Different Types of Crypto Wallets: All You Need to Know

Crypto wallets are a necessary tool in the world of digital assets and exchange, as they’re the gateway to managing, storing, and transacting digital tokens. There is now a wide range of different types of wallets, each with pros and cons. In this article, we delve into their advantages and downsides.

Private and public keys, and seed phrase: What’s what?

Before we explore the different types of wallets out there, it’s important to set a few things straight. Let’s start with the basics.

One can manage different accounts from the same crypto wallet. Every time a new blockchain address (account) is created inside a wallet, a corresponding set of public and private keys is generated. Public keys are like a bank IBAN: they are visible to everyone and necessary for you and others to transfer money — a public key is a shortened version of your account in the blockchain.

The private key is for you and you alone: it’s like the PIN access to your online banking account, needed to check the funds and manage it. It’s important that it remains secret, as access to it means access to your money; whoever has it can easily drain your account.

Thirdly, there’s the seed phrase (a random set of English words), which corresponds to each private key, and it’s used to retrieve access to a particular address in case you lose the private key.

Ownership: Custodial and Non-Custodial

Crypto wallets can be custodial or non-custodial (AKA self-custodial). With custodial, traders have to trust a third party with their funds (they’re under the custody of a company), which also means private keys are retrievable in case they get lost. Owners of non-custodial wallets have full control over their assets, but no way to regain lost private keys, most probably resulting in permanent loss of funds.

Some wallet providers, like Coinbase, Binance, Crypto.com, and Exodus (Exchange) offer both options, thus reaching a wider audience by allowing clients to choose how their private keys are stored. Others are strictly custodial (most exchange wallets, but also Bitstamp, PayPal, and Robinhood) or non-custodial (MetaMask, Exodus, Ledger, and Mycelium).

Wallet Types

It’s important to master the above-mentioned concepts to understand how choosing a wallet type can affect your experience. Crypto beginners might start with a popular choice (perhaps a custodial software wallet), and people looking to store large amounts for a long period might probably be keen on keeping their money in hardware wallets. Users can opt for both custodial and non-custodial wallet options across different types of wallets, depending on their needs.

Software (‘hot’) Wallets: The most commonly used

Software wallets are applications or programs that can be installed on computers or mobile devices. They can be further divided into desktop, mobile, and web wallets. Desktop wallets — usually self-custodial — are directly installed on the desktop as a software program, and give full control over private keys. Examples include Exodus and Electrum. They’re a good option for users who prefer to control their assets locally and have strong security practices. Desktop wallets provide a balance between security and usability and support several cryptocurrencies. They can, however, be vulnerable to malware or hacks if the computer is compromised, and require regular updates and security precautions.

Mobile wallets are designed for smartphones, allowing users to access and spend cryptocurrency on the go. These are great for users looking for a convenient and portable wallet for everyday transactions. User-friendly and accessible anytime, anywhere, it’s often integrated with QR code scanning for easy payments. It’s also very convenient to stake or trade assets directly within the app. The downside is, that since they’re in the form of an app and connected to the internet, they’re vulnerable to theft if the phone is hacked or stolen.

Web wallets are accessible via a web browser. Some are custodial (Kraken, Coinbase, Binance) and others are non-custodial (MetaMask, Coinbase Wallet) — choosing one or the other depends on the level of security and backup measures you’re aiming for. Non-custodial web wallets are recommended for users who frequently interact with DApps and DeFi. The accounts are easy to set up and come integrated with the exchanges and DeFi services.

Cold Wallets

Hardware Wallets

The feature that distinguishes hardware wallets is the fact they enable storage 100% offline — hence also known as “cold” wallets in opposition to the “hot” ones, which are connected to the internet. All hardware wallets are non-custodial, meaning users fully own and control their private keys. Most popular ones come in the form of a physical device, like a USB pen equipped with security features, a smart card, or an SD card.

Their purpose is to provide a secure, offline solution for managing crypto assets without relying on a third party to hold the keys. This makes them an ideal choice for long-term storage and enhanced security for those who want to maintain full control over their cryptocurrency. Some desktop wallets can also be used without an online connection, offering users more security. Ledger and Trezor are two popular hardware solutions.

