If you plan to invest in digital assets, you must know how to set up a crypto wallet. It’s also crucial to understand that there are several types of crypto wallets on the market. Each has a unique set of advantages and limitations. In this article, we will discuss both hot and cold wallets and explain the core differences between the two.
Setting up a crypto wallet isn’t rocket science, but storing your precious crypto assets safely and securely takes some preparation. While most processes aren’t technically difficult, knowing the basics to keep your digital assets safe and sound is crucial.
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What is a crypto wallet?
Let’s start at the beginning. Crypto wallets are digital programs allowing you to securely store, send, and receive cryptocurrencies such as bitcoin, ethereum, and dogecoin. It’s important to note that your actual cryptocurrency doesn’t physically exist in your wallet. Instead, your wallet stores the public and private keys to the underlying blockchain of that particular asset. The wallet uses these keys to track and manage your holdings on the blockchain.
The public key is more like a virtual address that you can share with others so they can make transactions with you. Meanwhile, the private key is a secret code you must keep to yourself. The private key gives you ownership over your cryptocurrencies. Therefore, you need it to access your funds and/or make transactions.
When you use your cryptocurrency wallet to send or receive funds, your wallet communicates with the blockchain to update the ledger. This ensures that changes in your holdings are accurately reflected.
Before we jump into the nitty-gritty of how to set up a crypto wallet, let’s look at the differences between the various types of wallets.
Types of crypto wallet
Cryptocurrency wallets include software wallets you can install on your smartphone or computer. Then, there are also hardware wallets, which are similar to USB flash drives. These are physical devices designed to store your keys offline, making them less vulnerable to breaches.
You can divide all these wallets into two main categories: hot wallets and cold wallets.
What are hot wallets?
A hot wallet is connected to the internet so that you can access it online. These wallets are generally used for storing relatively small amounts of cryptocurrencies that you plan to trade or use in everyday transactions. Despite being convenient, hot wallets come with certain risk factors. Because they are connected to the internet, they are more vulnerable to hackers and other security threats. Hot wallets are generally available as desktop, web, and mobile wallets.
There are two types of hot wallets:
- Hosted wallets (a.k.a. custodial wallets)
- Non-custodial wallets (a.k.a. self-custody wallets)
Hosted wallets
Hosted cryptocurrency wallets are digital wallets managed by third-party service providers — for example, a cryptocurrency exchange. These wallets are also called “custodial wallets” because the service provider holds custody of the private keys to the wallet. In other words, a third party stores your crypto assets on your behalf, much akin to how a bank holds your funds in a savings or current account.
Hosted wallets are typically web-based and can be accessed using a browser or mobile app. They are easy to set up (more on that later), and users can quickly buy, sell, and store crypto without worrying about managing their private keys.
The downside is that with hosted or custodial wallets, you entrust a centralized business with the custody of your digital assets. As a result, if the custodian is hacked, goes bankrupt, or acts maliciously at any point, you might as well kiss your funds goodbye. (As the saying in the crypto community goes; “not your keys, not your coins!”).
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Non-custodial wallets
As the name suggests, a non-custodial crypto wallet is the opposite of a custodial or hosted wallet. They allow users to manage their digital assets without relying on third-party custodians.
In other words, you have complete control over your funds in a non-custodial wallet so long as you have the private key. This is unlike a custodial wallet, where a centralized company or entity manages the assets on your behalf.
Non-custodial wallets are popular because they offer users more security and privacy than custodial wallets. That said, non-custodial wallets also come with risk factors. For instance, because the private key is the only way to access the funds, keeping it safe and secure is important. If you lose your private key, you may irretrievably lose your funds.
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Additionally, non-custodial wallets require users to be more vigilant about security threats such as phishing attacks, malware, and physical theft.
What are cold wallets?
Cold wallets are the go-to choice for any crypto user who prioritizes security over convenience. These wallets typically come in the form of a physical device (e.g., a USB stick) and are not connected to the internet.
Because cold wallets are not connected to the internet, they tend to be more secure than hot wallets. They’re a great option for people with large crypto stashes or those who want to HODL their crypto for a long time without worrying about hackers stealing funds.
The downside of cold wallets is that they can be less convenient than hot wallets. Users must physically connect them to a computer to make transactions. But for many crypto holders, the extra security is worth the trade-off in convenience.
Note that you can also use paper as a cold wallet. A paper wallet is a physical copy of your cryptocurrency’s public and private keys printed on a piece of paper. It is the simplest and most cost-efficient way to store cryptocurrency offline. However, as you would imagine, paper wallets are vulnerable to theft, water, and fire damage.
How to set up a crypto wallet?
Hosted wallets
First, you need to pick a trustworthy platform to host your wallet. Look for a provider with a proven track record that prioritizes security, user-friendliness, and compliance with government and financial regulations.
