Before you even start thinking about trading some cryptocurrency, youโll need to make sure you have a crypto wallet.
Cryptocurrency and crypto wallets are two peas in the same pod. They have been inherently tied to one another since crypto first made its debut in 2008 with Bitcoin (BTC).
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Similarly to regular wallets, crypto wallets are designed to keep tokens safe and organized, but there are many misconceptions about these accessories that should be cleared up. There is also such a variety of available wallets that it doesnโt hurt to conduct some research to know which will suit your needs the best.
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What Is a Crypto Wallet?
Itโs important to clarify one thing: crypto wallets do not directly store cryptocurrency, at least not directly.
Instead, they protect a personโs private and public keys, which are required to authorize cryptocurrency transactions. As a result, a person needs access to the keys in order to use their cryptocurrency, whether that be buying, selling, or even simply receiving tokens.
Think of it this way: the public key is like a bank account number that can be shared around without worry, but the private key is the pin, which should always be kept secret.
Crypto wallets secure these keys and, in turn, store the cryptocurrency in one organized, safe space for added convenience.
Why Are Crypto Keys so Important?
Crypto keys, specifically the private key, are the gateway into a personโs funds, so itโs of utmost importance to keep them safe. If a userโs private key and backup seed phrase are lost, they can be blocked out of their funds entirely.
As we will see later, there is an option to hand over the keys to a cryptocurrency exchange for them to take care of instead. However, there have been debates about how reliable this is, and has birthed the popular phrase โNot your keys, not your cryptoโ.
While crypto itself is obviously important, you should pay the most attention to the keys since a wallet simply wonโt work without them.
How Many Cryptocurrencies Can Be Stored in a Wallet?
The majority of wallets are multi-token, meaning they can hold multiple types of cryptocurrency at once, usually from completely different blockchain networks.
This is obviously beneficial in terms of convenience, but it can also help to save on transaction fees since you can buy or sell crypto all in one go. Itโs also an easy way to keep track of transaction and portfolio history without needing multiple wallets.
However, make sure always to read the fine print, as some wallets are a little more restricted in what they support. Sometimes, they can be tied to a specific blockchain network or will only support one dedicated token.
Do You Need a Crypto Wallet to Start Trading?
No matter how you slice it, youโre not going to be able to trade cryptocurrency without some kind of wallet.
Even just to receive crypto, you will need a wallet address so people know that theyโre sending their tokens to the correct receiver.
Some people sign up for a crypto exchange, such as Coinbase, for example, and store all their assets there rather than setting up their own wallet. However, this wallet still uses keys, so even those trying to skip the process will need to use one for buying, selling, and trading.
In all honesty, though, thereโs really no reason not to have a wallet, considering that they offer an essential layer of security and are often pretty easy to set up. Whether youโre an active trader who wants to buy and sell in short bursts or a long-term investor looking to rack up a hefty lump sum, youโll want a wallet to act as a form of personal storage.
However, there are many types of crypto wallets out there, so before jumping onto the markets, youโll need to decide which one will be most suitable for your investment plans.
Custodial vs. Non-Custodial: Key Differences
The biggest decision youโll need to make is where you want to store your personal keys. This will determine whether youโd be better off buying a custodial or a non-custodial wallet.
Custodial Wallets
If you sign up for a custodial wallet, youโll be handing your private key over to a custodian, most commonly a crypto exchange, to take care of.
There are a few benefits to this, but the biggest is how much responsibility it alleviates from the crypto ownersโ shoulders. Remember that misplacing a private key means losing access to your funds, so those who use custodial wallets wonโt need to worry about keeping their keys safe and secure since thereโs always a backup.
Custodial wallets also tend to be interconnected with an exchange, granting users immediate access to trading as soon as they sign up.
With that in mind, though, custodial wallets also come with security risks since third parties and exchanges are always at risk of cyberattacks and hackers.
Additionally, not owning your keys means you donโt technically own your crypto. This isnโt to say that the third party will use your keys behind your back to make transactions; itโs just that they are the ones who will need to sign transactions off. Some crypto holders may take issue with their keys being held elsewhere, especially if theyโre storing large amounts.
Non-Custodial Wallets
If you want complete control of your keys and donโt feel that you need any extra support protecting them, non-custodial crypto wallets are the best option.
As the name implies, these wallets donโt rely on custodians. Of course, from an ownership point of view, this is very appealing, but it also means thereโs no backup or extra assistance when it comes to protecting your keys.
On the flipside, though, not being connected to a collective online network greatly improves the overall security of non-custodial wallets. If an exchange were to go down or file for bankruptcy, non-custodial wallet holders wouldnโt be impacted by the aftershock.
Which Should I Choose?
When deciding between custodial or non-custodial, the central aspect you need to think about is how much you value having full ownership of your keys and assets.
If youโre new to the world of crypto and simply want an easy way to start storing and trading without getting bogged down in complexities, custodial can be more appealing.
