Are you wondering whether you should use multiple crypto wallets or one wallet to rule them all? Using many wallets means you need to manage multiple seed phrases and makes it hard to keep track of your total portfolio. Using a single wallet exposes you to more risk. What if you get hacked or lose your seed phrase? What if you lose your device if you use a hardware wallet? Is there even a single wallet that can accommodate everything you want to do with your crypto assets? Having used more than 17 different wallets, I guarantee you that you will end up using many wallets yourself as you become better acquainted with the world of crypto.
In this post, we will explore the benefits of using multiple wallets.
We’ll look at how you can diversify your risk and how you will cover different needs using different types of wallets.
I will walk you through the types of wallets and I will give you a brief overview of how wallets are grouped.
Finally, we’ll also look at what it would take to minimize the number of wallets you use so that you don’t have too many seed phrases and passwords to manage.
Use at least 4 wallets: one for managing day-to-day transactions on a centralized exchange, one for hooking up to DeFi, and two for storing larger amounts of crypto in cold storage either on a hardware device or a vault.
Avoid storing significant amounts of crypto on a mobile device or in one particular wallet.
Ready? Let’s dive in
How individual investors end up with more than one wallet
Most people who first start dabbling in crypto buy one of three coins: bitcoin, Ethereum, or Dogecoin.
And they use an exchange to do so.
They then leave their assets on the exchange.
Then one day they decide to take a bigger risk and invest in a coin that is not listed on one of the centralized exchanges such as Coinbase Kraken Binance etc.
Their online research tells them they need to use a decentralized exchange.
And to use a decentralized exchange they need a digital wallet.
And this is how they set up their first software wallet extension such as MetaMask or Trust Wallet and the like.
So now you have one wallet where you are storing your crypto assets and a new wallet that you are using to participate in Decentralized Finance.
As the value of your portfolio increases the more you learn about crypto the more you realize you should move your assets off crypto exchanges.
So now you decide to move your assets to a hot wallet like a desktop or mobile app such as Exodus or Coinbase Wallet (which is different to the Coinbase exchange by the way)
Finally, after reading about how online wallets tend to get hacked you research cold wallets and order yourself a hardware wallet such as a Trezor or Ledger device.
And this is how you have ended up using multiple wallets. But this isn’t a bad thing in my opinion. Let’s explore the benefits of owning multiple wallets
Why you should own more than one wallet
1. Portfolio diversification
The main reason to use more than one wallet is to diversify the risk of things going wrong.
Two things could go wrong with a wallet.
- You could get hacked
- You could lose your wallet seed phrase or the hardware wallet device itself.
While simpler to manage putting all your different cryptocurrencies in one wallet is a bad idea.
Holding crypto in a wallet is not the same as keeping your life’s savings in a savings account. Although it would be prescient to store your savings across multiple banks most people take comfort in using one or two bank accounts because they know that their funds are FDIC-insured.
If the bank explodes the government will print money and pay you back.
This doesn’t happen with crypto. If a crypto exchange where you store your digital assets blows up there is no guaranteed recourse to getting those assets back.
Similarly, if you lose the private keys of your self-custodial wallet there is no way to get them back.
If you use a hardware wallet and lose the device that’s it you are done for.
Hence by spreading your different currencies across wallets, you lessen the likelihood of losing everything when you store them in a single place.
2. Wallet features
Different wallets have different features and uses. Some allow you to store more than one type of coin. Others are thought to be more secure.
Some allow you to buy crypto directly via the interface with the user of debit cards or credit cards.
Others have built-in exchanges.
There are wallets that are better for everyday use and others that are safer for long-term storage.
Having reviewed more than 18 wallets I aggregated all the ways that a wallet might differentiate itself.
How wallets differentiate
- Custodial vs non-custodial
- Open source vs closed source: Open source wallets are thought to be more secure because the code is open for anyone to examine and point out vulnerabilities. The counterargument is that closed-source wallets are harder to access to hackers.
- Availability across devices: Android, iOS, Desktop MacOS, Windows, Linux, or website-based wallets. Desktop wallets are considered slightly safer than mobile wallets but make it harder to manage cryptocurrency transactions on the go.
- Fiat on ramps/offramps: can you buy crypto with dollars, euros yuan pesos, etc directly from within the app or do you need to use an exchange first?
- Built-in exchanges: can you trade crypto from within the wallet platform?
- Web3 compatibility via an integrated browser within the app or a Chrome browser extension: this is imperative if you want to use your wallet to participate in DeFI
- Number of languages supported: are you comfortable with English or do you need the interface to be in your language?