No need to compromise on any of these features; after all, it’s your money we’re talking about. To illustrate how to set up a crypto wallet, we will use ZenGo’s wallet offering.
- Download your hosted wallet (e.g., ZenGo). It is best practice to only download applications from the official website, the App Store (IOS), or the Google Play Store (Android).
2. Hosted wallets often require you to provide an email. After you submit your email, you will receive a verification link.
3. After you confirm your email, you will be directed back to the ZenGo app.
4. To access a hosted wallet’s full features (e.g., third-party payment providers), you often need to KYC (provide some personal information). In our example, you will need to provide a face scan. ZenGo uses a mathematical representation of your face, instead of your actual face, stored on its servers in case you delete the app or switch devices.
Voila, you are now web3 ready!
Once you’ve found a platform you’re comfortable with, it’s time to create your account. Fill in your personal information, select a strong password, and consider enabling two-factor authentication (2FA) to add an extra layer of security. With these simple steps, your hosted wallet will be up and running quickly. Simple as that.
Non-custodial wallets
Here is how to set up a non-custodial wallet:
- Download a non-custodial wallet app of your choice.
- Create an account. Unlike most hosted wallets, you don’t need to share much personal info to create a non-custodial wallet. Usually, an email ID would suffice, and in many cases, even that’s not required.
- The wallet will automatically generate your private key. In most cases, the key is a random 12-word phrase. You need to write it down and keep it safe. Losing this key may permanently lock you out of your wallet and any funds in it.
- Transfer crypto to your new wallet. Note that most non-custodial wallets won’t let you purchase crypto with fiat currencies.
Hardware wallets
To set up a hardware wallet, follow these simple steps:
- Purchase the hardware. Choose a hardware wallet from a reputable brand such as Ledger, Trezor, or SafePal. Both these brands have a proven track record of providing good security and user-friendly interfaces.
- Install the software. Each hardware wallet brand provides proprietary software you must install to set up your wallet. Download the software from the official company website and follow the instructions carefully to create your wallet.
- Once you have created your hardware wallet, it’s time to load it with some digital assets of your choice. Unfortunately, you can’t just hand over some cash or swipe a credit card to fill up your wallet. Instead, you’ll need to transfer some existing cryptocurrency from another wallet or exchange.
- Hardware wallets are like the ultimate piggy banks, but you’ll move around your precious digital coins instead of dropping in some spare change. Just follow the instructions provided by your hardware wallet provider to complete the transfer securely, and your hardware wallet will be ready.
How to choose the best crypto wallet
Now that you’re familiar with the basics of setting up a crypto wallet, the next important question is how to select the ideal wallet from the options available in the market. Here are some key aspects to consider.
Security
Security should be your top priority when picking a new crypto wallet. You want to ensure your wallet has strong security features that protect your digital assets from hackers and malicious actors.
The best wallets have a combination of security features, such as two-factor authentication, multi-signature capabilities, and cold storage.
User interface
The user interface is another crucial factor when choosing a cryptocurrency wallet. Ideally, you want to choose a wallet with an intuitive interface that is easy to navigate and use — more so if you are new to crypto. A good user interface makes it easy to view your balance, send and receive digital currencies, and access other important features.
Supported cryptocurrencies
Some wallets, by design, only support a limited number of cryptocurrencies, while others support a wider range of digital assets. It’s important to ensure that your wallet supports all the digital currencies you plan to invest in, not just the most popular ones.
Track record
Reputation is a key factor to consider when choosing a cryptocurrency wallet or any financial tool. Choose a wallet with a good reputation in the industry that has earned the trust of the broader community.
Customer support
Select a wallet with a reliable customer support team that can help you resolve any issues. A good wallet should have various customer support channels, including email, phone, and live chat.
Fees
Some wallet providers charge high transaction fees, while others are comparatively easy on your pocket. Compare the fee structures of all the wallets you have shortlisted, and choose the one with the lowest fees if it checks the other boxes too.
Mobile or desktop
You should also consider whether you want a mobile or desktop wallet. A mobile wallet is a convenient option if you can access your digital assets on the go. On the other hand, a desktop wallet is a good option if you plan to store your digital assets for an extended period. Some wallets offer both versions for multiple devices, while others are more limited.
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Securely navigate the crypto space with your new wallet
To surmise, crypto wallets are essential for investing in or using cryptocurrencies. Now you know how to set up a crypto wallet, getting started is a relatively straightforward process involving a few simple steps. You might prefer the security of a hardware wallet or the convenience of a non-custodial hot wallet. But either way, it’s crucial to follow best practices to protect your funds.
And finally, keep our tips in mind while choosing a new wallet. With the right wallet, you’ll be ready to dive headfirst into the exciting, rewarding, and sometimes unpredictable world of cryptocurrencies.
Frequently asked questions
Why do you need a crypto wallet?
How can I keep my crypto wallet safe?
Which type of wallet is the best one?
What are cold and hot wallets?
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