How to Think About Cryptocurrency Wallets

This two-part article will introduce you to cryptocurrency wallets. Part 1 will outline the different types of wallets available and Part 2 will describe the differences and how to use them.

There are several options for storing cryptocurrency holdings depending on:

  • Your level of comfort with technology
  • How much you have invested in cryptocurrencies
  • Your personal desire for the storage method

The main point to remember is that the security of your cryptocurrency depends on the security of the cryptocurrency’s private key (address).

When you use a crypto exchange like Coinbase (and Coinbase Pro), the exchange holds the private crypto keys that identify your crypto holdings. In a previous series, I discussed public and private keys and how to use them.

It’s important to remember that the private key identifies your cryptocurrency holding, and it enables you to access your holdings from any computer or smart phone from anywhere in the world. But when you use a large exchange, you don’t have to use the private key.

Exchanges such as Coinbase, Kraken and Bittrex maintain control of your private keys. They have wallets to hold the keys and most of the large exchanges have very good security, plus insurance against losses. These exchanges will use “hot wallets” for active trading since they’re connected to the Internet. They use “cold wallets” for offline storage (not connected to the internet) so that the keys are kept away from hackers.

Coinbase says it keeps 98% of its holdings offline in cold storage and takes care of switching back and forth between hot (online) and cold storage so that users don’t have to worry about where their cryptocurrencies are stored or what their private keys are.

Some crypto exchanges, such as KuCoin, provide the ability to move your crypto from your “main account,” which is a cold wallet, to your “trading account,” which is a hot wallet.

If you would rather not be dependent on an exchange to access your crypto holdings, you’ll need to maintain responsibility for your private keys. As with the exchanges, you have a choice between cold and hot wallets. Each has different types to consider:

Cold Wallets:

  • Paper wallets
  • Hardware wallets

Hot Wallets:

  • Web wallets
  • Mobile wallets
  • Computer wallets

In Part 2 of this article, I will describe how to use all of the above wallets and the level of protection each offers.

Crypto basics review

With this knowledge you will be able to decide whether you’re willing to let others maintain security of your crypto holdings or take on that responsibility yourself. You can let an exchange act as your crypto bank, the same as if you had a bank hold your cash, or you can take total control, as if putting your money under your mattress.

For the basics on how to get started investing in cryptocurrencies and how to buy and sell various cryptocurrencies, review these articles:

If you’d like to learn much more about cryptocurrencies, crypto exchanges and the state of the crypto market, sign up for a free trial of my weekly Crypto Wealth Protocol newsletter.

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