Non-custodial is for the people who believe in the central ethos of cryptocurrency, which is the idea of being decentralized. Having no reliance on outside sources and third parties has always been at the heart of crypto, and though non-custodial wallets can be more technical and expensive, they feed into this mindset a lot more.
Hot vs Cold Wallets: Key Differences
Crypto wallets are all about keeping your crypto assets secure, but itโs up to you to decide how much security you want and whether this should take priority over other factors. When it comes to wallet security, youโve got two options: hot or cold.
Hot Wallets
Simply put, hot wallets are crypto wallets that are always online. These usually take the form of software wallets such as web extensions, mobile device apps, or even just a custodial exchange.
On the one hand, this makes hot wallets accessible and user-friendly, especially since they also tend to be cheap or free of charge.
The biggest drawback is that hot wallets are always directly linked to a larger online database, meaning thereโs always a risk of cyberattacks and hacks.
Donโt worry; many hot wallets will still provide extra security measures like two-factor authentication to help bulk up your defenses. The important point to remember, though, is that this risk is always present, so just keep it in mind.
Cold Wallets
In stark contrast, cold wallets donโt require an internet connection and function entirely offline. They, therefore, sever any and all connections with third parties, including exchanges.
They often take the form of hardware devices like USB and Bluetooth plug-ins. They can even be paper wallets in which the user writes down their public and private keys on a piece of paper or registers them through a QR code.
No connection to the Internet means these forms of cold storage are far less likely to be accessed by devious outsiders. This does also come at the cost of accessibility, though, since hardware wallets are usually more expensive and can require some technical know-how to set up and use.
Which Should I Choose?
This should depend on your trading experience and how much you prioritize security.
Hot wallets are designed for beginners who want quick and instant access to the crypto market. They are ideal for frequent traders who want to transact smaller amounts to keep up with the market through a digital wallet that emphasizes ease of use and accessibility.
A cold wallet will be better suited for someone planning to store larger amounts of crypto over a longer period. They offer tight-knit security by always being offline and donโt rely on any other parties to keep them protected.
Popular Crypto Wallets
Thankfully, most wallet providers will implement a few features or extra additions that make their products unique. This can help with choosing which one to go with, but for reference, these are among some of the most popular options right now.
- Crypto.com: Non-custodial DeFi wallet supporting over 1000 cryptocurrencies.
- Coinbase: The largest US crypto exchange which has a built-in Coinbase wallet. Provides easy access to crypto markets.
- MetaMask: Ethereum-based wallet that handles tokens on the network, including ETH, Tether, and Shiba Inu.
- Exodus: A multi-chain web3 Bitcoin wallet supporting over 50 other tokens.
- Uphold: Built-in exchange wallet that stores crypto alongside other digital assets like precious metals and stocks. Good for diversifying a portfolio.
- Ledger: High-tech hardware wallets that come in the form of physical devices.
- Trust Wallet: Self-custody wallet with user-friendly interface and robust security features.
Experimental Wallets
Though crypto wallets have already been well established and separated into different versions, there are always new ideas and experiments looming on the horizon, such as these for example:
- Assisted Self-Custody: This attempts to create a middle ground between custodial and non-custodial custody. Uphold, for example, offers a wallet that contains three private keys, two of which are held by the crypto owner and the other by Uphold themselves. Though this can still be seen as custodial, there is at least an attempt to bridge the gap, though whether this will ever be successful is yet to be seen.
- Multi-Signature Wallets: Take security to a whole new level by requiring each transaction to contain numerous signatures before being verified.
- NFT Wallets: Work largely in the same way as crypto wallets but instead provide access to NFT marketplaces rather than crypto markets, though some can access both.
- โVaultโ Wallets: Hardware wallets that resemble old physical devices are always kept in airplane mode to provide maximum security. Polkadot Vault is a popular example.
On the Flipside
- The truth is, thereโs always going to be a risk affiliated with crypto wallets, especially those that are permanently online.
- Even hardware wallets can be stolen or destroyed if they end up in the wrong hands.
- Therefore, itโs important to frequently check your balance, watch out for crypto scams, and always set up two-factor authentication and other security protocols to stay safe.
Why This Matters
Cryptocurrency is valuable, and just like with any rare commodity, thereโs always going to be people out there looking to grab some for themselves at the expense of others.
Crypto wallets provide an essential layer of defense while also granting a gateway into the crypto markets. Therefore, there really isnโt any reason not to set up a wallet; just make sure you take the time to decide which kind you will need based on your investment habits and how much you care about full ownership.
FAQs
Hardware wallets refer to cold wallets that are physical devices. Some popular hardware wallets include Trezor and the Ledger Nano.ย
This is another way of referring to non-custodial cryptocurrency wallets, as the person will have full custody over their assets.ย
dApps are blockchain-based applications that enable crypto users to handle their finances in unique ways. Aave, for example, is a dApp that enables users to activate flash loans in seconds.ย