3 Types of Crypto Wallets for Beginners

If you want to transact on a blockchain network like Bitcoin or Ethereum, you will first need a place to store your cryptocurrency. This storage location is called a cryptocurrency wallet.

There are three types of crypto wallets:

Paper Wallets

Hardware Wallets

Software (online) Wallets

In this guide, we will explore the 3 different types of crypto wallets, as well as the difference between custodial and non-custodial wallets and hot and cold wallets.

New to crypto? Read our Crypto for Beginners guide here!

A blockchain wallet allows users to store, manage, and trade cryptocurrency assets. It also allows users to interact with DeFi (decentralized finance) and trade NFTs (non-fungible tokens). 

The primary function of a crypto wallet is to store your private key, which is necessary to transact on any blockchain network.  

It is important to note that your crypto is never stored on a wallet itself, but on a blockchain (such as Bitcoin or Ethereum). The private key held in your wallet simply unlocks your blockchain address, which is where the crypto is actually stored.  

Before we explore the different types of cryptocurrency wallets, let's take a moment to understand what exactly ‘public’ and ‘private’ keys are.

Note: Interested in learning what you can do with a crypto wallet? Read 3 Ways to Earn Yield in DeFi

All crypto wallets come in two forms: custodial and non-custodial.  

• In a custodial wallet, an exchange holds your private key for you. A popular example of such an exchange is Coinbase. Custodial wallets do not allow for interaction with Web3 as a user does not have direct access to their keys.  
• In non-custodial wallets (sometimes called self-custody wallets), the user has direct access to their keys, and, therefore, complete control over their digital assets. This control permits the owners of non-custodial wallets' direct interaction with a blockchain. With self-custody wallets, crypto is traded on decentralized crypto exchanges (DEXs), such as Uniswap. If you'd like to learn more about the tastycrypto non-custodial crypto wallet, check it out here!

This article will focus mainly on the three different types of non-custodial wallets. For a deeper dive into this subject, check out our custodial vs self-custody wallet article.

Note: New to crypto? Check out our crypto glossary for beginners!

• A paper wallet is a printed piece of paper that has your private key written on it.
• Paper wallets are best for users who rarely plan on interacting with their owned cryptocurrencies.
• Paper wallets in themselves are not secure. 

The first kind of crypto wallet on our list is the most basic: the paper crypto wallet.  

A paper wallet is simply a printed (or hand-written) sheet of paper that has written on it your private key and possibly scannable QR codes.  

Though paper wallets are completely disconnected from both the internet and blockchain, the keys on them do indeed represent keys on the blockchain which are still active and can be used to locate cryptocurrency.  

One of the biggest drawbacks of paper wallets is the fact that they are stored on paper. If the paper gets wet or is burnt in a fire, you will not be able to read your private key (or seed phrase) and the representative crypto will be lost forever. A water/fireproof safe is necessary for the secure storage of a paper wallet.  

Paper wallets also make the process of transacting with blockchain networks tedious: a Bitcoin private key is a 256-bit string.  

• Hardware wallets are physical devices that store the private key.
• Hardware wallets can be both connected and disconnected from the internet. 
• Hardware wallets offer a more secure place to store cryptocurrency than paper wallets. 

In blockchain technology, a hardware wallet is a cryptocurrency wallet that stores private keys on a hardware device, such as a USB drive.  

The hardware wallet has features of both ‘hot’ and ‘cold’ wallets (which we will soon discuss).  

Hardware wallets are like paper wallets in that they allow their owners to safely store their private keys offline.  

In addition to safeguarding your private keys offline (where they can never be hacked), most hardware wallets allow users to sign and confirm blockchain transactions by simply plugging their device into a computer.  

After a transaction is complete, a user can unplug their device, and not have to worry about it being constantly connected to the internet. This constant connection makes a wallet vulnerable to threat. 

Two of the more popular hardware wallet providers include Ledger and Trezor. 

