Protecting Your Crypto Assets: A Review of Wallet Options

In recent years, cryptocurrency has found a growing community of enthusiasts who appreciate the financial autonomy crypto assets have to offer. Autonomy over your holdings, though, comes with the very crucial responsibility to secure them. 

There are steps you can take to secure your wealth, whether you have a cold or a hot, a self-custodial or a custodial crypto wallet. They themselves offer plenty of interesting security options for you to consider.

Let’s review what to keep in mind when choosing your wallet to ensure the safety of your holdings at all times in Part One of our Protecting Your Crypto Assets series.

Why So Many Precautions?

Cryptocurrency is an asset class very much unlike any of its peers, offering great advantages while requiring great responsibility. The decentralized nature of the blockchain allows for system accountability and privacy between its users, but it does not inherently protect individuals’ wallets from being emptied when its derived seed phrase is leaked—whether it is through hacking, through theft or by sharing it with a fraudulent actor. 

The absence of a central authority makes it difficult to recuperate stolen funds, although authorities acting outside of the blockchain, like the Royal Canadian Mounted Police, can attempt to trace transactions.

On one hand, blockchain data immutability allows for greater transparency as it is publicly shared. On the other hand, it makes transactions irreversible. Unlike a fiat e-transfer, which can sometimes be cancelled or reversed, it is impossible to reverse a transaction on the blockchain without the cooperation of the receiver—problematic in case of fraud.

Luckily, there are ways to prevent such an event from occurring in the first place, from choosing the right storage methods for your private keys to taking additional active steps to safeguard your crypto holdings.

What Kind of Wallet Is Most Secure?

Private keys serve to confirm specific transactions on the blockchain. Often too long and complex to conveniently memorize, they are instead stored in a wallet, itself locked by a seed phrase derived directly from the wallet it protects—you can think of it as a master key of sorts. While your wallet does not contain your funds, it contains the keys necessary to access and manage your digital assets directly on the blockchain.

Cold Wallets

There are many wallets on the market. Cold wallets store your keys offline: they can be as simple as a seed phrase written on a piece of paper or as complex as a device with a touchscreen and additional layers of encryption including multi-signature (multi-sig) access, the latter of which being especially useful when crypto assets are owned as a group.

Cold wallets are chosen for the protection it offers as to Internet-related threats, but they can be difficult to use for someone who is new to the crypto world, or inconvenient for someone who makes frequent transactions. Furthermore, destruction of your device could bring about the loss of the private keys it contains if you do not have access to your seed phrase through a secure backup wallet, whether it be on a piece of paper or engraved metal for additional durability.

Specific hardware solutions like Cypherock X1 can replace the need for a backup by providing their own. Cypherock X1 separates your private keys among five different pieces of hardware to be stored separately, only two of which are needed to access your keys. This ensures functionality while protecting your keys from theft or destruction.

Hot Wallets

Hot wallets, on the other hand, store your keys online. As such, they can be vulnerable to hackers, but they are also much more convenient for frequent transactions.

Their interface additionally tends to be more simple, user-friendly and convenient compared to that of cold hardware wallets, as hot software wallets are hosted on a website or a mobile app designed with accessibility for increased flow of assets in mind. They are best suited for holding small amounts of cryptocurrency at a time, like a cash wallet, whereas cold or hardware wallets are more akin to a vault.

Hot wallets work by using your private keys, which they store on the internet or on a server, to sign on a transaction when you initiate it and confirming your ownership. They then authorize the transfer of funds and broadcast it to a cryptocurrency network.

Either kind of wallet can be self-custodial or custodial. The first refers to having responsibility over your own wallet and keys, while the latter implies a third-party—an exchange—is responsible for them. Self-custodial wallets ensure complete autonomy over your crypto wealth, whereas third-party custody wallets use defined security protocols and expertise to keep your information safe.

Emergence of Smart Wallets

Crypto wallet companies are increasingly offering emerging self-custodial smart wallets, leveraging advanced security features and smart contract capabilities. These wallets, which have gained traction since 2020, enhance the security of digital assets while ensuring users retain full autonomy over their private keys and wealth. 

With the rise of account abstraction (ERC-4337) on Ethereum and EVM-compatible chains, as well as innovations in multi-party computation (MPC) and threshold cryptography, smart self-custodial wallets have evolved beyond traditional key management. They now incorporate social recovery, multi-signature authorization, time-locked transactions, gas fee abstraction and programmable spending limits, making them more user-friendly and resilient against security threats.

This technology is rapidly advancing across multiple blockchain ecosystems, with increasing adoption in both retail and institutional crypto custody solutions.

Combining Methods

Each type of crypto wallet has its share of advantages and disadvantages. While the process of selecting a storage method may seem like choosing between convenience and security, there is a way to bypass this trade-off: combining them. 

Having different kinds of wallets for different purposes and using them in tandem allows you to balance the inconveniences of the one with the advantages of the other, ensuring both safety and ease of use. Indeed, backing up your seed phrase and keys ensure you no matter what problems you may encounter—phishing, theft, destruction or loss of your main wallet—, you always have a way to access your funds.

Many crypto users own both a hardware and a software wallet, using the first for long-term storage and the second for trading purposes. Such a configuration allows you to keep the bulk of your holdings away and safe from hackers in cold storage, while small amounts are held in your hot wallet, readily available. You can also keep all of your funds at the address of your cold wallet, and transfer what is left from your hot wallet to your cold one after each transaction.

Having different wallets, whether hot, cold, custodial, self-custodial, traditional or smart contract, also allows you to explore different advanced security features like multi-signature configuration, passkeys and multi-factor authentication.

Furthermore, it allows you to diversify your crypto portfolio and have backups in case one wallet is destroyed or emptied out.

Keeping your cryptocurrency holdings safe starts with choosing the right wallet—or wallets!—for your needs, but it does not stop there. In our next blog post, read more about the options smart wallets on the market have to offer. Sign up to our newsletter to discover all about EZO.

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Frequently Asked Questions

What Is The Best Type of Crypto Wallet?

Cold wallets are generally more safe while hot wallets and custodial wallets are more convenient and user-friendly. Self-custodial wallets, on the other hand, guarantee you autonomy over your holdings. Using a combination of types of wallets balances the advantages and the disadvantages of each.

What Are Crypto Smart Wallets?

Also known as smart contract wallets, these self-custodial wallets use smart contract codes to enhance the security and automation of traditional wallets, offering additional features including multi-factor authentification, passkeys or multi-signature.

What Services Does EZO Swap Provide?

EZO Swap enables you to seamlessly convert available currencies of your choice between one another, whether it is cryptocurrencies or fiat currencies, all while ensuring your privacy and your security with each transaction.