Cryptocurrency is an entirely digital means of value storage and transfer. However, it shares a highly important feature with traditional fiat currency — like cash, it’s necessary to store your cryptocurrency in a wallet.
In the cryptocurrency ecosystem, the term “wallet” refers to software, online or offline, that allows a cryptocurrency owner to access their cryptocurrency holdings. Wallets typically come in three different flavors: online or “hot” wallets (software wallets), and hardware wallets (dedicated thumb drive-like devices that offer the highest level of security).
Wallets can be somewhat complicated. If you trade cryptocurrency on a crypto exchange, you’ll have a wallet directly on the exchange for the cryptocurrency you use to trade. A crypto exchange wallet, however, is very different from a separate, dedicated cryptocurrency wallet software.
If you’re not sure where to start with crypto wallets, read on — this article will explain everything you need to know about crypto wallets in 2020.
When you send or receive any cryptocurrency, you’ll do so from a wallet.
Your crypto wallet can be considered your “address” on the blockchain network that a cryptocurrency operates on. Cryptocurrency wallet addresses exist in the digital realm and are accessed through cryptocurrency wallet software or hardware.
Cryptocurrency wallets hosted by exchanges are functionally similar to a bank account. An online crypto exchange wallet doesn’t provide you with full control over your cryptocurrency, but makes accessing and sending or receiving cryptocurrency simple.
Cryptocurrency wallet software is normally installed on a smartphone or computer that provides users with access to their private keys and therefore gives full control over a cryptocurrency wallet and the crypto it contains.
Cryptocurrency wallet hardware is functionally similar to software wallets in that users retain full control over their cryptocurrency, but with an added benefit — crypto wallet hardware is completely offline and is considered to be the most secure means of storing crypto.
A cryptocurrency wallet in its simplest form consists of two elements: a private key, and a public key.
The private key associated with a wallet is the “password” used to access it, and consists of a long, complex combination of letters and numbers. A public key is the public address of a cryptocurrency wallet and is used to receive or send cryptocurrency.
Private keys should be stored in a highly secure manner. Anybody with access to the private key associated with a wallet can access the cryptocurrency it stores, so it’s very important to take private key security seriously.
Cryptocurrency wallets typically allow users to interact with a blockchain using a private/public key pair. Crypto wallets that are “hosted” by exchanges such as Binance or Coinbase won’t provide access to your private key. They will store them on your behalf.
Cryptocurrency allows users to retain full control over their capital, but also makes security the responsibility of the user. While private and public key pairs may sound confusing, the practical use of most cryptocurrency wallets is relatively straightforward. Here’s how the various types of cryptocurrency wallets work:
Exchange or online wallets are typically accessed through cryptocurrency exchange accounts. Online wallets are easy to access and use, but don’t provide full control over user funds and are at risk of hacking.
Software wallets are installed on a smartphone or a PC, and store private keys on behalf of the user. Software wallets require a few extra steps to set up, but once configured are as easy to use as exchange wallets — with an added layer of security and control.
Hardware wallets are dedicated hardware devices, similar to USB drives, that offer the highest level of security. Users connect a hardware wallet to a PC in order to access their cryptocurrency — when the wallet is not connected to a PC, it’s completely inert and virtually unhackable.
When choosing the right cryptocurrency wallet for your needs, the most important factor to consider is security. While online wallets may be easy to access, it’s important to remember that any online wallet is much less secure than an offline wallet. In simple terms, if you don’t control your private keys, you don’t control your cryptocurrency.
Setting up a simple software wallet is a relatively simple process. A strong cryptocurrency storage methodology involves establishing a software or hardware wallet for long-term storage and using it in combination with online wallets, sending and receiving cryptocurrency for each individual trade or purchase.
Factors to consider when choosing a crypto wallet include:
How secure is your exchange wallet? There are many different exchange wallets to choose from. For more information on choosing an exchange, see the CryptoTrader.Tax guide to cryptocurrency exchanges in 2020.
Which device will you store your crypto on? The wallet software you use to store your crypto varies depending on whether you are using macOS, Windows, Android, or iOS.
