There are many different ways to store cryptocurrencies – from online wallets, which combine user-friendliness with quick access, to hardware wallets that offer the highest level of security. Each type of wallet has its own features and security functions tailored to different user needs.
Cryptocurrency holders should always choose the wallet that best meets their needs. But only if you understand the different wallets can you decide which crypto wallet is best suited for beginners and which one is the best choice for experienced users. We’ve summarised the different wallet types along with their pros and cons for you.
Custodial wallet
Custodial wallets are wallets in which a third-party provider retains control over your private keys. This type of wallet is often used by crypto exchanges, with the security and storage of the cryptocurrencies lying in the hands of the provider. This offers convenience but also means that you don’t have full control over your crypto assets. However, if you’re wondering which wallet is the easiest to use for cryptocurrencies, custodial wallets could be the right choice.
Advantages
There’s no need to secure private keys yourself – the provider takes care of that.
You can often benefit from integrated services such as trading and swaps directly within the wallet.
Custodial wallets are easy for beginners, as more complex security measures are not required.
Disadvantages
You depend on the security and reliability of the provider.
You have less control over your own cryptocurrencies.
There is a risk of losing cryptocurrency in the event of a security breach at the provider.
Note: Be aware that with custodial wallets, your crypto assets are legally owned by the wallet provider. That’s why it’s advisable to choose a provider that undergoes regular external security audits and complies with industry standards for secure asset protection. Because when you’re considering which crypto wallet is best for you, convenience and security should always go hand in hand.
Non-custodial wallet
Non-custodial wallets are wallets where you as the user have exclusive control over your private keys and therefore your cryptocurrencies. They offer more security and control, as no third party has access to your assets. For many crypto enthusiasts, this is a key factor when deciding which crypto wallet offers the best level of security and independence. However, they also require a higher level of responsibility for securing and managing your keys.
Advantages
You have full control over the private keys and therefore over the cryptocurrencies.
There is minimal risk that third parties can access your cryptocurrencies.
Open-source solutions usually allow code verification.
Disadvantages
You have full responsibility for the security of the private keys.
It requires a higher level of technical understanding and care.
If you lose the keys or backup information, there’s no way to recover the cryptocurrencies.
Note: When using a non-custodial wallet, careful handling is essential. Make sure your software is always up to date and consider using multisignature wallets for added security.
Cold wallet
Cold wallets offer one of the most secure methods of managing cryptocurrencies, as they are operated completely offline. This includes hardware wallets, paper wallets and any other type of storage medium that is not connected to the internet. Because of their offline nature, cold wallets are largely immune to cybercrime such as online hacking attacks, phishing attempts and other cybersecurity risks that threaten online wallets. If you ask some crypto investors “What’s the best crypto wallet?”, many will answer: cold wallets. However, alongside their advantages, they also come with certain disadvantages.
Advantages
High security through offline storage.
Protected from online hacker attacks and malware.
A long-term storage solution for crypto assets.
Reduced risk of theft by third parties.
Disadvantages
Cold wallets are less user-friendly and slower to access for frequent trading.
Upfront costs involved when buying hardware wallets like Ledger.
Risk of physical loss or damage to the storage medium.
Initial setup and recovery of holdings are complex.
Note: Cold wallets must be carefully managed to ensure access to cryptocurrencies in the event of device loss or damage. For maximum security, we recommend storing the cold wallet in a safe place and, if possible, keeping backup copies of private keys or recovery information in several secure locations.
Hardware wallet
Hardware wallets offer a very high level of user-friendliness and security, which is why they are often the best choice for managing cryptocurrencies. As a result, hardware wallets frequently rank high in comparisons evaluating what the best crypto wallet is. The private keys are stored on a cryptographically secured hardware device and cannot be read in plaintext (the unencrypted, directly readable form of data). Therefore, even if a computer is infected with a virus, hacking attacks are virtually impossible. If you want to know which wallet is best for cryptocurrencies, you should weigh the pros and cons.
Advantages
Hardware wallets are user-friendly.
They have very high security features.
Secure storage of the device is possible.
Convenient options exist for recovery of holdings in case of hardware loss or damage.
Disadvantages
Hardware wallets are not free.
Used hardware wallets could be infected with malware.
They can seem complicated at first use.