• Software wallets are both the most efficient and risky type of wallet.
• Software wallets include browser extension wallets, mobile app wallets, and desktop app wallets. 

Software wallets are the most popular wallets in the crypto world. This type of wallet is always connected to the internet. This constant connectivity allows users to seamlessly and speedily interact with DeFi protocols. Borrowing and lending, staking, swapping tokens, and trading on DEXs (decentralized cryptocurrency exchanges) are a breeze with a software wallet. All DEXs deploy smart contracts to swap crypto between parties.

However, this connectivity does indeed come with some downsides. Since a software wallet is constantly connected to the internet, it is at constant risk of being hacked.  

Threats to software wallets are not limited to cyberspace.  

If you misplace or lose an unlocked device upon which your wallet is located, the recovering party could very easily gain access and drain the crypto from your wallet. It is therefore important to always have any device that contains a software wallet safeguarded by a password. 

Let’s explore the different types of these online wallets. 

Sometimes, people refer to a wallet as simply a ‘hot’ or ‘cold’ wallet.

• A hot wallet is any wallet that is always connected to the internet, and therefore always at risk of being hacked.
• A cold wallet is any wallet that is not connected to the internet. A paper wallet would be an example of a cold wallet.

Hardware wallets share features of both hot and cold wallets. When a USB flash drive is not connected to the internet, a hardware wallet is considered a cold wallet. Once that USB gets plugged into an internet-connected computer, it becomes a hot wallet.

The Ethereum blockchain is not compatible with the Bitcoin blockchain. For this reason, you will need to have a wallet for each network if you want to interact with both of these networks.  

Electrum and Mycelium are two widely-used Bitcoin wallets while MetaMask and Coinbase both offer popular Ethereum-based wallets.  

The third most popular blockchain network is Binance. This network also has its own distinct wallet: Trust Wallet.  

Determining the type of wallet best suited for you depends on a few factors. 

How often do you plan on interacting with blockchain?

 If you want to purchase popular cryptocurrencies like BTC or ETH to hold over a long duration, a cold storage wallet solution may be best for you. An example of cold storage would be a USB flash drive. When crypto is held on devices like these, your wallet is not connected to the internet and therefore not at risk of being hacked. 

If you plan on swapping crypto and/or interacting with decentralized finance applications frequently, a software wallet may be your best option. Within these types of wallets, desktop and mobile wallet applications offer the best security.  

Do you tend to lose or forget things easily?

If you tend to misplace things and are generally not well organized, you may want to consider a custodial wallet. Unlike non-custodial wallets, if you forget your password credentials for a custodial wallet, you will be able to recover them through your broker.  

tastytrade offers a custodial wallet. With this wallet, you can trade: Bitcoin, Bitcoin Cash Ethereum, and Litecoin.

After your tastytrade account is open, you will need to enable cryptocurrency trading.  

tastytrade, Inc. and tastylive, Inc. are separate but affiliated companies.

tastytrade, Inc. provides its brokerage customers with access to cryptocurrency trading with Zero Hash Liquidity Services LLC, MSB # 31000181510564, and Zero Hash LLC NMLS # 169937. Zero Hash LLC is licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services. tastytrade, Inc. is a separate company and isn’t an affiliate company of Zero Hash Liquidity Services LLC or Zero Hash LLC. Cryptocurrency accounts aren’t protected by SIPC coverage. Cryptocurrencies aren’t covered by the FDIC, which covers fiat currency. Cryptocurrency trading isn’t suitable for all investors due to the number of risks involved, including volatile market prices, illiquid market conditions, lack of regulatory oversight, market manipulation, and other risks. You’re solely responsible for evaluating your financial circumstances and determining whether or not trading cryptocurrencies is appropriate for you. Only the following cryptocurrencies are currently available for customers who reside in New York: AAVE, BAT, BTC, BCH, LINK, ETH, LTC, PAXG, and MATIC. Cryptocurrency trading isn’t yet available for customers who reside in Hawaii.

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