Online wallet

Owning cryptocurrencies like Bitcoin and Ethereum is one thing – managing them securely and conveniently is another. An online wallet offers exactly that: quick access to your digital assets, no matter where you are. But how secure are online wallets really? What features do they offer and what should you look out for when creating an online wallet?

This guide shows you what an internet wallet is, how it works and what advantages and disadvantages it has. By the end, you'll know whether an online crypto wallet is the right choice for you and how to use it effectively.

• An online wallet, also called an internet wallet, is an internet-based wallet for crypto and can be particularly suitable for active trading of Bitcoin, Ethereum and other coins.

• Online wallets provide fast access to digital assets but may be more vulnerable to cyberattacks than other wallet types, which is why the security of your crypto assets largely depends on two-factor authentication and strong passwords.

• There are custodial and non-custodial versions of online wallets, with custodial wallets having a third party – such as a crypto exchange – manage the private keys, while with non-custodial wallets you control your assets yourself.

• Online wallets are among the so-called hot wallets, as they're permanently connected to the internet and therefore particularly flexible but also more security-critical than cold wallets, where private keys are stored offline.

Definition: What is an online wallet?

According to the definition, an online wallet is a web-based wallet for crypto assets that lets you manage coins and tokens. It allows you to easily manage, send and receive Bitcoin, Ethereum and other digital assets. Since it doesn't require physical storage, access is particularly flexible – whether on a smartphone, tablet or computer.

Thanks to their ease of use and quick availability, such internet wallets are especially popular with beginners and active traders. They offer a simple way to perform blockchain transactions without needing to install complex software or use a hardware wallet like Ledger.

Note: If you want to create a wallet, there are various options, depending on how you want to store and manage your crypto. For instance, there are dedicated wallet solutions for Bitcoin, the Bitcoin wallet, which is specifically optimised for managing BTC. If you want in-depth information on the subject, you can find more in our guide on “Creating a Bitcoin wallet”.

How does an online wallet work?

An online wallet provides a web-based interface through which users can manage their cryptocurrencies without needing additional hardware or physical storage media. Access is via a browser or an app.

Each online wallet uses a private key to sign transactions, enable access to your crypto assets and securely store your coins and tokens. Depending on the type of digital wallet, there are two approaches:

• Custodial wallets

• Non-custodial wallets

Which of these options is best suited as an online wallet for your cryptocurrency depends on how important control over your assets, security and ease of use are to you.

Creating an online wallet for cryptocurrencies – here’s how

Creating an online wallet is easy and takes just a few minutes. However, to manage your cryptocurrencies securely, you should consider a few important aspects. Here's a step-by-step guide:

1. Choose the best online wallet for your needs

There are many digital wallets that differ in features, security and control over private keys. Decide whether you want to use a custodial or a non-custodial wallet. The software of an online wallet determines what security features and user interface are available.

2. Create an account for the online wallet and set it up

Depending on the provider, registration is done via email and password or through a direct browser or app installation. Custodial wallets may require verification, while with non-custodial wallets you're usually ready to go straight away.

3. Activate security settings

After setup, you should immediately enable security measures:

• Enable two-factor authentication to protect your account from unauthorised access.

• choose a strong password and store it securely.

• in non-custodial wallets, write down the seed phrase and store it safely, as it's the only way to recover your wallet in an emergency.

4. Deposit cryptocurrencies into the wallet

To use your online crypto wallet, you need to deposit Bitcoin, Ethereum or other coins. You’ll receive a public wallet address which you can use for deposits. Alternatively, you can buy cryptocurrencies directly via a crypto exchange and send them to your wallet. All transactions are stored and verified on the blockchain to prevent manipulation.

Note: When depositing cryptocurrencies, be aware that some custodial wallets also offer the option to top up with fiat currency and convert it directly into coins and tokens.

5. Perform transactions securely

Once your balance is available in the online wallet, you can perform transactions and send and receive cryptocurrencies. Make sure to enter the correct wallet address of the recipient and carry out a security check before each transaction.

Distinction from digital wallets

Not every digital wallet is automatically an online wallet for cryptocurrencies. Well-known services like Google Wallet or Apple Pay are used for managing fiat money and belong to the traditional financial system. Fiat money is government-issued currency such as the euro or US dollar. Its value is based on trust in governments and central banks – not on intrinsic value.

Online wallets, by contrast, were developed specifically for cryptocurrencies like Bitcoin or Ethereum. They enable sending, receiving and managing digital assets via the blockchain – independently of traditional bank accounts.

What types of online wallets are there?

Online wallets come in various forms, differing by access type, platform and security model. While some wallets run directly in the browser, others exist as mobile apps or integrated wallets from crypto exchanges.

Note: Online wallets are considered hot wallets, as they are constantly connected to the internet. They provide quick access to cryptocurrencies but are more vulnerable to cyberattacks than cold wallets, such as hardware wallets (e.g. Ledger, Trezor), which store private keys offline.

Web wallets – browser-based online wallets

Web wallets work directly in the browser without requiring software installation. Their constant internet connection offers convenience, but also demands caution when handling login credentials.

Most web wallets are non-custodial. This gives you full control, but also means you must securely store your seed phrase. Some web wallets offered by crypto exchanges or platforms are custodial instead.