How often will you trade? If you’re a frequent trader, you’ll find yourself frequently making transactions from a secure offline or hardware wallet to your exchange wallet in order to trade. It’s important to select a wallet that makes this process simple.
Do you need to track your transactions? Depending on your tax reporting requirements, you may need to track every individual cryptocurrency trade made from your wallet. Crypto tax reporting software such as CryptoTrader.Tax automates this process and allows you to generate your necessary crypto tax reports based on your wallet transaction history with the click of a button.
Online cryptocurrency wallets are also referred to as “hot” wallets, and are not considered a secure option for long-term crypto storage. Online crypto wallets are in almost every case operated by cryptocurrency exchanges, and are not safe places to store cryptocurrency.
An online wallet is essential, however, for purchasing or trading cryptocurrency. Below, we’ve identified the best online crypto wallets.
Kraken is widely considered one of the most secure cryptocurrency exchanges and, notably, has never experienced a hack or loss of user funds. Kraken provides users with access to cryptocurrency wallets for many different cryptocurrencies, and offers a simple, easy to use wallet interface.
Wallets hosted with Kraken offer enhanced security features such as email confirmations for withdrawals, configurable account timeout, time lock settings, and two-factor authentication. While online wallets are the least secure option for holding cryptocurrency, Kraken is the “least insecure” online wallet available.
Checkout Kraken wallets and other offerings here.
Coinbase is an online cryptocurrency exchange and brokerage that offers users a browser-based exchange UI alongside a dedicated mobile app for iOS and Android. The Coinbase wallet supports a diverse range of cryptocurrencies, and integrates a number of features that allow users to participate in ICOs, access airdrops, or interact with decentralized applications.
Like Kraken, Coinbase is not considered a secure wallet, as the user private keys are withheld. Security features include two-factor authentication, as well as access to a 12-word recovery phrase that allows users to recover lost wallets.
Learn more about Coinbase offerings here.
Metamask is a cryptocurrency wallet browser extension that supports ERC-20 tokens — cryptocurrencies issued on the Ethereum blockchain. The Metamask browser plugin provides private key access and is typically used to interact with web-based decentralized applications.
Compared to a cryptocurrency hardware wallet, which is functionally equivalent to a bank vault, Metamask can be considered as the wallet or purse you keep in your pocket for everyday purchases. Metamask is not a secure means of storing cryptocurrency, but is an effective and simple way to connect to and use decentralized applications online.
Software wallets are a more secure means of storing cryptocurrency while making it instantly accessible at any time. Unlike online exchange wallets, software wallets are managed entirely by the user, including private keys — but remain connected to the internet.
A software wallet is typically installed on a PC or smartphone, and allows users to record and store their private key, set up recovery phrases, and remain in control of their crypto at all times. A significant drawback of software wallets is that they are only as secure as the device that they are installed on — if the laptop you install a software wallet is hacked, for example, it’s likely that your software wallet will be compromised.
Many software wallets offer direct compatibility with hardware wallets, streamlining hardware wallet management.
Exodus offers software wallet apps for both PC and smartphone, and is an ideal software wallet solution for new crypto users. The Exodus app offers a built-in exchange alongside an extremely simple and easy to understand interface, while still providing the features expected of a software wallet.
Exodus supports an extremely wide range of cryptocurrencies and allows users to manage their own private keys. It’s important to note, however, that Exodus is closed-source, which means it’s not possible for the cryptocurrency community to audit the code that drives the Exodus app — users are forced to trust the developers of Exodus that the app is secure.
Electrum isn’t the most user-friendly wallet available today, but is one of the best Bitcoin-only wallets available. The original Electrum wallet application was published in 2011, making it one of the oldest wallet solutions in existence. The open-source nature of Electrum makes it possible for anybody to audit the code that drives it, making it a highly secure option.
Using Electrum, it’s possible to customize a wide range of security options. Electrum allows users to create complex wallets such as 2FA wallets or multi-signature wallets, delivering the greatest flexibility of any dedicated Bitcoin wallet available today.
