Investors often talk about different strategies for risk management. However, more often than not they overlook the importance of cryptocurrency wallets as the foundation for any risk management system. After all, they contain all your assets and without a safe wallet, you are bound to lose your funds.
Cryptocurrency wallets come in multiple formats, prices, and even sizes. While this variety offers users a range of products to choose from, finding the best wallet can often be a burdensome task. But securing your assets does not have to be hard at all. In fact, we have decided to create a comprehensive guide on cryptocurrency wallets to help you with this task.
In this article, we will discuss how experts choose their cryptocurrency wallets and what types of wallets exist. Moreover, we will feature two of the best hardware wallets that are designed to maximize security.
Why do cryptocurrency wallets matter?
From the perspective of a hacker, a cryptocurrency wallet represents the first attack vector when it comes to stealing digital assets. In today’s age, hackers have a sharper edge compared to cybersecurity experts, making it extremely hard to protect users against malicious acts.
Software developers have to constantly keep their products up to date and make sure to detect any loopholes to prevent hackers from gaining access.
In this regard, cryptocurrency investors must be constantly aware of the risks associated with having their account or wallet hacked. Today, neither exchanges nor personal wallets have demonstrated an ability to evade attacks. In 2020, crypto exchanges experienced numerous hacks, including an event in which an individual stole more than $200 million from Kucoin.
Additionally, a new report from CipherTrace revealed that hackers have massively increased their activity this year due to the rise of DeFi. CipherTrace notes that decentralized finance accounts for 50% of all hacked volume in 2020, with protocols being hacked almost every single week.
While it is impossible to protect the entire industry as an individual, it is enough that you protect your own funds by imposing severe security measures. You can do so by selecting a cryptocurrency wallet that best suits your needs and situation. While it is difficult to make the right decision, guides like this one can drastically help you with choosing the perfect cryptocurrency wallet.
It may be rare for a hacker to target your specific wallet, but that does not mean that it can never happen. In fact, users have in the past years reported situations where hackers gained access to both software and hardware wallets. On that account, it is important to secure your assets as soon as possible by taking the right precautions.
How are wallets categorized?
Before explaining how to choose the best crypto wallet for your needs, we must first showcase all the types of cryptocurrency wallets that exist. After all, how can you choose between a paper, software, or hardware wallet when you do not know how they work?
All cryptocurrency wallets are first categorized as being either hot wallets or cold wallets. This may be the most important distinction when it comes to methods of storing digital assets. But what is the difference?
Hot wallets represent a wallet that most investors use. They are unique for being always connected to the internet, which makes it easier for a hacker to gain access. However, hot wallets are easy to set up and be always accessed with minimum difficulty. What they lack in security, they gain in convenience. As you can probably already guess, hot wallets include software wallets, web wallets, and exchange account wallets.
Cold wallets on the other hand are not connected to the internet. They often come in a physical form and allow you to have maximum degrees of protection. Because they are offline, cold wallets offer a better alternative for storing cryptocurrencies, especially if you are not regularly trading them.
Types of hot (software) wallets
Hot wallets are often called software wallets as they come in the form of an application. As we revealed previously these wallets are almost always connected to the internet. Popular types include web wallets, desktop wallets, and mobile wallets.
If you are a DeFi trader, you have most likely interacted with at least one web wallet. MetaMaskis a highly popular option for storing cryptocurrencies. It can be downloaded as an extension on most web browsers and configured in the same way as a regular wallet.
In the case of Metamask, you will receive a 12-word seed phrase for backup purposes and a password used to access the wallet. However, this form of hot wallet represents the least safe option as a simple virus can corrupt the wallet extension on your browser and gain access to your account.
Desktop wallets include popular options such as Electrum, Exodus, Bitcoin Core, and the Atomic wallet. These are programs that you have to download and install on your PC. A desktop wallet’s information is stored locally in a ‘wallet.dat’ file which contains your private keys.
While they are safer compared to web wallets, they are still susceptible to attacks. However, we note that desktop wallets are convenient to use. Mobile wallets are extremely similar to desktop wallets, with the only difference that they are installed on your smartphone.
