Compared to exchanges, we analyze the alternatives to store Bitcoin on private hardware, software, and wallets.
- Crypto Wallets Summary
- Private Hardware Wallets
- Private Software Wallets
- Exchange Wallets
- Crypto Wallet Risks
No Financial Advice, Information only. Do your own research
Crypto Wallets – Different purposes
There are different purposes for different types of crypto wallets.
- Hardware wallets – Here, you probably want to store your crypto on a long-term basis. The downside is that you can’t earn interest or stake to receive APY yield.
- Software wallets – This is a hybrid between hardware wallets and exchange wallets. With non-custodial software wallets, you are still in control of the private keys, but there are many limitations on using your cryptocurrencies. For example, you can’t lend them to earn interest.
- Exchange wallets – There are two reasons to use custodial exchange wallets. Either you want to store most of your funds in non-custodial software wallets and hardware wallets and deposit them into exchanges to make trades and swaps. Or you want to store your cryptocurrencies on sale because you think it’s just more convenient if someone else keeps them for you, and also, in many cases, you can earn an APY yield on them.
1. Private Hardware Crypto Wallets
Private hardware crypto wallets are physical devices that store your cryptocurrency private keys offline. This makes them the most secure way to store your cryptocurrency, as they are not vulnerable to hacking or online attacks.
Hardware wallets typically look like USB drives or small computers. They have a built-in display and buttons, which you can use to generate and manage your private keys.
To use a hardware wallet, you first need to transfer your cryptocurrency to the wallet’s address. Once your cryptocurrency is on the wallet, you can use the wallet’s interface to send and receive cryptocurrency.
Hardware wallets are typically more expensive than other types of crypto wallets, such as software wallets or online wallets. However, the extra security is worth it for many investors.
Hardware Wallet Pros
Security: Hardware wallets are the most secure way to store your cryptocurrency. Private keys are stored offline on the device, making them inaccessible to hackers and other online threats.
Durability: Hardware wallets, such as water or fire, can withstand physical damage.
Ease of use: Hardware wallets are relatively easy to use, even for beginners.
Versatility: Hardware wallets support a wide range of cryptocurrencies.
Hardware Wallet Cons
Cost: Hardware wallets are typically more expensive than other crypto wallets.
Complexity: Hardware wallets can be more complex to set up and use than other crypto wallets.
Portability: Hardware wallets are less portable than other crypto wallets, such as software or mobile wallets.
Overall, hardware wallets are the most secure way to store your cryptocurrency. If you are serious about investing in cryptocurrency, I recommend using a hardware wallet.
2. Private Software Crypto Wallets
Private software crypto wallets are software applications that store your cryptocurrency private keys on your computer or mobile device. This makes them less secure than hardware wallets, but they are still a good option for many investors.
Software wallets are typically free to use and easy to set up. They also offer a variety of features, such as the ability to send and receive cryptocurrency, track your portfolio, and exchange currencies.
However, software wallets are more vulnerable to hacking and online attacks than hardware wallets. This is because your private keys are stored on your computer or mobile device, which can be compromised by malware or other security threats.
Software Wallet Pros
- Convenience: Software wallets are convenient and can be accessed from anywhere with an internet connection.
- Ease of use: Software wallets are typically easy to set up and use, even for beginners.
- Features: Software wallets offer a variety of features, such as the ability to send and receive cryptocurrency, track your portfolio, and exchange currencies.
- Cost: Software wallets are typically free to use.
Hardware Wallet Cons
- Security: Software wallets are less secure than hardware wallets, as they are more vulnerable to hacking and online attacks.
- Reliance on internet connection: Software wallets require an internet connection to access your cryptocurrency.
- Potential for errors: Software wallets are more prone to errors than hardware wallets.
Overall, software wallets are a good option for investors who are looking for a convenient and easy-to-use way to store their cryptocurrency. However, it is important to be aware of the security risks involved.
3. Exchange Crypto Wallets
Exchange crypto wallets are digital wallets that are hosted by cryptocurrency exchanges. This means that the exchange has control over your private keys and your cryptocurrency.
Exchange wallets are typically the easiest type of crypto wallet to use. They are also the most convenient, as you can use them to buy, sell, and trade cryptocurrency directly on the exchange.
However, exchange wallets are the least secure type of crypto wallet. This is because your cryptocurrency is not under your control. If the exchange is hacked or compromised, your cryptocurrency could be lost.
Exchange Crypto Wallets Pros
Convenience: Exchange wallets are the most convenient crypto wallet type. You can use them to buy, sell, and trade cryptocurrency directly on the exchange.
Ease of use: Exchange wallets are typically easy to set up and use, even for beginners.
Support: Exchange wallets offer support from the exchange, which can be helpful if you have any problems.
Exchange Crypto Wallets Cons
Security: Exchange wallets are the least secure type of crypto wallet. This is because your cryptocurrency is not under your control.
Counterparty risk: Your cryptocurrency could be lost if the exchange goes bankrupt or is hacked.
Fees: Exchange wallets typically charge fees for buying, selling, and trading cryptocurrency.
Overall, exchange wallets are a good option for investors looking for a convenient, easy-to-use way to store their cryptocurrency.
However, it is important to be aware of the security risks involved.
Crypto Wallet Risks
There are certain risks associated with non-custodial and custodial wallets. We will list all the risks we can come up with here, but they might not be limited to these.
- There is no way to recover a lost password to a non-custodial wallet.
- There are many ways in how you can lose your cryptocurrencies in a custodial exchange wallet (The exchange can run bad business, can go bankrupt, can be a scam or Ponzi scheme, can be hacked )
One way to minimize the risks is to diversify your portfolio. For example, don’t hold all your crypto in a single wallet or exchange.
Exchange Risks VS Rewards
As for all capital investments, storage, and management, you should always weigh your risks vs. your potential rewards.
- The risks with a custodial exchange are listed above, and the rewards are the possibility of earning a yield on your deposit with Binance Earn, Kucoin Earn, or similar.
- The risk with a non-custodial wallet is that there is no way to recover a lost password. The rewards are that you avoid all the risks associated with a 3rd party wallet provider.