There are many different ways to store cryptocurrencies safely. Cryptocurrency owners can choose the wallet that best suits their needs. We've summarised the different wallet types along with their advantages and disadvantages.
Custodial wallet
Custodial wallets are wallets where a third party retains control over your private keys. This type of wallet is often used by crypto exchanges, with the security and custody of the cryptocurrencies in the hands of the provider. This offers convenience but also means that you don't have full control over your crypto assets.
Advantages:
No need to secure private keys yourself – the provider takes care of it
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 eliminated
Disadvantages:
You depend on the security and reliability of the provider
You have less control over your own cryptocurrencies
There's a risk of losing the cryptocurrency in case of security breaches of the provider
Note: Be aware that with custodial wallets, your crypto assets are legally owned by the wallet provider. Therefore, you should choose a provider like Bitpanda, which ensures secure asset protection through regular external security audits and adherence to industry standards.
Non-custodial wallet
Non-custodial wallets are wallets where you, as the user, have exclusive control over your private keys and thus over your cryptocurrencies. They offer more security and control, as no third party has access to your assets. 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 thus over the cryptocurrencies
There's a low risk that third parties can access the cryptocurrencies
Open source often allows 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: Careful handling is important when using a non-custodial wallet. Ensure that your software is always up to date and consider using multi-signature wallets for additional security.
Cold wallet
Cold wallets offer one of the most secure methods for managing cryptocurrencies as they operate completely offline. This includes hardware wallets, paper wallets and any other form of storage medium that is not connected to the internet. Due to this offline nature, cold wallets are largely immune to online hacking attacks, phishing attempts and other cybersecurity risks that threaten online wallets.
Advantages:
High security through offline storage
The wallet is protected from online hacker attacks and malware
It provides a long-term storage solution for crypto assets
It reduces the risk of theft by third parties
Disadvantages:
The cold wallet is less user-friendly and less quickly accessible for regular trading
There are initial costs when purchasing hardware wallets
There's a risk of physical loss or damage to the storage medium
Initial configuration and recovery of assets are complex
Note: It's important to manage cold wallets carefully to ensure access to cryptocurrencies in case of loss or damage to the device. For maximum security, we recommend storing the cold wallet in a safe place and possibly depositing backups of the private keys or recovery information in multiple secure locations.
Hardware wallet
Hardware wallets offer a very high level of user-friendliness and security and are therefore often best suited for managing cryptocurrencies. The private keys are stored on a cryptographically secured hardware device and cannot be read in plaintext. Therefore, hacker attacks are almost impossible, even if a computer is infected with a virus.
Advantages:
Hardware wallets are user-friendly
They have very high security features
Secure storage of the device is possible
Convenient solutions for recovering assets in case of loss or damage to the hardware
Disadvantages:
Hardware wallets are not free
Used hardware wallets could be infected with malware
They may seem complicated at first use
There's no way to recover the assets in case of loss or theft of the device
Note: To ensure that hardware wallets have not been compromised before purchase, you should never buy used hardware wallets and always obtain them directly from trusted manufacturers.
Paper wallet / physical 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 on which the keys are engraved. This type of wallet is, of course, always offline and therefore offers high security.
Advantages:
Depending on the type and creation of the paper wallet, there are high security features
It's inexpensive, simple and quick
Disadvantages:
If the printout with the private keys is lost, it cannot be recovered
It could be manipulated 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 generate the keys on the user's device. This means the keys are not sent to you over the internet.
Hot wallet
Hot wallets are crypto wallets that are constantly connected to the internet, allowing quick and convenient access to your cryptocurrencies – these include, for example, web wallets, mobile wallet apps and web-based desktop wallets. Due to their constant online connection, they are less secure against unauthorised access but offer higher user-friendliness for frequent trading and payments.
Advantages:
Hot wallets offer the easiest way to start crypto trading
You don't have to transfer funds when you want to sell them
A hot wallet is quick and inexpensive
There are high security features on trusted websites from providers like Bitpanda
Disadvantages:
Not every exchange offers wallet security at the latest technical standard
An exchange is inherently a "single point of failure" – if a component of the technical system fails, it can lead to a complete system failure
Convenience can lead users to no longer think about the security of management
You can't access your balance immediately
Note: Bitpanda stores all user assets in secure offline wallets that are state-of-the-art. In addition, users can secure their accounts using two-factor authentication (2FA). Users also have an overview of their active devices and sessions, can log out and close active sessions with another device. Furthermore, Bitpanda offers SSL encryption and protection against DDoS attacks. It's generally recommended to store only a small portion of your assets on an exchange and the majority of your coins in "cold storage" (offline).
Software wallet (desktop / mobile / online)
A software wallet offers high user-friendliness and high security features. Your balance is stored on a computer desktop or a mobile device such as a smartphone. You can access your cryptocurrency holdings immediately and have full control over your private keys, which are stored in a "single wallet file". For security reasons, this file is also encrypted, i.e., 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: Either you use a separate crypto wallet for each cryptocurrency you own, or you use a software wallet in which multiple cryptocurrencies can be stored.
Online wallet / web wallet
An online wallet is a type of software wallet that’s accessible via a web browser. It’s hosted on a server and allows users to access their cryptocurrencies over the internet. Although it's convenient and can be used from any internet-enabled device, it's generally considered less secure than other types of wallets, like desktop or hardware wallets, which offer offline storage of private keys.
Advantages:
You have immediate access to your cryptocurrencies over the internet
It’s integrated into many crypto exchanges or brokers for quick payments
An online wallet has user-friendly interfaces and is easy to set up
Disadvantages:
There’s a higher risk due to online storage of private keys
It’s vulnerable to hacking and phishing attacks
You might lose access if you forget login credentials or lack proper backups
Note: Maximise the security of your online wallet by conducting regular security audits and using features such as auto-logout timers and alerts for unfamiliar login attempts.
Web3 wallets: your key to the decentralised world
Web3 wallets let you do far more than manage cryptocurrencies, they're your gateway 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 with them seamlessly, without revealing personal data. Whether you're trading tokens, joining a DAO or collecting NFTs—Web3 wallets give you direct control over your assets without intermediaries.
For maximum control and security, make sure to use your private keys only on trusted devices and create regular security backups.
If you want to explore the Web3 world further, we recommend our articles What is Web3?, where you’ll learn how the new decentralised internet works, and What is a Web3 wallet?, which shows you how to interact directly with the blockchain and manage your digital identity.
