, in order to send cryptocurrency.
Paper wallets
Paper wallets fall under the category of cold storage wallets.
They’re just pieces of paper with the private key or seed written on them.
You have to keep them extra safe because anyone who has physical access to that piece of paper can steal your cryptocurrency.
Another downside of using paper wallets is that — they’re easily destroyed. Therefore, it is advisable to create multiple copies of your paper wallet so that even if you lose it, you can still retrieve your cryptocurrency (bitcoin).
It’s also important to keep in mind that — in order for you to send cryptocurrencies such as bitcoin from your paper wallet to someone else, you’ll have to import the private key to some form of digital bitcoin wallet before you can go ahead with the transaction.
Brain Wallets
Brain wallets are just a way to create a private key out of a predetermined text or set of words. So instead of getting a randomly generated seed, you can decide for yourself on a passphrase, and use some basic algorithms to generate a private key from that passphrase.
Brain wallets still present a significant disadvantage because they have a higher probability of being hacked.
When it comes to user-generated passwords or “supposedly random generated texts”, people are usually very predictable, and hackers have a unique way of knowing that.
Multi-sig Wallets (Multi-signature wallets).
Is a kind of wallet that allows sending cryptocurrency such as bitcoin, only with the approval of enough private keys out of a set of predefined keys.
For example, John, Samm, and Duke have a business together where they invest some of their Bitcoin, but none of them wants only one person to have the private keys to this money, so they each get one key and use a multi-sig wallet that requires two out of three of those keys.
This way, none of them can run away with the money alone, but they also don’t need all three of them to pay the expenses.
Eg, if Samm wants to run with the money, she can’t do that because she only has access to one key, but if John is missing, and Samm and Duke want to pay an expense, they can do it with their two keys.
Multi-sig wallets don’t necessarily need to be only two out of three. It can be almost any combination.
Another example is — A couple wants to have a shared account and decides that they can only spend the money if both of them agree.
Or a company's board that allows payments based on the vote of the majority.
Multi-sig wallets are also used for escrow services where two parties decide on a transaction that requires two out of three keys, if the seller and buyer don’t agree, a trusted third party will have to arbitrate and release the funds.
Questions To Keep In Mind When Choosing A Digital Wallet
Different people will choose different wallets for different reasons.
If you want to store large amounts of cryptocurrency, then you might want to use a different wallet from if you want to store a small amount on a wallet. (to make small purchases, like food.- is this part necessary?)
Wallets usually vary on a scale of security and convenience.
Some questions to consider when choosing a wallet —
Am I tech savvy?
How frequently will I use my digital wallet?
How many cryptocurrencies will I be buying and storing?
Can I afford to pay for a hardware wallet?
Do I need to carry the wallet around with me?
Do I need to share the wallet with someone else?
How much do I value my privacy?
Do I trust myself to safeguard my wallet or do I want to give a third party the task of doing so?
Keep in mind — you’re also free to use more than one wallet.
For example, you may decide to use a hardware wallet for large sums of money, while also using a mobile wallet with a small balance on it for daily payments.