Hot or Cold Storage? Choosing the Right Cryptocurrency Wallet
Cryptocurrency wallets are pieces of hardware and/or software that are used to send, receive, and store cryptocurrency, such as Ethereum or Bitcoin. Most cryptocurrencies have their own wallets that are designed specifically for them, but there are an increasing number of third-party wallets that are designed to hold multiple kinds of cryptocurrency at once. In order to buy, sell, or own cryptocurrency, you must have some sort of cryptocurrency wallet. There are five types of cryptocurrency wallets: hardware (also known as “cold” wallets), desktop, paper, online, and mobile.
The important thing to remember is that you are ultimately responsible for what happens to your cryptocurrency. Cryptocurrency transactions are not reversible, and the decentralized nature of cryptocurrency means that there is most likely no “control center” that can be reached for help should your coins be stolen or misplaced, though the creator of your wallet may offer some assistance. If you lose your private keys, you lose your cryptocurrency, just like you would lose the money in a lost fiat wallet. Therefore, it’s very important to properly research the different options for crypto storage.
Online vs. Offline Storage: “Hot” and “Cold” Wallets
Cold wallets are essentially small hard drives that securely store your cryptocurrencies offline, and are therefore less vulnerable to online hackers. The most popular options at the moment are made by Trezor and Ledger. They cost a pretty penny–Trezor at €89 (~$105USD), Ledger Blue at €274.80 (~$325USD), and the Ledger Nano S at €69.60 ($~82USD). However, they are far and away the best option for serious crypto investors with large amounts of crypto capital.
Another kind of offline wallet is what’s known as a paper wallet. Paper wallets combine software with physical backups in the form of printed keys or code words that will generate the public and private keys to your cryptocurrency. Paper wallets are quite a secure option, because your cryptocurrency is stored offline. Additionally, if you choose a paper wallet, you will always have access to your coins, because you have their private keys. However, paper is quite a delicate material–it can be lost, ripped, burned, or otherwise destroyed.
Software-based wallets (also known as “hot” wallets) are the more commonly-used option. Although there really isn’t a hot wallet that quite compares with the security of a cold wallet, the increasing popularity of cryptocurrency has caused the availability, variety, and quality of hot wallets to increase. Hot wallets are most often free to download and setup, though there are fees later on for sending and receiving capital. Setting up an account can take anywhere from a few minutes to a few days. Different wallets require different levels of identity verification, and the time that it takes to go through this process varies from platform to platform.
Types of Hot Wallets
Desktop wallets are the most secure option as far as hot wallets are concerned, but may not be practical for day traders or people who want the option to quickly buy and sell cryptocurrencies. Desktop wallets also offer the widest variety in terms of types of cryptocurrency that can be stored on them. However, the download and setup processes of some desktop wallets can be technically complex, and may be difficult for people who are new to cryptocurrency. Keep in mind that a hard-drive crash or a lost/stolen PC could also cause you to permanently lose access to your cryptocurrency, so having some kind of backup is quite important.
Mobile wallets run as smartphone apps. They are the most accessible and practical kind of software wallet, and are one of the better options for people who want the ability to quickly buy and sell crypto on-the-go. However, although some mobile wallets have multi-signature security options to protect users, they are not as secure as desktop or cold wallets, and should not be used for holding large amounts of Bitcoin. Some of the more popular mobile wallets (ie Coinbase and Copay) do not give their users access to their Bitcoins’ private keys, which can be problematic.
Online wallets are the type of wallet that is most vulnerable to hacking, and they should really only be used for short-term trading. They are accessible from any device that has an internet connection, and transactions made through online wallets are quick and easy. However, past failures of online Bitcoin exchanges Bitfinex and Mt Gox should give pause to anyone thinking of leaving their cryptocurrency in an online wallet for more than a few hours. Online wallets are best used in combination with a secure desktop or offline wallet. You could also consider downloading an encrypted browser, such as Epic, to make your transactions slightly more secure.
As cryptocurrency becomes more popular and technology is improving, more wallets are offering multiple options for access and overlapped technologies–a desktop wallet may also have a mobile platform and an option for a paper backup.
Best Practices for Keeping Your Wallet Secure
No matter which wallet you choose, the practices that you employ when using it will absolutely make a difference when it comes to keeping your coins secure. Here are some helpful tips:
- Wallets that you use frequently should have as little cryptocurrency in them as possible. Keep the bulk of your crypto in a wallet that you don’t access very often.
- Use applications like Authy or Google Authenticator to add an extra layer of security for logins.
- Use an encrypted browser to make transactions in online wallets and exchanges.
- Avoid making transactions on public networks.
- Encrypt your wallet and use a strong password. Do not forget your password!
- Keep multiple backups of your wallet in multiple locations, and make new backups regularly. Backups could be paper backups, and can also be stored on thumb drives and CDs.
- Keep your software up-to-date.
Which Wallet Should You Use?
If you are not using a cold wallet, one of the tried-and-true methods for choosing a wallet is just to use the wallet that was built for a particular coin by the makers of that coin. For example, Bitcoin has the Bitcoin Wallet, and Litecoin has Litecoin-QT. However, when you are downloading these wallets, be absolutely sure that you are getting the officially endorsed version on the official website of the coin. There are fake wallets on the web that are designed to steal or otherwise compromise your crypto and personal information.
When choosing a wallet, there are a couple of questions that you should ask yourself:
How often will I be purchasing, selling, and trading coins?
If the answer to this question is “often”, you should consider opting for a wallet that has a mobile interface and low fees. If you want to buy cryptocurrency and sit on it for a long time, you might think about a multisig desktop wallet with a paper backup, or just a paper wallet.
How much money am I going to put into my cryptocurrency?
If you’re planning on putting a lot of money into crypto, you need to choose one of the more secure options for storage. Savvy traders frequently use more than one option–a mobile wallet for quick trading, and a desktop wallet with paper backup for longer-term secure storage.