By Special to MoneySense on April 27, 2022
Estimated reading time: 4 minutes

What’s the best type of crypto wallet?

By Special to MoneySense on April 27, 2022
Estimated reading time: 4 minutes

For cryptocurrency investors, security is top of mind. Here’s how to keep your bitcoin, ether and other digital assets safe.

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I’m going to invest in cryptocurrencies, but I’m not sure what’s the best way to store my coins to protect against theft and other risks. What should I look for in a crypto wallet? What makes a wallet “good”?
—Anand

Great question, Anand. First, let’s clear something up: A crypto wallet doesn’t store coins—your coins will always be in the blockchains where they were created. Your wallet stores the private keys—very long, randomly generated strings of numbers and letters—that allow you to find your coins in the blockchains. It’s common to hear people say they’re storing crypto in a wallet, though, so we’ll do the same.

Protecting your keys is essential to safeguarding your cryptocurrency. For that, let’s look at hot wallets and cold wallets.

What’s the difference between hot vs. cold wallets?

Hot wallets are digital wallets that are connected to the internet, such as crypto platform wallets and browser wallets. You can use hot wallets to send and receive crypto and store your private keys short-term. They’re not recommended for long-term storage. Because hot wallets are always connected to the internet, they’re susceptible to hacks. For the same reason, it’s a good idea to keep only a small amount of crypto assets in a hot wallet.

Cold wallets, also called cold storage, are held offline. They include digital wallets stored on devices that aren’t connected to the internet (hardware wallets), as well as paper wallets—hard-copy documents that list your public and private keys. Cold wallets are more secure than hot wallets, but they don’t give you quick access to your coins—and it’s up to you to protect them from loss or theft.

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How should you divide your crypto between wallets?

Once you have both hot and cold wallets, you will want to split your crypto into portions depending on what you plan to do with it. Keep the majority of your coins (75% or more) in your cold wallet if you want to be a long-term holder. Keep the rest in a safe hot wallet (like MetaMask) so that you can actively trade them or convert them into fiat currency when you need some cash.

What’s the best wallet for storing crypto?

To keep your crypto safe, the best option is a hardware wallet like a Trezor or a Ledger Nano. These wallets offer you the best of both worlds: Not only do they keep your keys offline, but they can also be plugged into your computer for quick access to your coins. Several decentralized finance (DeFi) apps allow you to log in with your hardware wallet, making the entire process very simple.

Having said that, you must take good care of your seed phrase—the list of 12 to 24 words that you’ll need to access the crypto in your wallet, and to recover access if your hardware wallet is lost or damaged. If you lose your seed phrase (also known as a recovery phrase or mnemonic phrase), you’ll lose access to your coins.

Tips for protecting your seed phrase

To protect your seed phrase, keep it offline (not on your phone, computer or other internet-connected device), and store it using these tactics:

Seed splitting: Divide your seed phrase into parts and store them separately and securely in different locations—for example, a safe, a second spot in your home or another location, or a safe deposit box at a bank.
Hardware drive: Save your seed phrase to one or more hardware drives or USB sticks and store them securely.
Metal capsule: Keep your seed phrase in a purpose-built capsule, such as the waterproof, fireproof models made by Cryptosteel.
Hard copy: Print or write out your seed phrase on paper (split two or three ways, as noted above), using fade-proof ink or toner. Laminate the paper to protect it from moisture and other damage.

Don’t store your seed phrase in a password manager or take a photo of it—someone could gain access through your phone or your cloud storage accounts.

As you can see, Anand, crypto investors need to play an active role in managing risks and keeping their holdings secure. One final tip: Find out if your cryptocurrency trading platform keeps customers’ crypto in cold storage. At CoinSmart, we provide cold storage for each cryptocurrency we offer, protected with standard industry practices and procedures, for added security.

CoinSmart is a Canadian cryptocurrency trading platform. Sign up for an account* with the code money30 and receive C$30 in bitcoin when you deposit a minimum of C$100.

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