Types of cold (hardware) wallets
Hardware cryptocurrency wallets come in the form of a physical electronic device which generates your public and private keys. These keys are stored on the wallet itself, which is offline. Security experts deem hardware wallets to be the most secure option for storing cryptocurrencies.
However, the problem with hardware wallets is that they are not user-friendly. Moreover, users are at the risk of losing their assets if they do not properly update their firmware. Even in the case of hardware wallets, there have been reports of hacks. However, note that a hacker must have physical access to your wallet to hack it.
Ledgerand Trezorare the most popular hardware wallets. They are often bought by investors who seek to store digital assets for the long-term, moving them rarely. When purely looking at security, hardware wallets are the most attractive option when it comes to fending off hackers.
The basics of choosing a crypto wallet
Choosing a cryptocurrency wallet is not hard at all. After all, the only thing that you have to do is analyze your position and discover what kind of wallet suits your situation and needs. While a more serious investor may look towards hardware wallets, a beginner might be confident with using a software wallet on their desktop
You may even combine multiple types of wallets to experience the best of both worlds and enjoy both accessibility and security.
For example, if you are new to the market and are just making it by understanding the basic concepts and terms, it may be wise to choose a software wallet on your desktop or smartphone. In this case, you will interact with a simple user interface that practically guides you through the entire process. As long as you select a reputable company, your funds will likely still remain secure.
On the other hand, you may have invested a significant amount of money and are looking to protect your investments. In this case, it would be wise to purchase a hardware wallet such as Trezor or Ledger. If you are looking to actively trade as well, you can use a software wallet to temporarily store a portion of your funds which you want to use for creating trading positions. Whales often utilize this technique to constantly transfer assets inside and outside exchanges, while keeping a majority of their funds inside a cold wallet storage system.
The best cryptocurrency wallets
We have explained security and hackers as the main reasons for taking cryptocurrency wallets more seriously. On that account, we decided to review two major hardware wallets that offer the highest levels of security: Trezor and Ledger.
Trezor is a cryptocurrency hardware wallet producer based in Europe that offers high-quality products. These products include two models: Trezor One and Trezor Model T. Both wallets are nearly impossible to hack and offer a beginner-friendly interface. The main difference between the two is the type of access.
The Trezor One is accessed through either a desktop PC or a smartphone. Pin entry, passphrase entry, and device recovery is exclusively accessed and managed through desktops and smartphones.
On the other hand, the Trezor Model T is accessed in its entirety through a full-color touchscreen. This makes the model completely offline, requiring no access to an external device.
Both models offer support for thousands of cryptocurrencies and are compatible with a wide range of applications, including desktop wallets and exchanges. The hardware wallets are intuitive and can be set up in only 10 minutes. Trezor is one of the oldest hardware wallets producers, whose products are used by a vast community of hardware wallet owners.
Trezor’s hardware wallets may be extremely secure, but security comes at a cost. The Trezor One comes at a price of $59, while the Trezor T costs $159.
Ledger is another European wallet producer that designs premium cryptocurrency hardware wallets. Their wallets feature a certified secure chip that hosts a custom OS, designed to ensure maximum security and protection against hacks. The wallet supports more than 1500 cryptocurrencies, which can be easily managed with the native Ledger Live application or an external wallet.
According to the company, Ledger has sold more than 1.5 million wallets all over the world. Moreover, their wallets are highly regarded as being the best option for storing cryptocurrencies on a cold wallet.
Compared to Trezor, Ledger’s products are considerably smaller. The company offers two types of wallets, the Ledger Nano S and the Nano X. The main difference is that Nano X supports Bluetooth, which enables users to quickly connect them to smart devices. Otherwise, these wallets are almost the same and come in the size of a basic USB thumb drive.
The Ledger Nano S costs $59 while the Bluetooth-supported Ledger Nano X costs $119. If you are looking for a budget-oriented option that is smaller, Ledger may be the better choice for you. Otherwise, you may want to buy a Trezor wallet if you wish to use a cold wallet that does not need to be connected with an external device.
About The Author:
The Shrimpy Team
The Shrimpy Team is comprised of highly experienced content writers who analyze and research the latest market trends, delivering content suitable for both beginner and veteran crypto investors.