- Option to stake crypto holdings directly from within the app
- Multisig or not: do you want to set up a multi-signature wallet that requires more than one person’s approval for transactions to go through
- Hardware wallet enabled: hardware wallets need to speak to a software wallet. Life is simpler if your hot wallet is compatible with your hardware wallet.
- What unique features does the wallet offer that others don’t? Here are some examples that I have come across:
- Options for advanced developers and miners to customize the nodes they connect to.
- Backup restore options.
- Prepaid visa card.
- Loan facility to borrow crypto or cash against your crypto collateral.
- User experience and ease of use: how easy is the user interface to navigate?
- Fees: most wallets are not transparent about how much of a commission they charge for trading or buying crypto however some charge a monthly subscription fee. You need to check the terms of service for each wallet’s peculiarities when it comes to fees.
- NFT gallery: is there a place where you can store all of your NFTs
- Cross-chain: can you store different coins that belong to different blockchains?
- Security features: do they use 2FA, passwords, fingerprint ID or PIN, and so on?
- Customer support: does it exist and what do reviews say about it?
- Number of crypto coins you can store: multi-cryptocurrency wallets offer more convenience at the expense of more complexity which increases the risk of potential hacks
3. Not all wallets offer all cryptocurrencies
There might be some that offer a type of cryptocurrency that others don’t so you end up using both wallets
4. Hot wallets vs hardware wallets
Hardware wallets are considered the safest wallets.
But this means you have to hook up your device every time you want to transact in crypto.
Most people use a hardware wallet to store significant amounts of crypto and a hot wallet to participate in decentralized finance such as staking, lending, and investing your assets or participating in gaming.
5. Reduce the risk of scams
Ever seen a message telling you to connect your wallet to do something?
It’s a good practice to use a test wallet first to make sure what you are connecting to is not a scam.
Before we go any further I’d like to walk you through how the whole wallet thing works.
How wallets work
I’ll tell you a shocking secret.
When you use a wallet you aren’t storing any assets on it.
All you are doing is storing a pair of public and private keys.
The public key is your crypto address. Everyone can see it and anyone can send crypto to it. It has to be the right type of crypto though.
So if your public address is a Bitcoin address then people will only be able to send your Bitcoin. If they try to send you something else such as Bitcoin Cash or Ethereum they will lose it.
Your private keys on the other hand allow you to manage the funds on that public address.
Using your private keys you can authorize transactions to send or use your funds elsewhere.
The best analogy to public and private keys is to think of your public address as being equivalent to your home and the private key as being equivalent to the keys to your house.
Anyone can know your home address if you share it with them.
This way they can send you deliveries by mail.
But only you own the keys to enter your house.
Now just as there are different types of houses there are different types of wallets.
Types of wallets
There are different crypto wallets to choose from and invariable you will end up using a combination
#1. Custodial vs non-custodial wallets
A custodial wallet takes care of your private keys for you. Examples of custodial wallets are centralized exchanges such as KuCoin, Crypto.com, and Coinbase, brokers such as eToro and WeBull, and certain wallets such as Freewallet and Coinpayments.
When you sign up they will ask you for an email and password.
Because these platforms are managing your assets and private keys on your behalf they are required to hold a Money Services business license.
For this reason, they will ask you to verify your identity since they need to comply with KYC (Know you customer) and AML (Anti-money laundering) regulations.
In practice, this means you will upload a copy of your ID and documentation to prove your address.
With exchange wallets, you never see your private keys.
The exchange manages the whole process in the backend and the only thing you need to initiate transactions is your email and password.
To approve the transaction there are a few extra security measures.
The first is that you will need to authorize any transaction using an SMS or email code.
Email is safer because phone SIM cards can be taken over by hackers.
In addition, you should make sure to set up two-factor authentication.
This means you will use an authentication app such as Google Authenticator to enter an additional code that your authenticator app generates and is valid for one minute.
Once you confirm a transaction the exchange will email you.
Some exchanges such as Kraken allow you to set up a time limit for the transaction to go through.
This way if you suddenly receive a notification for a transaction that you did not perform you have time to reach out to their support to block it.
Centralized exchanges store the majority of their assets in cold storage meaning they are offline and can’t be reached by hackers.
Custodial wallets benefits
The benefit of using custodial wallets is that they are idiot-proof.
There are no private keys or seed phrases to lose and you can always recover your password should you lose it by reaching out to the custodial wallet providers’s support team.
The other benefit is that you can use the services and product features of the platform.
In the case of centralized exchanges, you can use the assets in your custodial wallet to trade or participate in staking via the exchange.
Sometimes you can borrow using your crypto as collateral or procure a prepaid visa card and use your crypto to make payments.
The other benefit is that if you use one exchange you can see all your assets in one place under the portfolio tab.
