What Are the Different Types of Bitcoin Wallets?

There is no such thing as THE Bitcoin wallet.

There are multiple Bitcoin wallets available that you can use. And they come in different types.

To make it easier for you to understand, I classify each “type” of crypto wallet into three groups:

• Medium: What type of medium the wallet is stored on?
• Connectivity: Is the wallet connected to the internet?
• Custodianship: Who has access to, and therefore, control of the wallet’s private keys?

Crypto Wallets Based on Medium

In terms of medium, wallets can be broken into four main categories:

1. Software wallets
2. Hardware wallets
3. Paper wallets
4. Brain wallets

Software wallets

A software wallet is a computer program or mobile app that holds private keys online.

They connect to the Bitcoin network through trusted full nodes, centralized services (such as centralized exchanges), or are full nodes themselves.

There are three types of software wallets:

1. Desktop wallets that are used on a desktop or laptop computer.
2. Mobile wallets that work as a mobile “app” and are used on your smartphones
3. Web-based wallets that work as a browser extension and are used in your web browser.

Hardware wallets

A hardware wallet is a small, portable physical device (similar to a USB flash drive) that keeps your private keys isolated from the internet at all times.

To transact, a computer and the device manufacturer’s software application are required to authorize (or “sign”) the transaction since the private keys are kept offline.

Hardware wallets provide an extra layer of security than software wallets but most people don’t use them since they’re complicated and the devices themselves are expensive.

I recommend hardware wallets from  Ledger, Trezor, or SecuX.

Here’s an example of what a hardware wallet looks like:

Paper wallets

A paper wallet is literally a piece of paper with your address and private key printed or written on it.

Paper wallets are created by downloading software, then running the software offline (disconnected from the internet) to generate a public/private key pair which you print out on a piece of paper.

Here’s an example of what a Bitcoin paper wallet looks like:

Brain wallets

A brain wallet refers to a private key that is stored in the user’s memory in the form of a seed phrase, which is a sequence of 12-24 words (often called a “mnemonic phrase”).

It is similar to a paper wallet, except nothing is written down on paper. It’s all stored in memory….your memory.

If you’ve ever forgotten a password, ca brain wallets is definitely NOT for you.

Here’s a beautiful painting of the different wallet types by medium:

Crypto Wallets Based on Internet Connectivity

In terms of internet connectivity, wallets can be broken into two categories:

1. Hot wallets
2. Cold wallets (or “cold storage”)

Hot wallets

🔥 The “hot” in hot wallet refers to its connection to the interwebz.

A wallet is considered “hot” when:

• The wallet can be directly accessed through the internet or…
• The wallet is on a device that is always connected to the internet

If you can access your crypto directly through a web browser or through a desktop, laptop, tablet, or mobile phone that has an internet connection, then in the words of the legendary Paris Hilton, “That’s hot.”

Cold wallets

🧊 The “cold” in a cold wallet or cold storage refers to the lack of connection to the internet.

Because cold wallets are never connected to the internet, online theft of your bitcoins is impossible. A hacker would have to physically steal the device to gain access to your bitcoins.

Here’s a diagram showing how the different types of crypto wallets are classified as either a hot wallet or cold storage:

Crypto Wallets Based on Custody

When it comes to cash, there are two ways to keep it safe:

1. Do it yourself and assume full responsibility. (Hide it under your mattress or keep it in a safe.)
2. Trust someone else to do it for you. (Like a bank.)

The same thing applies to cryptocurrencies under the concept of “custody“.

With cryptocurrencies, “custody” refers to the ability of a trusted entity or third party to hold and protect its customers’ private keys and cryptocurrency holdings.

In terms of custody, Bitcoin wallets can be broken into two categories:

1. Custodial wallets: the wallet provider has access to your bitcoin.
2. Non-Custodial wallets: the wallet provider does NOT have access to your bitcoin.

Custodial Wallets

A custodial wallet is controlled by a trusted entity, with the user typically having to access its contents via a web interface. These sites store private keys for you so you don’t have to worry about them.

Custodial wallets are also known as “hosted wallets“. Wallets are considered “hosted” because a third party holds your crypto for you, similar to how a bank holds your money in a savings or checking (or current) account.

 

Wallets provided by centralized crypto exchanges (CEXs) are a common example of custodial wallets. They hold your bitcoins and other cryptocurrencies in an account, and they manage and control the keys.

This means that they have full control over your funds.

You only have permission to send and receive bitcoin.

There’s a popular saying in the crypto world:

 “if you don’t control your keys, you don’t control your coins.”

If you keep cryptocurrency on an exchange, then it is the custodian of your private keys. You’re trusting it with your keys in the same way you’d trust a bank’s vault to hold your cash.

When using a custodial wallet, there’s always a risk that the trusted third-party entity involved could be hacked or you could lose all your crypto.

Many people like the convenience of using a custodial wallet since they don’t have to store their private keys themselves and have to worry about losing them.

Accessing a custodial wallet usually just requires a password, and even if you lose or forget your password, you can always contact the third-party provider to reset your password.

Non-Custodial Wallets

A non-custodial wallet gives the user full control over their funds and the associated private keys or seed phrase.

This sounds great but that also means that YOU are solely responsible for the security of your own private keys.

While non-custodial wallets provide the software necessary to manage your crypto, the responsibility of keeping your private keys safe falls entirely on YOU.

There is no third party or a “custodian” to keep your crypto safe.

If you lose or forget your private key or seed phrase, there’s no way to access your crypto. They are not stored on any online server by a trusted third party and are therefore much less susceptible to theft or hacking.

If you lose them, you will lose access to your funds forever. There will be no entity or third party that you can contact to help you recover your private keys.

And if someone else discovers your private key, they’ll get full access to your crypto.

That’s why when you entrust your bitcoins to nobody and take responsibility for your own funds by saving your private keys yourself, this is known as “self-custody“.

“Self-sovereignty” is an important concept in crypto.  It means that one should have access to their cryptocurrency without needing to depend on a bank or other trusted third party (TTP) to keep it safe or reveal/prove their identity. Using a non-custodial wallet helps you achieve this.

Conclusion

A Bitcoin wallet is necessary for storing private and public keys, which are used to send and receive transactions.

Different types of wallets offer varying levels of security and ease of use.

If security and long-term storage is your primary goal, then a cold wallet is a better option than a hot wallet.

An example of a cold wallet is a hardware wallet from Ledger, Trezor, or SecuX.

If you want to make frequent and fast transactions, without being solely responsible for the security of your wallet and seed phrase, a custodial hot wallet may be the better option.