What Kind of Cryptocurrency Wallet Should I Use?

Exchange Wallet (Custodial)

An exchange wallet is an account on an exchange that allows a user to hold various types of cryptocurrencies supported by the exchange. Having funds in your wallet on an exchange is crucial for access to cryptocurrency trading markets or exchanging your crypto assets back to fiat currency. There are many other features that some exchanges provide users with, for example lending services, ability to get interest on crypto assets, visa debit cards, and lots more. To fully leverage some of these features, it is required that you have funds on your exchange wallet.

One thing to note is that since users’ funds are held by the exchange, the user doesn’t have complete control over their funds, hence, exchange wallets are categorized as custodial wallets. As we’ve seen in the past, sometimes this security is breached and funds can be stolen.

We always recommend that your crypto assets, when not in use, are stored off of exchanges. Mobile or desktop wallets come in really handy when you simply want to use your cryptocurrency to spend or transfer to another user. If you are planning on simply holding on to your cryptocurrency, hardware or paper wallets will serve you best.

Pros:

• Ease of access to funds for trading, lending, and much more
• Ability to earn interest on some exchanges
• Deposit insurance on applicable exchanges

Cons

• Lack of control and ownership of funds
• Vulnerable to hacks
• Vulnerable to exchange outages/maintenance/downtime

Mobile Wallets

Mobile wallets are a great middle ground between desktop and exchange wallets. Mobile wallets come in both categories – custodial and non-custodial. Custodial mobile wallets are connect to an exchange and give you the ability to purchase cryptocurrency within the app, as well as, access to other features like trading, lending, borrowing, and many more. A non-custodial mobile wallet is not connected to an exchange, and gives you complete access and control over your crypto assets.

A mobile wallet can easily be downloaded from the App store or Google Play store. Once a mobile wallet of your choosing is downloaded, you can set up you wallet as a new wallet in the app or restore a previously existing wallet by using your secret/backup phrase. It is important to note here that for non-custodial wallets, you are able to access your crypto funds on both devices – desktop and mobile. You simply need to feed each wallet with the same backup/seed phrase and you will have access to the same funds.

Once the mobile wallet is set up, users can send and receive cryptocurrencies supported in that mobile wallet right from their phone, as long as they have an internet connection. Mobile wallet apps also feature QR codes and scanners, making sending and receiving cryptocurrency even easier.

Pros

• Extremely accessible
• QR codes make sending and receiving easy
• Ability to purchase crypto from the wallet, on applicable wallets
• Pin and password protection

Cons

• Lose your device, lose your funds (if seed/backup phrase is not backed up)
• Vulnerable to mobile viruses
• Lack of access to features like lending, borrowing, etc (applicable to non-custodial wallets)

Software/Desktop Wallets

A software or desktop wallet enables users to easily manage their crypto assets on their desktop. Software wallets are downloaded onto the users’s computer. Users are easily able to create a new wallet or restore a previously created wallet. Most wallets have easy to navigate user interfaces showing wallet information, balances, transaction history, and some even have a contact book of previously used addresses. Some desktop wallets offer a cold-wallet functionality as a feature, where users can easily disconnect their desktop wallet from the internet for enhanced security.

Software wallets fall into the category of Non-Custodial wallets, since you have complete access and control over your crypto assets. How this differs from exchange wallets that are custodial in nature, is that you have the complete responsibility of maintaining access to your funds via your desktop wallet. When you download your desktop wallet for the first time, you will be asked to ‘backup’ your wallet by copying down a set of 12 to 24 words. These words are your seed phrase and are the only way to regain access to your non-custodial/desktop wallet should anything happen to your computer. It is extremely important that you backup your seed phrase and store it in a waterproof and fireproof enclosure.

Pros

• User has complete control and ownership of crypto assets
• Ability to function as a cold wallet
• Easy setup and use
• Pin and password protection

Cons

• Lose your device, lose your funds (if seed/backup phrase is not backed up)
• Lack of access to features like lending, borrowing, etc
• Limited access to trading assets
• Vulnerable to personal computer hacks

Hardware Wallets

A hardware wallet is composed of a physical device that stores access to your crypto assets. Hardware wallets comes in many forms, some look like USB devices, while others look like a phone. They can be connected to your computer/mobile using a separate cable or via bluetooth. Storing your cryptocurrency in a hardware wallet is one of the safest ways to hold on to your crypto assets. Hardware wallets are offline and access to the world is eliminated since it is a physical device. The advantages of a hardware wallets are primarily its unbeatable security and the ownership and control users have over their own funds.

In order to use a hardware wallet, you need to plug it in to your computer/mobile device and use the interface that either comes with the wallet and is installed automatically, or can be downloaded from the company website.

Pros

• User is sole point of contact with the wallet
• No third party risk
• Offline, hence safe and inaccessible to hackers

Cons

• Longer setup
• Need to purchase device
• Usually need to download interface on desktop to spend funds