If you’re new to the crypto trade, you have probably checked out Bitcoin’s current price and decided it’s high time to get in on the action before it’s too late. Unfortunately, you might struggle with the next few steps of the process i.e. determine where and how to store the cryptocurrency.
You might have Googled the answer to how to get and store crypto, but you’re puzzled by which wallet option to create. Bitcoin wallet choice will depend on your needs, and this guide will help you pick the correct one.
Bitcoin Exchange Wallet vs. Private Wallet
Exchanges are a straightforward concept to grasp. You open an account, get an exchange wallet, pay in fiat currency, they deposit the corresponding amount of BTC (minus the fees) into your account. However, the exchange wallet you created is by far the least secure option for long-term storage, and the exchange itself can be shut down or get hacked at any time. In the process, you could lose access to your Bitcoin.
The main difference between these wallets is who owns the data behind them. While private wallets are, as you might expect, owned by you, the exchange wallet is owned by the crypto exchange you opened the account with.
When you’re starting out, you don’t really get to choose between these two types. Exchange wallets are excellent for obtaining the initial Bitcoin, while private wallets serve better for long-term use and security. As such, you’ll use both for different purposes.
Private Wallet Types
There are many factors to consider when it comes to private wallets before choosing a particular one to create. Bitcoin wallet choice is a serious investment in the future, so contemplate what you want to accomplish with your wallet. Bitcoin wallets use zero-knowledge technology. The private key you generate isn’t stored on a server and can’t be backed up automatically. Similar to pin numbers or passwords, a Private key allows the user to access the wallet, initiate transactions, and more. Without this key, the wallet is useless.
A hot wallet refers to any cryptocurrency wallet that is connected to the internet. Hot wallets are easier to set up and access.
Hot Bitcoin (or other cryptocurrencies) wallet is always connected to the internet and the blockchain network. They allow you to make transactions at any time, at the cost of reduced security. Since your data is potentially accessible to anyone that can hack into your network or server, there is a larger (but still minimal) chance to lose access to your hard-earned Bitcoin.
Experienced crypto investors only keep a small portion of their holdings in their hot wallet that they plan to spend in the near future in their hot wallet. Their remaining assets will stay in cold storage until they are needed for specific transactions.
Hot wallets come in three types:
- Web wallets:
These wallets store your information on a third-party server. Their primary benefit is the ease of access, as you can log into your account from any internet-connected device to review your balance and make transactions. However, since you don’t have direct control over your data, there is an increased security risk.
- Desktop wallets:
This type downloads an app to work on your PC. Since it doesn’t depend on third-party infrastructure, a desktop wallet can serve both as a hot wallet or cold storage, depending on its internet connectivity.
- Mobile wallets:
Mobile types work via an app on your phone. They can use near-field communication technology to make crypto transactions outside of using an internet connection and have user-friendly interfaces of a mobile app. However, phones are prone to hacking attacks, theft, or just getting lost by the owner, and you can stand to lose a lot if you misplace your phone.
Note that mobile and desktop wallets aren’t easily transferrable between devices, so losing access to a device with a wallet inside may mean losing access to the crypto you’ve been storing.
Cold wallets or storage devices are more secure, but they don’t store as many cryptocurrencies as hot wallets. Based on the user choice, Cold wallets could cost upward of $80-100, while hot wallets are free.
Unlike hot wallets, cold wallets are used for long-term storage. Think of them like a safety deposit box or a savings account. While you can still make transactions from a cold-wallet, doing so usually requires separate infrastructure or voids the wallet entirely. Cold wallets have increased security compared to hot ones. Since they’re disconnected from the internet, there are very few ways for someone to obtain your private key.
There are a few main cold wallet types:
- Hardware wallets:
These use a piece of tech hardware to store data. USB drives have become popular as Bitcoin wallets with advanced models allowing for an overview of current balances via the LED screen. Desktop wallets on PCs that are always offline can also be considered hardware wallets. Do note that hardware wallets can degrade over time.
- Paper wallets:
There are a few ways to use paper as a wallet, and they are often more straightforward to create. Bitcoin wallet addresses can be written on a piece of paper and laminated, allowing you to store them relatively safe and protected. Other, more functional models exist with QR codes and one-time use functions such as those from Bitcoin ATMs.
- Coins or cards:
Some wallet manufacturers offer special coin- or card-shaped wallets. These usual store addresses sealed into the sides, and you need to remove the seal to make a successful transaction. They can be great collector pieces but can be unwieldy to use.
The main risk with hardware wallets comes not from the internet, but in losing the actual wallet, so keep them in a safe place, protected from water or fire damage.
You Can Choose More Than One Wallet to Create
Debating on how to create Bitcoin Wallet types to suit your needs can be time-consuming. They range from the most user-friendly to special editions reserved for long-term saving, and picking one won’t be straightforward. You can always combine the best of both worlds, and use a hot wallet for smaller amount daily transactions while offloading larger amounts to safe cold storage options.