You might not believe it, but there are several types of crypto wallets. Josh Hornthal, vice president of design at Coinbase, talks about different sorts of crypto wallets, how to get one up and keep your digital assets safe with Boardroom. You can’t easily store cryptocurrencies in your physical wallet like you can dollars bills or debit cards. We’re sorry if you’ve tried and failed. But you can store them in digital wallets that live on the blockchain.
A crypto wallet is a program or physical medium to store your public and private keys safely. Cryptocurrency wallets also enable you to send and receive various cryptocurrencies, including Bitcoin, Ethereum, Solana, and beyond. Using one of these tools, you can keep track of your non-fungible digital assets as well.
What Are the Types of Crypto Wallets?
Let’s start by defining some key terms related to crypto wallets:
- Custody is a term used to describe the custody and protection of assets. Crypto custody is concerned with your private keys’ storage.
- A public key is a numerical value that allows you to receive cryptocurrency payments. This is similar to your crypto email address, which you can share with others confidentially to send and receive money.
- Private key: This is generally a string of letters and numbers that should never be shared with anybody. Your private key is what you’ll use to approve and sign transactions. “It’s kind of like swiping your card or signing your signature,” Hornthall said.
Software wallets are a type of cryptocurrency wallet that you can set up on your own. For the sake of this post, we’ll be focusing on how to set up software wallets. It’s worth noting that hardware wallets, such as Trezor and Nano Ledger S, may store your keys. Every crypto wallet has a public and private key, which are kind of like two-part passwords used to access and unlock your crypto wallet assets.
Individuals who use a self-custody wallet have sole responsibility for safeguarding their keys in any manner they see fit. The benefit of these wallets is that you have complete control over your keys and money. If you lose your recovery phrase, a 12-word private phrase generated by your wallet when you first use it, no one can assist you.
Bitcoin’s limited number of coins, which are generated through mining, gives rise to hosted wallets. Hosted wallets imply entrusting another party with your keys. Every centralized cryptocurrency exchange offers you one of these by default, according to Hornthal.
“It’s almost like when you go to your bank or log into your online bank account,” Hornthal added. “You see money there, but it’s really in the care of the bank. That’s how we’ve always done things.”
How to set up a self-custody wallet
Setting up one of these doesn’t require verification right away; you’ll have to do it when you want to deposit some cryptocurrency. Here’s a quick guide on how to set up a self-custody mobile wallet:
- Choose a wallet app such as Coinbase Wallet, Mycelium, or Metamask.
- Create an account and record your recovery phrase.
- Some wallet apps may allow you to add an extra layer of security, like facial recognition or creating a passcode.
- Begin sending, receiving, or trading crypto.
I utilized Coinbase’s Wallet to test the setup procedure, and after about four minutes, I was up and running. Unfortunately, you won’t be able to request a password reset if you lose access to your wallet because it doesn’t feature that functionality. Your only option for regaining control is to reveal your secret key, which is a sequence of 12 random words generated for you when you created the wallet.
Given that blockchain technology is distributed and decentralized, providers don’t save these on any server. And yet further, “If someone gets those 12 words, they have access to all of your money’s contents. Crypto, identity, and so on—they have access to it all.” Hornthal added.
You may log into your wallet on as many devices as you’d like as long as you have your recovery phrase on standby.
Every single cryptocurrency in the digital world has its own set of requirements, so double-check that your wallet supports the coin you wish to trade or connect with. Because Solana is written in a different programming language and uses a separate network than Coinbase Wallet, it will not operate in that wallet since it is incompatible.
Most importantly, if you want to interact with Ethereum-based applications, you’ll need a self-custody wallet and Ethereum. Hosted wallets are unable to accomplish this.
“You need a self-custody wallet if you want to go all the way with Web3.” nSelf-custody wallets can be web-based, desktop software, or even hardware devices, depending on your preference.
How to Set Up a Hosted Wallet
This is the choice that most people take because they want to buy and trade cryptocurrencies. If you sign up for an account with a cryptocurrency exchange like Coinbase, Crypto.com, or Binance, you will be offered a hosted wallet that is typically available via mobile apps. Although this may appear similar to the wallet described above, it isn’t since you’re handing your keys to someone else.
It’s critical to pick a platform you can trust to accomplish what you want with your cryptocurrency portfolio. All you have to do now is create an account, verify your identity, and move any crypto you already own. “If all you want to do is purchase, store, and invest in cryptocurrencies, a hosted custody wallet may be ideal,” said Hornthal.
Hosted wallets are viewed as less safe since someone else controls your keys, but on the plus side, it means less responsibility for you. nnChoosing the best crypto wallet is all about how you want to keep your money secure and what you plan to do with it in the long run. Fortunately, going from a hosted wallet to a self-custody wallet does not have to be done in an intimidating or complex manner.