The degree to which something is safe can only be determined by that which it is trying to protect against. Rock is safe against scissors but not against paper. In the world of crypto, the “safety” of a wallet is determined by that which an individual is trying to protect against. The threats include, but aren’t limited to: malware, custodial risk, end-user error, etc.
Choosing the best crypto wallet and safest option should take into consideration how you plan to interact with blockchains and the safety features provided by that wallet.
Types of Wallets
Let’s first explore the different types of cryptocurrency wallets, examples of these wallets, and what they are typically used for.
A crypto wallet is a piece of software or application which stores your private keys and enables users to view/interact with crypto assets. Once you create a wallet address for a blockchain and are provided with your private key, you are free to import these private keys into dedicated wallet software and applications.
Hot Wallets are typically software wallets that have had an internet connection at any point in time, and are often hosted on a device that is constantly capable of internet connectivity. Hot wallets offer much easier accessibility to your assets and allow you to actively interact with decentralized applications and exchanges. You’ll be able to access your wallet on desktop, mobile, and browser based applications.
Benefits – high degree of accessibility, more easily interact with decentralized applications (DApps), more likely to be able to access and interact with blockchain specific token protocols.
Vulnerabilities – can be targeted by malware more easily, often used with multiple 3rd party DApps and software.
Examples – MetaMask (ETH), Phantom (SOL), Temple (XTZ), Edge (multi-asset).
Cold Wallets are often hardware wallets that are isolated from internet connectivity. Cold wallets are typically used to store crypto assets long term in secure locations and give you more control over when you connect to the blockchain via an internet connection to make a transaction. Some people prefer paper wallets simply with a printed private key as opposed to usb-like hardware devices.
Benefits – Storage is isolated from internet connection, private keys are held on a dedicated device.
Vulnerabilities – Physical backup of private keys is prone to theft or loss. Tedious and difficult to access funds. Limited support for many assets.
Examples – Ledger, Trezor, a printed piece of paper with your private key or QR code.
Custodial Wallet companies and services own and maintain the private keys for the wallets your cryptocurrencies and assets are held in.
Benefits – Some provide theft and loss protections, simple username and password setup rather than backing up seed phrases.
Vulnerabilities – Crypto assets are not technically owned by the user – they’re owned by the custodial service. Possible custodian mismanagement of funds. Internal theft of funds by custodian employees. Massive target for hackers due to aggregation of user funds (honey pot effect).
Examples – Coinbase, Binance, BlockFi, Celsius, Voyager, Gemini, Crypto.com, and other exchange based custodial wallets.
Vulnerabilities of Crypto Wallets
Of all possible vulnerabilities associated with crypto wallets, the most common is human error. This includes loss of private keys, accidentally sending assets to the wrong address, etc.
Crypto wallet apps such as Edge provide support for multiple cryptocurrencies and blockchains packaged into a single application with client side data encryption and backups. Applications such as Edge remove much of the risk of human error by offering automatic encryption of private keys and auto backup in case of device loss or failure. Applications like these allow users to exchange assets as well, without holding them on custodial exchanges.
Other vulnerabilities include the wallet application’s security, the device’s security used to access your wallet, and connections with decentralized apps.
Similar to device vulnerabilities with malware, it’s important to trust the wallet application and software security. If possible, before using a crypto wallet, check to see if it has an open source code base for easy, recurring, auditability. This will provide peace of mind, especially if the wallet is a hot wallet and used often with decentralized apps. Hot wallets such as MetaMask and Edge have publicly available source code for the public to review.
Simply connecting your wallet to a decentralized app can pose a security risk if the website hosting the decentralized app has been compromised or if the user connects to a fraudulent or phishing website. Due diligence should be used before interacting with any Dapps external to the wallet.
Finally, if the minute, yet possible risk of malware is a major concern, it may be a users preference to use a cold wallet such as Ledger to hold crypto assets.
Recap of the Safest Wallets
The safest wallet depends on how you plan on interacting with your crypto assets and the blockchain, as well as the specific threat you’re trying to protect against. There are certain risks users take with hot wallets on devices always connected to the internet, but choosing wallets that have client side data encryption and security audits on record is typically safer.
Cryptocurrency users often split their assets between multiple wallets to get around security vulnerabilities, but in the process create human error vulnerability due to multiple private keys and seed phrases to keep track of. Due to this risk, multi-asset applications reduce the possibility of error, offering user friendly security and support.