Types of Wallets

Types of Wallets

Crypto wallets are where you can store your tokens and NFTs. There are several different types of wallets that are appropriate for different use cases.

Hosted Wallet

Advantages: Crypto is stored by a trusted exchange like Coinbase or FTX. Users do not need to keep track of seed phrases to buy and sell their crypto. Their accounts can be recovered through their email address.

Disadvantages: Hosted wallets cannot interact with most of the crypto ecosystem, like NFT marketplaces, decentralized exchanges and crypto games. They also do not allow storage of NFTs.

Best Use Case: You want to buy and hold popular crypto tokens like BTC and ETH without worrying about losing your seed phrase or cold wallet.

The most popular and easy-to-set-up crypto wallet is a hosted wallet. When you buy crypto using an app like Coinbase, your crypto is automatically held in a hosted wallet. It’s called hosted because a third party keeps your crypto for you, similar to how a bank keeps your money in a checking or savings account. You may have heard of people “losing their keys” or “losing their USB wallet” but with a hosted wallet you don’t have to worry about any of that. The main benefit of keeping your crypto in a hosted wallet is if you forget your password, you won’t lose your crypto. A drawback to a hosted wallet is you can’t access everything crypto has to offer. However, that may change as hosted wallets start to support more features.

Hot Wallet

Advantages: Hot wallets, usually managed through a browser extension, allow you to connect to Web 3-enabled websites like NFT marketplaces and decentralized exchanges.

Disadvantages: Users need to self-custody their seed phrase. Hot wallets are also prone to security breaches when interacting with smart contracts created by scammers.

Best Use Case: Use a hot wallet to interact with Web 3 protocols but store a minimal amount of tokens and NFTs on it. The bulk of your crypto holdings should be on a hosted or cold wallet.

A self-custody wallet, like Coinbase Wallet or MetaMask, puts you in complete control of your crypto. Non-custodial wallets don’t rely on a third party — or a “custodian” — to keep your crypto safe. While they provide the software necessary to store your crypto, the responsibility of remembering and safeguarding your password falls entirely on you. If you lose or forget your password — often referred to as a “private key” or “seed phrase” — there’s no way to access your crypto. And if someone else discovers your private key, they’ll get full access to your assets. Why have a non-custodial wallet? In addition to being in full control of the security of your crypto, you can also access more advanced crypto activities like yield farming, staking, lending, borrowing, and more.

Cold Wallet

Advantages: The most secure way to store crypto tokens and NFTs.

Disadvantages: Managing tokens stored on a hardware wallet requires additional steps, like plugging an external device into your computer and clicking buttons on it to confirm transactions.

Best Use Case: Long-term storage of tokens and NFTs that you do not plan on selling anytime soon.

A hardware wallet refers to a crypto wallet where the seed phrase is stored offline for maximum security. Also, users that use a hardware wallet can only approve transactions from their wallet by plugging their external device to their computer to “sign” transactions.

A common misconception with cold wallets, which often look like flash drives, is that the tokens and NFTs are stored within the device itself. This is incorrect. The tokens and NFTs are stored on the blockchain network like any other wallet. The only difference is that the seed phrase and signer for the wallet are stored offline, making it impossible for hackers to access.