A common misconception is that a crypto wallet is a hardware or software device that holds your crypto assets. Unlike the wallet in your pocket that holds your cash, a crypto wallet does not actually hold any of your crypto assets. All crypto assets exist on the blockchain and never leave. They may travel from one blockchain to another (well not technically) but they never actually leave the blockchain. A crypto wallet simply holds your private keys and seed phrase which are needed in order to access the assets in your wallet address on the blockchain. Would you leave your debit card on your front porch with a sticky note attached that has your PIN written on it? If you did, that would be a pretty dumb thing to do. Securing access to your wallet and private keys is as important as keeping your debit card and PIN secure so they are unable to be used by anyone else.
For more in-depth information about crypto security, read my article titled "Essential Tips for Securing Your Crypto Assets."
There are two main types of crypto wallets.
Software Wallets
This type of wallet is referred to as a software wallet or a hot wallet. The term "hot" indicates that this type of wallet connects to the internet. These come in three main forms:
1. Web wallets that are accessed through a web browser without the need to install any software.
2. Desktop wallets such as MetaMask, TronLink, or Binance Smart Chain Wallet.
3. Mobile app wallets such as Coinbase Wallet or TrustWallet.
This type of wallet is the least secure because your seed phrase is entered into and exists on the device itself. Because it connects to the internet it is prone to hackers getting ahold of your seed phrase and taking control of your assets. This happens more frequently than we would like and it is important to take security seriously.
Hardware Wallets
This type of wallet is sometimes referred to as a cold wallet. The term "cold" indicates that this type of wallet does not connect to the internet. These offer better security than software wallets due to this fact. With hardware wallets, you are never using your computer keyboard to enter any seed phrase into your computer for anyone to see or track with a key logger. These are slightly less convenient as you need to connect the device to your computer each time you want to transact. This slight inconvenience is a small price to pay to keep your assets safe.
The two most popular hardware wallets are made by Trezor and Ledger. Both offer a few different models with varying feature sets. Only purchase your hardware wallets directly from the manufacturer using the links above. The links do contain a referral code. Using these links is one way you can support me so that I am able to continue to provide this content.
Security Tips
1. Mouse over the links above (or long-press on mobile) so that you can verify they point to the actual manufacturer websites at trezor.io and ledger.com. This is a good security practice before clicking any link so you can verify that the link is going to take you to where you expect it to.
2. For security reasons, DO NOT purchase hardware wallets from 3rd-party websites such as Amazon, eBay, and Walmart. Hackers and douchebags can modify hardware wallets, repackage them and sell them on these 3rd-party websites. You don't know what might happen when you plug these devices into your computer. DON'T DO IT!
This video provides a good summary of cryptocurrency wallets.
Can I receive airdrops in a hardware (cold) wallet?
Yes. Since your assets reside on the blockchain and not in the hardware wallet device anyone can send assets to any of your wallet addresses. Your hardware wallet device does not need to be connected to your computer to receive the assets. Assets in your wallet addresses are publicly viewable to anyone on-chain. You can view your own wallet address at any time by looking it up on the block explorer for the chain the assets are on. For example, the block explorer for Ethereum is at etherscan.io. Each blockchain will have one or more block explorers for that chain.
Can I stake, provide liquidity or participate in other Defi protocols with a cold wallet?
Yes. Since you will be initiating a transaction you will need your hardware wallet device. First, you will need to connect your wallet to your computer. Follow the instructions provided by your device manufacturer on how to do this. Next, you will need to connect that hardware wallet to MetaMask. Here is a short video explaining the process.
After connecting your wallet to MetaMask, you can go to the website for your desired Defi protocol and complete your transaction. Once you have completed your desired transactions, disconnect your hardware wallet device and lock it away. If you want to monitor how your assets are performing after the transaction, you can do so from the Defi protocol they are in or from the block explorer without needing to plug in your hardware wallet device. The device is only needed when you wish to perform a transaction.
