As a newcomer, or even an intermediate user of crypto, the options for securing your crypto assets can be murky and daunting. Hardware wallets, hot wallets, paper wallets, what does it all mean? Today we’re going to break it down.

Definitions

All crypto wallets can be categorized into one of two types: cold wallets and hot wallets. The distinction is quite simple:

A cold wallet is one that generates and stores your private keys offline, while a hot wallet can expose your private keys to the internet if you or the wallet is not careful.

Hot wallets are convenient and keep your crypto assets liquid, but not secure, while cold wallets are much more secure at the expense of liquidity and convenience.

To understand why the distinction is made around whether the keys are exposed to the internet, just know that anything that connects to the internet is vulnerable to hacking and infiltration. Your personal computer and mobile device is susceptible to trojans, phishing, keylogging, and a slew of other nefarious methods of stealing sensitive information. Thus the best approach to safeguarding your wealth is to keep your sensitive information as far away from the internet as possible.

Now that we understand the difference, let’s look at the different types of cold and hot wallets out there today and their trade-offs for managing crypto:

Cold Wallets

Paper wallet

A paper wallet is simply a piece of paper with your private and public keys printed on it. This is a basic and bulletproof way to keep your private key away from hackers — as long as the key pair was generated offline machine (or by calculated by hand, which you can do if you are a math whiz with a lot of free time. If you are interested, you can learn more about how public addresses are derived mathematically from a private key here). As you can imagine though, a paper wallet is not very convenient as you would need to manually type in your very long public and private keys any time you’d want to move your funds. If you type in the wrong public address, you can send your funds to the wrong place and lose your funds forever. Paper wallets are best used for long term storage of funds you don’t intend to move very often.

Advantages:

• Unhackable (besides the moment of transaction)
• Ideal for holding large amounts of crypto over long periods of time

Disadvantages:

• Illiquid
• Requires very careful typing to avoid mistakes when transferring funds
• Can be lost or destroyed

Hardware wallet:

A hardware wallet is a digital device that stores your private keys on its firmware and signs transactions for you without exposing your keys to the internet. You connect your device to your computer via USB whenever you want to transfer funds and confirm transactions with a tap of a button on the device. To date, this is the most secure option, and is the one most intermediate crypto investors use. The drawbacks are that the devices are pricey and that it is time consuming to move funds out of a hardware wallet to an exchange to trade and vice versa.

Advantages:

• Most secure method of storing crypto assets
• Can manage multiple cryptocurrencies

Disadvantages:

• Slow to move funds, especially when trying to capture trade windows
• Difficult for people unfamiliar with tech
• Often hard to get online
• Beware of buying from re-sellers like Ebay which may sell compromised devices

Examples: The two best hardware wallets on the market to date are the Ledger Nano S ($92) and the Trezor ($105).

Hot Wallets

Online wallet (web wallet):

Online wallets are any wallets accessed through your web browser. These include exchanges such as Binance, Bitfinex, and Gemini. Online wallets are the most liquid and are unavoidable if you want to trade your assets. Unfortunately, online wallets are notoriously prone to hacking. Hundreds of millions of dollars have been hacked and lost forever on these platforms. For instance, Bitfinex only has one cold wallet that they use to store bitcoin. As a smart crypto holder, you want to be sure to minimize your exposure to these wallets as much as possible while taking advantage of the liquidity.

Advantages:

• Most liquid, allows for maximum leverage of assets owned
• Ideal for small amounts of currency for specific actions

Disadvantages:

• Your private keys are stored with a third party on a server
• Your funds are vulnerable to phishing, DDOS attacks, malware, and server breaches

Examples: Coinbase, Bittrex, Gemini, Kraken

Desktop wallet:

A desktop wallet is an application that sits on your personal computer which stores private keys as a file on your disk drive. This is a good alternative to a web wallet as you can enjoy the peace of mind in knowing where your keys are. It is relatively more convenient than both paper and hardware wallets.

However if you lose your computer, suffer a hard drive crash, fall prey to a trojan or keylogging attack, your funds can be lost. A great way to enjoy semi-cold wallet with a desktop computer is to install your wallet on a computer you don’t typically use to connect to the internet. Essentially this setup would serve as a large Nano or Trezor.

Advantages:

• Easy to use
• Large graphical user interface
• Store keys on your own computer

Disadvantages:

• Susceptible to trojan attacks
• If you lose or break your computer, your keys may be lost

Examples: Exodus Wallet, Multibit, Armory, Bitcoin Core

Mobile wallet:

Mobile wallets serve a similar function as desktop wallet, but on your mobile device. They are a great way to access your funds on the go. They provide the convenience and advantages of a desktop wallet and an online wallet, but also suffer from the combined disadvantages in security.

Advantages:

• Manage your crypto assets wherever you are
• Convenient and fast to send and receive funds

Disadvantages:

• Extremely vulnerable to a wide array of attacks including keylogging, bluetooth vulnerabilities, phishing, rooting
• Phones are prone to being lost

Examples: Coinomi, Jaxx, Mycelium, Breadwallet

TL;DR Here’s a nifty Venn Diagram for you:

What crypto wallet is right for you?

Choosing the right wallet depends on your technical expertise, amount of funds you are holding, and how often you want to move your funds. Different wallets out there serve a different type of user.

Arcana Wallet aims to cater to the ideal overlap by marrying the security of a cold wallet with the convenience and functionality of a hot wallet. Visit arcanawallet.com to learn more.