One of the biggest differences between cryptocurrencies and traditional finance is that with cryptocurrencies you have the opportunity to really own and hold the underlying asset. With this huge opportunity comes some responsibility, especially with regards to the best way to store your crypto and manage your private keys.
Within the maturing cryptocurrency industry there are different kinds of products and wallets. Today, we’ll walk through some of the different kinds and take a look at what makes each one distinctive.
How to secure your crypto assets
There are generally two different categories of cryptocurrency wallets: cold storage and hot storage. The main difference between the two types of wallets are ease of use and storage security.
1. Cold storage
Cold storage wallets allow access to your digital currencies without connecting to the internet.
Cold wallets are either hardware wallets or paper wallets. They are often compared to safe deposit boxes because you can use them for storing cryptocurrency for the long term.
Since they are not connected to the internet, cold storage wallets have fewer security risks than hot wallets (which are connected to the internet), but there are still precautions that users need to take in order to protect their cryptoassets.
- Hardware wallets
Hardware wallets store your private keys in the form of a hardware device. You need to plug them into an internet-connected device to transfer your crypto funds. Just like software wallets, hardware wallets are portable. Two examples of hardware wallets are the Ledger Nano S and Trezor.
- Paper wallets
Paper wallets are wallets that have printed versions of your public and private key QR codes. As one of the oldest methods of storing cryptocurrencies, the paper wallet is a time-tested method of storing cryptoassets.
2. Hot storage
Hot storage crypto wallets are digital wallets that are stored on a computing device and are connected to the internet. The benefit of using a hot wallet is that you can access your wallet easily and quickly.
The types of hot storage wallets:
- Desktop wallets
Desktop software that you download and install on your computer. You can’t access your cryptocurrency from any other computer or device except the computer on which it resides. When it comes to security, if your computer is hacked, you lose all your cryptocurrencies. A few examples of desktop wallets are Exodus, Jaxx, Atomic, and Electrum.
- Online/exchange-based/cloud wallets
An online wallet is a web-based wallet that stores your digital currencies and all other details on the cloud. You can access these wallets using any computing device, at any time, anywhere. A third party controls your online wallets, security and other processes (known as custodial wallets, which are kind of like traditional bank accounts). Your online wallets are more prone to theft and vulnerabilities due to third-party involvement. Online wallets save your private keys on third-party servers and are known as custodial wallets.
- Mobile wallets
Mobile wallets are another type of hot storage wallet that you can use on both Android and iOS devices. With mobile wallets, you can store your keys on your mobile device, and send, receive, trade, and even invest in cryptocurrencies instantly.
3. Securing your wallet
Depending on your cryptocurrency wallet, there are various ways of securing your digital assets:
Backing up your wallet
Your exact backup process will vary depending on the cryptocurrency wallet you are using. If you are using a cloud wallet, there will be a two-factor authentication and automated backup procedure to help you protect and recover access to your funds.
Another way of backing up your cryptocurrencies is to store your keys by printing them or etching them onto a durable surface (in addition to archival quality paper, some people have engraved their keys into stone or metal — the sky’s the limit, so you can get creative with this step).
That wasn’t too complex, was it?
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Upcoming Lesson: [Lesson 6] Cryptocurrency wallet