Mobile wallets – wallet apps on the go

Mobile wallets are software applications like apps for smartphones or tablets that allow user-friendly management of cryptocurrencies. They often offer additional features like QR code scanning for quick transactions, integration with DeFi applications, staking options and direct access to blockchain networks to securely manage coins and tokens.

Most mobile wallets are non-custodial wallets, so you retain full ownership rights over your private keys. However, there are also custodial versions, mainly from crypto exchanges or financial service providers, where the provider controls the keys.

Integrated wallets from crypto exchanges

Many crypto exchanges offer their own integrated online wallets, directly linked to the trading platform, allowing easy management of coins and tokens. These wallets are almost always custodial.

The custodial option is especially convenient for active trading, as no external transfers are needed. However, this also means you're dependent on the exchange's security measures and your cryptocurrencies could theoretically be frozen or restricted.

Best online wallet for beginners

Bitpanda offers an integrated wallet linked directly to its trading platform, making it easier to manage cryptocurrencies like Bitcoin and Ethereum. This wallet functions as a custodial wallet, with Bitpanda managing your private keys. This provides the benefit that you don’t have to secure the keys yourself, while still maintaining access to your digital assets at all times. Bitpanda places great emphasis on security and uses advanced technologies to protect your cryptocurrencies.

Advantages and disadvantages of online wallets

Whether an online wallet is the best option for managing and sending cryptocurrency depends on various factors. Here are the main advantages and disadvantages to consider.

Advantages of online wallets

• Easy to use: Online wallets offer quick setup and operation, which can make them ideal for beginners, as no special hardware or technical knowledge is required.

• Instant access to cryptocurrencies: since internet wallets are accessible from any internet-enabled device, they are especially suitable for active trading or quick blockchain transactions.

• Integration with crypto exchanges and DeFi: many custodial online wallets are directly linked to trading platforms, while non-custodial wallets can be used with DeFi applications, NFT marketplaces and dApps.

• Synchronisation across multiple devices: online wallets can be used on smartphones, tablets or computers, making them particularly convenient for active traders or users with several devices who want flexible access to their coins and tokens.

• No physical loss possible: unlike hardware wallets like Ledger, which can be lost or damaged, internet wallets remain available as long as login credentials are stored securely.

Disadvantages of online wallets

• Higher security risk due to internet connection: since internet wallets are always online, they are more vulnerable to phishing, hacking or malware attacks, putting digital assets at risk.

• Dependence on third parties (for custodial wallets): custodial wallets require trust in a provider or exchange, as access to assets could be limited or blocked due to platform outages or regulations.

• Loss of access if not backed up (for non-custodial wallets): non-custodial wallets require secure storage of the seed phrase, as a lost phrase can't be recovered.

• Private keys can be compromised: web wallets often store keys in the browser, making them more vulnerable than other solutions, which is why additional security measures like two-factor authentication are important.

Conclusion: Is an online wallet my best option for storing my cryptocurrencies?

Whether an online wallet is the best choice for storing your cryptocurrencies depends on how you intend to use your digital assets. If you trade regularly, want to carry out fast transactions or interact with DeFi applications and NFT marketplaces, an online wallet offers the advantage of simple and flexible access. It's instantly available, requires no additional hardware and can be conveniently used across different devices.

For long-term storage of large amounts of Bitcoin, Ethereum or other cryptocurrencies, however, an online wallet may pose certain security risks. As it is constantly connected to the internet, it is more vulnerable to cyberattacks, phishing and platform outages. If you're looking for maximum security, you might consider also using a hardware wallet, as it stores private keys offline and is better protected against external threats.

The right wallet choice depends on your individual requirements for security, flexibility and frequency of use.

Frequently asked questions about online wallets

Before deciding on an online wallet, you may have a few open questions – for example about costs, suitability for beginners or security aspects. Here you'll find answers to the most common questions, so you can choose the right wallet solution for you.

What does an online wallet cost?

Most online wallets are free to use. Wallet providers generally don't charge a fee for creating or managing the wallet. However, network fees apply when carrying out transactions, as each transfer is processed on the blockchain. These fees depend on the specific cryptocurrency.

Custodial online wallets provided by crypto exchanges may charge additional fees, such as for withdrawals or using certain features. Some non-custodial wallets offer optional paid features, like enhanced security functions or cloud backups.

Is an online wallet suitable for beginners?

Yes, an online wallet can be a good choice for beginners, as it's easy to set up and intuitive to use. Custodial wallets from crypto exchanges are particularly suitable for beginners, as they require no technical effort and no private key management.

With non-custodial wallets, users must securely store their seed phrase, as losing it means the wallet can't be recovered. However, those willing to engage with basic security practices can still use a non-custodial wallet as a beginner.

Are online wallets secure?

Online wallets are considered less secure than offline solutions due to their constant internet connection. Web wallets, in particular, which store private keys in the browser, are more vulnerable to security breaches.

The security of a custodial wallet depends on the provider. Reputable crypto exchanges use encryption, multi-factor authentication and offline storage of some assets. However, there's always a risk the provider could be hacked or restrict wallet access.With non-custodial wallets, security is your own responsibility. Those who create secure backups and use proven security measures like two-factor authentication can significantly reduce the risk.

More topics related to cryptocurrency

Want to deepen your understanding of cryptocurrencies? Then check out our detailed articles in the Bitpanda Academy to gain deeper insight into the world of digital currencies.

• Can Bitcoin be hacked?

• Storing cryptocurrencies securely

• How do I get started with cryptocurrency trading