If the device is lost or stolen, there is no way to recover the holdings.
Note: Make sure that your hardware wallet has not been compromised in any way before purchase. That’s why it is highly recommended to never buy used hardware wallets, but always source them directly from trusted manufacturers.
Paper wallet
A paper wallet is a form of cold storage and refers to a physical document that contains your public and private keys, usually in the form of QR codes. Physical wallets can also take other forms, such as metal plates with engraved keys. This type of wallet is, of course, always offline and therefore offers a high level of security.
Advantages
Depending on the type and creation of the paper wallet, high security standards are possible.
It is inexpensive, simple and quick.
Disadvantages
If the printout with the private keys is lost, it cannot be recovered.
It may be compromised from the start if the computer is infected with malware.
Note: It only takes a few minutes to create a paper wallet. Open-source services are available online, but they generate the keys on the user’s device. This means the keys are not sent to you via the internet.
Hot wallet
Hot wallets are crypto wallets that are constantly connected to the internet, allowing fast and convenient access to your cryptocurrencies. These include web wallets, mobile wallet apps and web-based desktop wallets. Due to their constant online connection, they’re less secure against unauthorised access but offer greater user-friendliness for frequent trading and payments. Still, you should weigh the pros and cons and not rely on convenience alone.
Advantages
Hot wallets provide the easiest way to get started with crypto trading.
Your coins are instantly available, so you can sell them immediately without transferring first.
A hot wallet is fast and cost-effective.
Strong security features are available on trusted provider websites like Bitpanda.
Disadvantages
Not every exchange offers cutting-edge wallet security.
An exchange is inherently a “single point of failure” – if one component of the technical system fails, it may result in a complete system outage.
Convenience can lead users to neglect wallet security.
Note: Bitpanda stores all user holdings in offline wallets that meet the latest technological standards. In addition, users can secure their accounts using two-factor authentication (2FA). They also have visibility over their active devices and sessions, can log out, and end active sessions from another device. Bitpanda also offers SSL encryption and protection against DDoS attacks. In general, you might consider keeping only a small portion of your holdings on an exchange and the majority of your coins in cold storage (offline).
Software wallet
A software wallet offers high user-friendliness and strong security features. Your balance is stored on a computer desktop or a mobile device such as a smartphone. You can instantly access your cryptocurrency holdings and retain full control over your private keys, which are stored in a “single wallet file”. For security reasons, this file is also encrypted, meaning you can use a custom passphrase to access it.
Advantages
Disadvantages
A software wallet can be hacked if the computer or mobile device is lost.
If your computer or smartphone is connected to the internet, your balance is online.
Using public Wi-Fi networks is not safe for accessing your holdings.
Note: You can either spread your cryptocurrency across multiple crypto wallets or use a software wallet that can store multiple cryptocurrencies.
Online wallet / web wallet
An online wallet is a type of software wallet accessible via a web browser. It is hosted on a server and allows the user to access their cryptocurrencies via the internet. While it can be used conveniently from any internet-connected device, it is considered less secure than other types of wallets, such as desktop or hardware wallets, due to the online storage of private keys.
Advantages
You have instant access to your cryptocurrencies via the internet.
It’s integrated with many crypto exchanges or brokers for fast payments.
An online wallet has user-friendly interfaces and is easy to set up.
Disadvantages
Higher risk due to online storage of private keys.
Vulnerable to hacking and phishing attacks.
Access can be lost if you forget login details or lack proper backups.
Note: Maximise the security of your online wallet by conducting regular security audits and using features like automatic logout timeouts and notifications of unknown login attempts.
Web3 wallets: your key to the decentralised world
Anyone exploring the question “what is a crypto wallet” will soon come across Web3 wallets. They allow far more than just managing your cryptocurrencies – they grant access to decentralised applications (DApps), NFT marketplaces and DeFi protocols.
Unlike traditional wallets, Web3 wallets act as a digital identity in the Web3 ecosystem. You can log into platforms seamlessly without revealing personal data. Whether you're trading tokens, joining a decentralised autonomous organisation (DAO) or collecting NFTs – with a Web3 wallet, you control your assets directly and without intermediaries.
For maximum control and security, however, you should ensure you only use your private keys on trusted devices and create regular security backups.
