Choosing the Right Wallet: Understanding the Basics

A crypto wallet is an essential tool for anyone who wishes to own cryptocurrencies. A wallet does not store your cryptocurrencies in a centralized manner like a traditional bank account can. Your cryptocurrency funds are stored in a decentralized manner on the blockchain. The crypto wallet allows you to interact with the blockchain by sending, receiving, or making transactions in cryptocurrencies like Bitcoin and Ethereum. There are several ways to access your crypto wallet: computer via desktop crypto (Exodus), on mobile apps (Coinbase Wallet), or online via a browser extension (Metamask).

Public Key and Private Key: What is the difference?

Like a bank account that has an IBAN (public) number and a PIN (private), crypto wallets have a public key and a private key.

The public key is a series of numbers and letters and it is used for receiving cryptocurrency without compromising the security of your wallet.

The private key should never be shared. It allows you to access your cryptocurrency funds on the blockchain. Sharing your private key with someone is equivalent to giving them access to your crypto wallet.

For more information on the differences between public and private keys, read our article on asymmetric cryptography.

Hot Wallet and Cold Wallet: What is the difference?

Among the large number of different wallets, it is possible to distinguish two main categories of wallets: hot wallets and cold wallets. Hot wallets are connected to the internet and are therefore more convenient for everyday transactions. Cold wallets are not connected to the internet and provide a higher level of security for storing large amounts of cryptocurrency. For more information on the differences between these two categories of wallets, read our article on Hot Wallet vs Cold Wallet.

"Custodial" or "Centralized" wallet

Easy to set up and use, centralized wallets are those provided on platforms such as Binance or Coinbase. With this type of wallet, the user does not own their private keys. Furthermore, platforms offering centralized wallets, host their clients' private keys online.

This type of wallet has the advantage of being easy to use, particularly when it comes to the day-to-day management of one's cryptocurrencies. It is also possible to use the support service of centralized exchange platforms in case of forgetting one's password. However, it presents many risks. On the one hand, the user is not the owner of their private keys. This means that at any time, they may be prohibited from withdrawing their funds by a centralized platform or accessing their account for example. On the other hand, private keys are stored online, which exposes them to internet attacks.

Finally, the custodial wallet is easy to set up and use, but it presents many risks in terms of data centralization and cyberattack.

"Non custodial" or "Decentralized" wallet

Harder to grasp, decentralized wallets are available on applications, via web extensions, local hard drive, physical support, etc. Unlike the custodial wallet, the non custodial or decentralized wallet puts the management of private keys back in the hands of users. This means that using a decentralized wallet allows the user to be in control of their private keys without the intervention of an intermediary. This also means that in case of loss of their private keys, there is no recourse to recover them.

This type of wallet has the advantage of owning one's private keys. It also allows for less exposure to internet attacks. On the other hand, the disadvantage is that it requires good organization of one's activities to not lose their private keys. Necessary for other features such as access to decentralized finance or NFT exchange platforms, decentralized wallets are generally used to hold cryptocurrencies for the long term.

In conclusion, the decentralized wallet requires the user to be fully responsible for their data. While it is one of the best ways to secure one's funds, not everyone feels capable of managing such responsibility. Nonetheless, the decentralized wallet allows for better protection against malicious online attacks or the mismanagement of a centralized platform.

Hardware or physical wallet

Among the category of cold wallets, physical wallets are devices that usually take the form of a USB key, a smart card or even a small smartphone. The physical wallet is not difficult to set up. Private keys are therefore stored directly on the device. Its main advantage is that it is very little, or never connected to a computer or the internet, and that it allows you to stay out of reach of online attacks.

The physical wallet is one of the most secure ways to hold one's cryptocurrencies. However, the loss of one's private key will result in a loss of funds held in the wallet.

Paper wallet

The paper wallet takes the form of a physical support, generally paper, on which the private keys are written. Very popular between 2016 and 2017, the paper wallet presents risks. It is generally a very fragile support, susceptible to being damaged or lost. On the other hand, the main interest of the paper wallet is that it allows you to never hold your private keys on a computer or on the internet.

Which wallet to choose?

It is difficult to answer this question without hesitation. Each type of wallet has advantages and disadvantages.

A physical wallet like Ledger is one of the best ways to secure one's cryptocurrency funds. However, losing one's private keys would make the physical wallet inaccessible. A custodial wallet provided by a centralized exchange platform allows for the recovery of one's password in case of forgetting it. However, a non custodial wallet like Metamask would protect the user in the event of the bankruptcy of a centralized exchange platform to whom the user had entrusted their funds.

A professional trader who regularly manages their cryptocurrencies will prefer a centralized wallet. A long-term investor who makes few transactions will prefer a physical wallet. Finally, the person who wants to use decentralized finance will use a decentralized wallet.

Choosing a wallet will depend on the level of experience and needs of each person. But it is difficult to say that one wallet is better than another. That's why, as with investments, it is preferable to diversify the types of wallets used.

Ultimately, before choosing a wallet, it is important to know one's goals to find the wallet that is best suited to one's needs.

Check out our recommended article, which has been read by other users interested in this topic: Which Ledger to choose? Complete comparison of Ledger hardware wallets