There are 5 different cryptocurrency wallet types. In this article we will discuss the advantages and disadvantages of each and detail the situations in which one may be preferable over another.
Before we start, there is some key terminology that is essential for all to understand.
- Hot Wallet vs Cold Wallet
The difference between a hot wallet and a cold wallet depends upon whether the wallet is connected to the internet or not. Hot wallets are connected to the internet, while cold wallets are not, and it is therefore unsurprising that hot wallets are less secure. The benefit however, is that they are much more user-friendly.
Cold wallets on the other hand, are used for improved security and most commonly for long term holding. The downside of this however, is that day to day transactions become less convenient.
- Public and Private Keys
In simple terms, cryptocurrency is represented by an entry in the blockchain associated to a public key.
In order to do anything with a cryptocurrency, a private key is required to authenticate and unlock it. If this private key is lost, so is your cryptocurrency. It is therefore imperative to carefully consider how and where your private keys are stored. For example, some wallets will store private keys offline, while others will hold them online.
KEY NOTE: It is not the bitcoin or the cryptocurrency that gets hacked, it is the devices that store the private keys that do.
- Multisig wallet
A multisig/ multigeniture wallet refers to a cryptocurrency wallet that requires authentication from multiple parties to complete a transaction. This wallet model is ideal for the use of families or businesses where more than one person is involved.
- Multi-currency wallet
While some wallets are specific to one type of cryptocurrency, others will allow you to store multiple types of cryptocurrency in one place. Some of these wallets will enable you to convert your cryptocurrency into another, which is accomplished through an integration with a third party called ShapeShift.
The 5 Crypto Wallet Types
- Online wallet or a Web Wallet
Online wallets are essentially cryptocurrency wallets that are accessible via your web browser. While these wallets are convenient if you are making frequent transactions, we highly recommend that you do not put the bulk of your cryptocurrencies into these as they are incredibly attractive to hackers.
- Provide the fastest method to complete transactions
- Some have the ability to manage multiple cryptocurrencies and transfer between them
- Highly attractive to hackers
- All coin information is stored with a third party and therefore if your computer is affected by malware or viruses, your wallet may be as well
- Mobile Wallet
Mobile wallets enable you to access your cryptocurrencies via any mobile device. While they share many features of internet-based wallets, they provide additional features and come with a higher level of security risk.
- Practical and easy to use
- Have additional features above and beyond online and hardware wallets like QR code scanning
- If a phone is maliciously compromised, then your cryptocurrency may be as well
- Desktop Wallet
If you are committed to online security, a desktop wallet can be a more secure place to store your cryptocurrency than in an online or mobile wallet. This is especially true if the storage device is frequently taken offline, for example an old laptop.
- Easy to use
- Private keys not stored on a third-party server
- If you are connected to the internet there may be security weaknesses
- If your computer dies and your crypto is not backed up, then it will not be recoverable
- Your computer is vulnerable to malware and viruses
- Anyone else that uses your computer, for example computer repair, would be able to access your cryptocurrency
- Hardware Wallets
Hardware wallets are generally more secure than hot wallets, although they are slightly less user-friendly than web and desktop wallets. There are lots of different models, with different functionality, but overall, they are great for storing large amounts of cryptocurrency and offer more control.
- If the hardware device has a screen, and is therefore not dependent upon a computer, it is the most secure way to store crypto long-term
- Stronger security than all other wallets
- Can be cumbersome for beginners but essential for large quantities of crypto storage
- Difficult to get hold of
- Paper Wallets
Before wallets could be stored on hardware, paper wallets were the standard for cold storage. This involves printing out your public and private keys on a piece of paper, which is then stored in a secure place.
- This is one of the most hacker-proof wallet choices
- Private keys are not stored on a third-party server
- It requires more effort to transfer and switch cryptocurrencies
- Necessary to have greater technological understanding
Cryptocurrency theft is now an industry that is worth millions of dollars; and with the staggering figure of $1.1 billion dollars of cryptocurrency already stolen this year, it is evident that owners must seriously consider their storage options. As discussed, there are several different crypto-wallets, but as with all assets of high value, insurance is highly recommended.
While crypto exchanges and ICOs are uninsurable within the Lloyd’s marketplace, the cold storage of cryptocurrency, D&O and tech E&O of blockchain technology has been approved and is rapidly increasing in demand. Many insurers are still not yet convinced that the cryptocurrency business is large enough for premiums to cover possible losses, however Safeonline is committed to be a leader in the emerging technology risk space.
If you would like to find out more about cryptocurrency wallets, their threat landscape or how to insure them, please do not hesitate to get in contact at firstname.lastname@example.org