Crypto wallets explained: which kind should you use?

What a wallet actually does

Your coins live on the blockchain. A wallet is the software or device that holds the private keys for your addresses, shows your balances by reading the chain, and signs transactions when you send. Most wallets derive all their keys from one seed phrase, so a single backup restores everything. The questions that matter are who holds the keys and how exposed they are.

The five main kinds

Exchange accounts (custodial)

The exchange holds the keys and you sign in with a password. There is nothing to back up and buying or selling is easy, but you are trusting a company with your coins. Exchanges vs self-custody covers what that means in practice.

Software wallets (hot wallets)

Apps for phones and computers, and browser extensions used with web apps. The keys are yours, but they live on a device that is online and runs other software, so malware, a fake app or a malicious extension can reach them. Good for everyday amounts and for using apps on Ethereum and other chains.

Hardware wallets

A small device that generates the keys and signs inside itself. Your computer or phone prepares the transaction, the device shows the destination and amount on its own screen, and nothing leaves it except the signature. Malware on your computer cannot extract the keys, though it can still try to trick you into approving the wrong thing, which is why the device screen is the one to trust.

Paper wallets

A private key and its address printed on paper, popular in Bitcoin’s early years. They are now discouraged: the key usually has to be generated on a computer and sent to a printer, both chances for it to leak, and spending from it means importing the key into software, which ends its offline life. A seed phrase written on paper as the backup for a hardware wallet is a different thing, and a good one.

Multisig wallets

A wallet that needs several keys to sign, for example any 2 of 3. Each key lives on a separate device, ideally in a separate place, so a thief needs more than one and you can lose one without losing the funds. On Bitcoin, wallets such as Sparrow and Electrum build multisig from hardware wallets; on Ethereum and other EVM chains the usual choice is a Safe smart-contract wallet.

Side by side

• Exchange account. Keys: held by the exchange. Cost: free. Main risk: the company fails, freezes your account or is hacked. Suits: buying, selling and trading balances.
• Software wallet. Keys: yours, on an online device. Cost: free. Main risk: malware, fake apps and phishing. Suits: spending money and using apps.
• Hardware wallet. Keys: yours, on a dedicated device. Cost: the device. Main risk: losing the seed backup, or approving a transaction without reading it. Suits: savings.
• Paper wallet. Keys: yours, on paper. Cost: free. Main risk: the key leaks when it is made or when it is spent. Suits: nothing a hardware wallet does not do better.
• Multisig. Keys: spread over several devices, and sometimes several people. Cost: more devices and a careful set-up. Main risk: losing the configuration needed to recover it. Suits: large holdings, businesses and shared funds.

Matching the wallet to the amount

A useful rule is to match the wallet to what you would lose if it failed.

• Money you will spend this month: a reputable software wallet, or the exchange if you trade.
• Savings you would hate to lose: a hardware wallet, with the seed phrase backed up on paper or metal in two places.
• Amounts that would change your life, or funds shared by a business: multisig across hardware wallets from more than one manufacturer, so one faulty or compromised model cannot put everything at risk.

Getting a wallet safely

• Download wallets only from the maker’s official site, or the app store listing that site links to. Fake wallet apps and browser extensions are one of the commonest ways people lose everything.
• Buy hardware wallets from the manufacturer or an authorised reseller. A device that arrives with a seed phrase already filled in is a scam: set up a new wallet yourself.
• Whatever the wallet, the seed phrase is the wallet. Store it as described in seed phrases, and never type it into a website or send it to anyone.

Watching without the keys

You do not need a wallet’s keys to see its balance. An address, or for a Bitcoin wallet an extended public key (xpub), is enough to watch it. Our xpub address explorer shows the addresses an xpub derives, entirely in your browser, and Wardcrest monitoring can alert you when funds move. Neither can spend anything.