What is a cryptocurrency wallet?
A cryptocurrency wallet is a digital wallet to manage your cryptocurrency. Just like you need an email address to manage your online communication, you need a cryptocurrency wallet to manage your crypto.
A cryptocurrency wallet has two keys, a public and a private key. Your public key is also called a receive address and you send it to people to receive cryptocurrency. Just like you send your email address to people to receive an email message. A private key gives you full rights and full access to your wallet. It is extremely important that only you have access to your private key and that you don’t share this with anyone. This is the key to your wallet, similar to a password to your email account. Here you can read more about private keys.
Keep in mind that you need a separate wallet for each different cryptocurrency. For example, sending Bitcoin to an Ethereum wallet can result in you losing your Bitcoin. So, always pay attention! This is different with tokens, for example, ERC-20 tokens can be sent to your Ethereum wallet address. This is because ERC-20 tokens use the Ethereum network.
Four different types of cryptocurrency wallets
Not only does each cryptocurrency have its own wallet, but there are also four different types of wallets. Each wallet has its own advantages and disadvantages. Read our guide how to create a free cryptocurrency wallet.
A hardware wallet is the safest option and resembles a USB stick. You store your cryptocurrency offline by using cold storage. Because of this, it is not (yet) possible to steal your crypto from it. Because it is a physical device, there are costs involved. A well-known manufacturer of hardware wallets is Ledger. The top product of Ledger is the Nano Ledger X.
Advantages of a hardware wallet
- Safest way of crypto storage by using cold storage
- Support for multiple different cryptos (over 1250 supported coins, see the complete list here)
- User-friendly software with free updates
- Private keys under own control
Disadvantages of a hardware wallet
- There are costs involved (more or less € 100)
- Vulnerabilities may be found in the future
- You could lose your wallet or your recovery seed
With an online wallet you use a third party, these are often brokers and exchanges that offer built-in wallets. It is always recommended, not to keep your cryptocurrency with a third party. In case of a hack, there is a chance that you lose your cryptocurrency.
The wallet is accessible online, which also means that in theory a hacker can have online access to your wallet. Always enable two-step authentication for online wallets.
Examples of online wallets:
Advantages online wallet
- Accessible anywhere, anytime
- Easy to trade with your crypto and if needed converted to euro.
- Support for multiple different crypto
- Hard forks and tokens swaps are often supported
- Access can be restored by the third party in case of loss of password
Disadvantages online wallet
- Very sensitive to hackers
- High risk
- No management of your private keys
In terms of safety, a software wallet is between a hardware wallet and an online wallet. You install special wallet software on your desktop, laptop or smartphone and you can use it to manage your crypto. There are many different vendors, like Exodus for your desktop and Coinomi for your smartphone. The security depends on yourself. You have to keep your devices and software up to date. Also you need to know who has acces to your devices.
Advantages software wallet
- Support for multiple different cryptos
- Suitable for many different devices (laptop, deskopt and mobile)
- Private key often under your own control
- Often free
Disadvantages software wallet
- You are in control of security (keeping your devices up-to-date).
The fourth type is the paper wallet. This is simply a sheet of paper containing the code for both your public Bitcoin address and the private key that goes with it. Just like a hardware wallet, this is a very secure way of storing cryptocurrency. After all, all the data is offline. Keep in mind, that it takes more effort to do transactions with a paper wallet than with a hardware wallet. If you want to store crypto for long term we recommend a paper wallet.
Advantages paper wallet
- You keep your paper wallet in a safe place
- Private key under your own control
- Convenient for a long term investment
Disadvantages paper wallet
- Paper wallet is only suitable for one coin
- Susceptible to fire and can be stolen
- Not convenient to do transactions with