Coinomi is a smartphone-focused crypto wallet that supports over 200 different cryptocurrencies, making it the ideal solution for a mobile multi-currency wallet. Coinomi isn’t the most secure crypto wallet on this list, as older versions of the Coinomi app have been targeted by hackers, but recent changes to the Coinomi code appear to have fixed this problem.
Coinomi functions as a reasonably secure mobile wallet for iOS and Android, but it’s best used in combination with a hardware wallet for storing large amounts of cryptocurrency in a secure manner. Importantly, Coinomi allows users to hold their own private keys, and offers a relatively easy to understand user interface.
Hardware wallets are the most secure wallet option available. Unlike the online or software crypto wallets, hardware wallets are completely offline and are virtually hack-proof. Hardware wallets allow users to send or receive funds only when the device is connected to a computer with access to the internet, and cannot send funds without a user pressing a physical switch or button on the device itself.
France-based Ledger is one of the longest-operating hardware wallet manufacturers. The Ledger Nano X is the latest offering from Ledger, and is visually identical to a standard USB thumb drive. Nano X users connect their wallet to any mobile device or computer with USB or Bluetooth, and are able to store 30 different cryptocurrencies on the device.
Ledger’s Nano X is one of the easiest hardware wallets to use and is widely regarded as the “gold standard” of cryptocurrency security. Ledger includes unique security features in the Nano X, such as a “plausible deniability” function that allows users to enter an incorrect password in order to access a dummy wallet — protecting user funds from physical attacks or extortion attempts.
To learn more about Ledger wallets, click here.
The Trezor is another highly popular hardware wallet manufactured by Satoshi Labs, the first crypto hardware wallet manufacturer in the world. The Trezor Model T improves on previous iterations of the Trezor product line, offering a touchscreen interface and far greater support for altcoins than the Ledger Nano X.
Trezor offers impressive functionality, allowing users to access conversion to fiat currency, atomic swaps, and additional security features that protect users from common PC threats such as keyloggers. Notably, the Trezor Model T presents all transaction requests along with details on the built-in touchscreen, ensuring users are aware of which service or cryptocurrency they are using at all times.
Checkout Trezor here.
The KeepKey, manufactured by ShapeShift, is a budget-conscious crypto hardware wallet that offers much of the functionality delivered by other more expensive hardware wallets at a lower price point. The KeepKey streamlines the backup and recovery process, allowing users to manage their cryptocurrency holdings in a fully secure manner.
ShapeShift, the manufacturer of the KeepKey, operates a cryptocurrency exchange platform of the same name, which allows KeepKey owners to trade crypto commission free directly from their KeepKey wallet, making it a strong choice for newer traders.
No matter which wallet solution you use, it’s important to remember that your cryptocurrency is only safe if your private keys were generated offline, are stored securely, and remain a secret — under your full control.
While online wallets deliver seamless ease of use, they aren’t safe for long-term storage. When trading or buying cryptocurrency, it’s best to only store cryptocurrency on exchanges or software wallets temporarily while in use. Long-term cryptocurrency holdings should be stored in dedicated crypto hardware wallets.
If you are leveraging crypto hardware wallets, it’s likely that you are a moderate to advanced crypto user.
For those investing, trading, and selling cryptocurrencies, it’s important to stay up to date with cryptocurrency-related tax obligations—specifically reporting your gains and losses from your trades. Ensuring that you keep up-to-date records of your cryptocurrency transactions is a critical element of any effective crypto tax strategy.
To learn more about how cryptocurrency income is taxed, checkout this complete cryptocurrency tax guide.
Today, tens of thousands of crypto investors all over the world use CryptoTrader.Tax to automate all of their tax reporting.
Simply sign up for an account for free, connect your wallets and exchanges, and generate your crypto tax reports with the click of a button.
Once generated, CryptoTrader.Tax reports can be provided to an accountant or imported into tax filing software such as TurboTax or TaxAct.
You can learn more about how CryptoTrader.Tax works here.