Cryptocurrency wallets are important pieces of software or hardware. They store the private keys that you need to be able to send cryptocurrency, effectively giving you full ownership of your crypto portfolio. However, there are risks, as well as pros and cons, associated with most types of wallet.

For example, while hot wallets are convenient and quick to access, they are the most prone to theft and hacking. In contrast, hardware wallets offer much greater security, because they are cold, i.e. they do not connect to the Internet, but they do take more management and it takes longer to send and receive payments.

Hot Software Wallets

Crypto wallet options like the best Apple crypto wallets are convenient and easy to use, with access to more than 60 blockchains, across hundreds of cryptocurrencies, in addition to non-custodial services, low fees, and staking opportunities. Many of these wallets are installed on mobile devices, and are referred to as hot wallets because they connect to the internet. This means they can be used to quickly transfer, and receive, crypto.

But, because they are connected to the Internet, these wallets may be susceptible to cybercriminal activity. Generally, and especially if you have a sizable portfolio, it is recommended that you keep your portfolio in a cold wallet and only send enough crypto to your hot wallet for regular, daily transfers. Do ensure you keep your seed phrase safe, use multi-factor authentication, and create as strong a password as possible for your hot wallets.

Cold Hardware Wallets

Ideally, as well as a hot wallet for daily transactions and day trading, you will also have a cold wallet. A cold wallet is not connected to the Internet, which makes it impossible for hackers to digitally steal your private keys. The most common form of cold wallet is a physical wallet like the Trezor, although a few software wallets do offer cold storage as well as hot wallet features.

A cold wallet keeps private keys off the Internet, signing transactions before sending the transaction to the blockchain but retaining the private key in cold storage.  Cold storage is more secure but it can be cumbersome if you’re a regular crypto user. It is a good idea to keep the vast majority of your holdings in a cold wallet.

Cryptocurrency Exchange Wallets

To use a centralized crypto exchange, you have to add crypto to your exchange account. This is stored on the exchange and used for any transactions you initiate or complete. Crypto exchange wallets are the least secure method of storage.

Bybit, one of the world’s largest crypto exchanges, had $1.5 billion of its customers’ funds stolen at the beginning of this year, and users of Mt. Gox are still awaiting partial payout of the money they lost when the exchange went under more than ten years ago. Major exchanges do lose money, so you should only keep cryptocurrency on exchanges long enough to complete trades, before moving it back out to cold storage.

Multi-Signature Wallets

Multi-signature wallets are rarely used but are most commonly used by businesses and partnerships. They operate in a similar way to joint bank accounts. Any transaction through the wallet requires multiple cryptocurrency signatures using different private keys. If one or more of the required keys is absent, the transaction will not process.

This type of storage solution is secure and can be useful for businesses, but if you lose access to one or more of the keys, it can be very difficult to gain access to your cryptocurrency assets. Therefore, you should only use these wallets where it is strategically necessary and when the other party, or parties, are reliable and trustworthy.

Custodial Services

Custodial services are among the most secure means of storing cryptocurrency, but critics point to the fact that the user does not have access to their own private keys. A custodial service operates similarly to a bank. They receive and retain the private keys and you access funds either using online accounts or by speaking to account managers.

The service will keep the keys in cold storage, potentially even in physical vaults or safes. However, it can be long-winded and challenging to gain access to crypto stored in this way. It is a secure means of storing large amounts of cryptocurrency for long periods, but not convenient for daily use.

Paper Wallets

A paper wallet is a form of cold storage, at least regarding the fact that the piece of paper itself is never connected to the Internet. That piece of paper contains private and public keys. It can also contain a QR code that can be scanned to sign payments.

This form of storage is somewhat old-school, and inconvenient, and while the paper itself is a means of cold storage, using the keys typically still requires some form of connection to the Internet, when it is no longer as secure.