The different types of crypto wallets: Explanations and recommendations

Cryptocurrencies rely on wallets to function. While coins like Bitcoin (BTC) dominate headlines, crypto wallet technology is what makes transferring value onchain possible. All wallets follow similar cryptographic standards, but they come in many forms with distinct features. As more wallet brands emerge, consumers have more choices than ever – but that doesn’t make selecting the best digital wallet for cryptocurrency any easier.

In this guide, we’ll explore the different types of crypto wallets, highlighting their pros and cons to help you find the crypto storage solution that’s right for you.

How do crypto wallets work? Explaining how to use a cryptocurrency wallet 

Fundamentally, a cryptocurrency wallet is a tool for storing, transferring, and managing crypto assets. However, instead of holding coins or tokens like a virtual purse, wallets provide users with privileged access to unique addresses on blockchain networks and broadcast transaction details to peer-to-peer (P2P) networks. When a user sends cryptocurrency from their wallet, the wallet "signs" the transaction using a critical passcode called a private key. If the signature passes a blockchain's validation process, the transaction is recorded on the distributed ledger and moves to the recipient's address.

Crypto wallets also generate public keys, which are safe to share when receiving cryptocurrency. However, most wallets contain multiple public key addresses, each designed for specific P2P protocols. For example, Bitcoin (BTC) cannot be sent to an Ethereum (ETH) address, and vice versa. Crypto traders must always verify that the blockchain address they’re using matches the digital asset they intend to send to avoid losing funds.

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Cryptocurrency wallet types 

Although every crypto wallet functions using private and public keys, there are different categories to choose from. The type of wallet a user selects impacts key factors like security and ownership rights.

Hot vs. cold wallets 

One of the primary distinctions in crypto wallets is between hot and cold storage solutions. Hot wallets are software-based and always connected to the internet, making them accessible on mobile and desktop devices. 

In contrast, a cold wallet stores private keys offline, providing a higher level of security. Since cold wallets keep private keys disconnected from the internet, they’re considered the gold standard for crypto security. Even with firewalls and encryption, hot wallets remain more vulnerable to cyberattacks due to their constant online presence. While hot wallets are typically more affordable and convenient, crypto investors favor cold wallets for long-term storage.

Here’s a quick overview of the different types of crypto wallets that exist:

• Desktop wallets: These are variants of hot software wallets designed to work on a PC or laptop.  Some are available as browser extensions on compatible web browsers, making it easier to interact with decentralized applications (dApps).
• Mobile wallets: Similar to desktop wallets, mobile wallets are software-based and support dApp integration. The key difference is that they operate on smartphones and are available for download through app stores like Google Play.
• Paper wallets: One of the original cold storage solutions, paper wallets contain a physical printout of a public and private key, often in the form of a QR code. While highly secure if stored properly, they’re less common today due to their susceptibility to issues like physical damage, smudges, or loss. 
• Hardware wallets: These have become a popular choice for cold wallet storage. Hardware wallets store the private keys in USB-like units and use cords or Bluetooth technology to connect to the internet when users want to make a transfer.  

Self-custody vs. third-party custody

Even though crypto wallets require private keys to function, they don’t always reveal this information to end users. Some wallets are custodial, meaning a third-party entity – often a centralized exchange (CEX) – controls the private keys on behalf of users. While individuals with custodial wallets technically own their crypto, they must trust the entity holding their private keys and remain exposed to counterparty risks.

True control over digital assets only comes when traders transfer their crypto to a self-custodial wallet. These wallets generate a private key during setup and provide it to users, usually as a human-readable seed phrase. While self-custodial wallets grant direct access to crypto holdings, they lack customer support and insurance protections. The trade-off for eliminating counterparty risk is that users must take full responsibility for securing their private keys and backing up their assets.

How to choose the best digital wallets for cryptocurrency

Since every crypto investor has unique goals and preferences, there isn’t a single “perfect” crypto wallet. However, there are a few core factors to consider when evaluating different wallet options and deciding where to store digital assets.

• Security: The most important factor when choosing a crypto wallet is its security standards. Cold wallets generally provide the highest level of security since they store private keys offline, protecting them from hacks. For those preferring software wallets, look for extra security features like two-factor authentication (2FA) and encryption to reduce the risk of cyberattacks.
• Reputation: A wallet’s security history matters. Check if it has faced hacks or scandals and review feedback on platforms like the App Store, Google Play, or crypto-focused forums for unbiased user opinions.
• Access to private keys: Custodial wallets may be suitable for investors who are comfortable entrusting private keys to a third party, especially if they want insurance protections. However, for full control over crypto assets, self-custodial wallets are the better choice, as they provide private keys during setup.
• User experience: While not as critical as security, a wallet’s UI/UX should be easy to navigate. Investors should explore different wallet layouts and features to find one that feels intuitive.
• Blockchain coverage: Not all crypto wallets support every blockchain network. Before downloading or purchasing a wallet, check its official list of supported coins and tokens to ensure compatibility with the desired assets.

Examples of crypto wallet types 

Custodial

• Coinbase: With hundreds of millions of users, San Francisco-based Coinbase remains the largest CEX in the U.S. and a major crypto trading hub. Users who sign up for a Coinbase trading account receive a custodial crypto wallet for their purchases. Note: This custodial Coinbase account is separate from the self-custodial "Coinbase Wallet," which is available as a mobile application and browser extension.
• Kraken: Founded in 2011, Kraken is one of the oldest U.S.-based CEXs and offers features for crypto traders of all skill levels. After completing know-your-customer (KYC) verification, users receive a custodial crypto wallet for their digital assets. Kraken also offers a separate self-custodial wallet application.

Self-custodial

• Exodus: Launched in 2015 by JP Richardson and Daniel Castagnoli, Exodus was designed to make crypto management more accessible. It remains a popular option due to its intuitive UI/UX and support for multiple cryptocurrencies.
• MetaMask: Since its 2016 launch, MetaMask has become the dominant self-custodial wallet for ERC-20 tokens. Initially released as a browser extension for Ethereum, it has since expanded with mobile apps and integrations with Ethereum Virtual Machine (EVM) chains like Avalanche (AVAX) and Arbitrum (ARB).
• Uniswap: Released in 2023, the Uniswap Wallet is a newer self-custodial wallet but is tied to one of the most respected decentralized exchanges (DEXs) in DeFi. Uniswap Labs designed it to provide users with seamless access to Uniswap’s DEX for yield farming and token swaps.

Hardware 

• Trezor: A pioneer in hardware wallet security, Czech-based Trezor was the first company to mass-produce a secure hardware wallet – the Trezor One. While the Trezor One is still available, the company has expanded its lineup with newer devices like the Trezor Model T, which offers additional features and functionality.
• Ledger: Based in Paris, Ledger is a leading hardware wallet provider known for its durable devices and proprietary Secure Element Chip. While the Ledger Nano S remains its flagship product, Ledger now offers premium models like the Bluetooth-supported Ledger Nano X and the touchscreen-enabled Ledger Stax.

Use CoinTracker for crypto portfolio tracking

No matter what types of crypto wallets you use to store your digital assets, CoinTracker has the software to accurately account for your transactions. CoinTracker’s Portfolio Tracker allows you to easily link your crypto wallets and exchange APIs for a detailed read on your web3 activities. CoinTracker also automatically imports all these details into IRS-compliant forms like Schedule D and Form 8949.

Discover why more than 2 million users trust CoinTracker with their crypto tax reports by getting started with a free account today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.