They are immune to online hacks, viruses, and phishing attacks. Users can store a wide range of cryptocurrencies, and physical access to the device is required for transactions, which adds an extra layer of protection. However, they can turn frequent transactions into a cumbersome task. Also, there’s the risk of the device getting damaged or lost — some enable some form of backup, but others don’t, thus leading to loss of funds.

But how do hardware wallets enable crypto transactions if they aren’t connected to the internet? They keep the private keys offline and use a process called offline signing. When a user wants to send crypto, the transaction details are created on an internet-connected device and then sent to the hardware wallet. The wallet, still offline, securely signs the transaction internally using the private key without ever exposing it. The signed transaction is then returned to the internet-connected device, which broadcasts it to the blockchain. This ensures the private key remains secure and never interacts with the online world, safeguarding the user’s assets.

Paper or Metal Wallets

Although kind of obsolete, this wallet format still exists. It’s basically having your public and private keys written down on a piece of paper or engraved in a metal piece. They usually include QR codes for easier scanning — the keys can be generated offline, on an air-gapped computer. QR generator websites shouldn’t be used, as no one can ever be sure if these generators are stealing the users’ information.

More cautious users won’t use a printer with an internet connection; they’ll simply write it down. Anytime data is sent to the printing device, there’s a chance that it can be intercepted by malicious actors. Storing your keys in paper wallets can be extremely risky as they can easily get lost, or damaged by fire or water. Metal wallets are another option. Private and public keys can be engraved in a piece of metal through different methods. Some companies doing this use materials that are resistant to fire and other agents.

Polkadot-Eco Wallets

There are a few Polkadot-Eco wallets worth mentioning. Polkadot.js is probably the most well-known and comes in the form of both a browser extension and a webpage. It is the official wallet for Polkadot and supports other Substrate-based blockchains like Kusama. It allows you to easily create, manage, and switch between multiple Polkadot accounts, and users can participate in Polkadot’s staking, voting, and governance functions from Polkadot.js. It’s ideal for developers and users who need full access to Polkadot’s network features — especially developers and advanced users because it enables access to extrinsics, metadata, and other chain-specific operations.

Subwallet only comes with a browser extension version and is compatible with Polkadot.js to make it easy to access and interact with Polkadot dApps. It also allows governance participation and other features.

Also accessible via a web browser extension and web interface, Talisman supports Polkadot and other Substrate-based chains (like Kusama, Moonbeam, and Acala) as well as Ethereum-based assets. One of Talisman’s most sought-after features is that it enables seamless interaction with the Polkadot ecosystem and bridges to Ethereum.

Nova Wallet is a mobile wallet available for iOS and Android — with a clean and user-friendly interface. Moving assets across chains is another positive aspect of Nova Wallet. You can participate in parachain auctions directly from the wallet, and participate in governance features like voting on referenda.

Ledger is one of the most well-known hardware wallets integrated with Polkadot.js. It provides secure, offline storage for your Polkadot and Ecosystem tokens. Besides managing assets, you can also participate in governance without fear of exposing your private keys.

Incognitee will be the first solution with a wallet allowing Polkadot users to transact and store crypto privately, without the data being publicly recorded in the blockchain. There will also be a wallet integration option, which will allow you to connect other wallets to do private transactions through Incognitee.

Which wallet is best for you?

Choosing the right wallet depends on your needs, technical ability, and security concerns. When it comes to control, custodial wallets are good for those who truly value privacy and security, as they’re the only ones in control of their own keys. Having sole custody over a wallet is also risky because there is no way to retrieve the funds in case access is lost. Non-custodial wallets are a great option for frequent traders and people who enjoy interacting with other blockchain Dapps, and like to have a backup in case something happens to their private key.

Now, the kind of wallet. Do you prefer to keep your wallet completely offline, or enjoy the easiness of exchanges and apps? Hardware ones are best for long-term storage and high-value holdings, but they might not be so user-friendly for beginners.

Software wallets offer convenience (especially mobile and web wallets) for daily use and are ideal for people starting out in the crypto world.

The best approach may be using a combination of wallets — keeping large amounts in a hardware wallet while using mobile or software wallets for smaller, daily transactions. As the crypto world evolves, so too will wallet technologies, providing users with more secure, efficient, and innovative ways to manage their digital assets.

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