Vaults a more secure type of custodial wallet
Different exchanges offer different security options. Some exchanges such as Coinbase offer their users Vaults. Vaults are a nice alternative to hardware devices. For example, Coinbase Vaults are cold storage wallets that have a time delay of at least 48 hours and where you can set up multisig approval. This means that it will take 48 hrs for a transaction to go through no matter what. This way if there is a security breach you would get notified about the activity but the hacker wouldn’t be able to do anything to speed things up by which time you will have reached out to support to have the transaction blocked. Similarly, if you set up multisig approval more than one person needs to approve the transactions to go through.
Custodial wallet drawbacks
The drawback of custodial wallets is that the assets are not yours.
You are trusting a third party which isn’t even a bank to hold the assets on your behalf.
This means that you need to place a lot of trust in the platform that is holding your assets.
For example, if you hold your assets on Coinbase then you are placing a whole lot of trust in the Coinbase brand.
But the thing with crypto is that dodgy stuff happens all the time.
For instance, people placed a lot of trust in the FTX brand.
FTX was one of the largest exchanges with celebrity sponsors and even a stadium in its name. But then one day we found that they were taking users’ assets and using them to place risky bets.
There is a famous saying in crypto that says:
Not your keys not your crypto
So let’s take a look at how you can take ownership of your funds
Self custody wallets
Non-custodial or self-custody wallets give you ownership of your keys.
When you set up a custodial wallet you don’t need to provide an email address or any personal information.
Setting up an account requires that you write down a 12-25 mnemonic keyphrase.
Anyone with that phrase can derive the private keys to your wallet which means you need to store it safely and offline.
Your private keys are then encrypted on your device.
The benefits of using a custodial wallet are
- You own the assets. Even if the platform or app you use disappears you can use your recovery phrase to set up your wallet using another wallet provider.
- You can participate in DeFi to earn a yield on your assets or use your crypto as collateral. Many wallets have a browser extension that allows you to hook up your wallet to decentralized finance entities. Some even have a web3 tab integrated into the mobile app version of the wallet
Now that you know the distinction between the two you can see why you are going to end up having both a custodial and a non-custodial wallet.
A further distinction between self-custodial wallets is whether they connect to the internet or not.
#2. Hot wallets vs Cold wallets
A hot wallet is a software wallet such as a desktop app, mobile app, or browser extension that is connected to the internet.
Hot wallets are more prone to being hacked and you should avoid storing a large amount of crypto on them.
Cold wallets are devices that are not connected to the internet.
You can make a cold wallet on your own by storing your private keys on a laptop or hard drive that you never connect to the internet. Or you can use a custom-built hardware device.
The most popular devices are the Trezor and Ledger hardware wallets such as the Trezor Model T the Ledger Nano X and the Ledger Nano S Plus.
These devices store your private keys and look somewhat similar to USD sticks.
The main benefit of using them is that hackers can’t access them. The drawback is that if you lose the device you lose all your funds.
#3. Paper wallets vs digital wallets
For those who do not want to even touch a digital device, there is the option to create a paper wallet.
With a paper wallet, you write down your public address and private key code on a piece of paper.
This way you can be certain that your keys are not available anywhere online.
The drawback of paper wallets of course is that they are easier to lose and more clunky to manage whenever you want to perform a transaction.
Best practices for managing separate wallets
Here is how you choose wallets for different purposes:
1. Funds on custodial wallets
Make sure you use an exchange that uses cold storage, offers 2FA, and does not use SMS authentication.
Also, use one that allows you to set time limits on transfers so that you have time to react if you get hijacked. Check out 20 Crucial Factors to Look for in a Cryptocurrency Exchange for more.
2. Funds on hot wallets
Choose a wallet that has a browser extension or integrated Web3 browser to show that you can participate in DeFI. You can also use the wallets to purchase digital currencies that are not available on centralized exchanges.
3. Hardware wallets
Use these to store any significant amounts of assets. If you are afraid of losing the device or keys then the next best alternative is to use vault on an exchange.
How to keep track of your wallets and portfolio
One of the major drawbacks to using multiple wallets is that it becomes much harder to manage and keep track of your overall crypto portfolio. To do this you can plug in your wallets and exchanges to a portfolio tracker that aggregates your data. Some popular crypto portfolio trackers are Delta, Koinly, and CoinLedger. Some of these tools will also make your life easy for tax reporting.
If you want to explore the various wallets check out some of the wallet review
Cryptocurrencies have revolutionized the financial landscape, providing individuals with an alternative method for storing and transacting value. Two essential components of the cryptocurrency ecosystem are cryptocurrency exchanges and cryptocurrency wallets. While both serve critical functions within this digital realm, they are distinct in terms of their features, purposes, and modes of operation. In this article, we will delve into 10 key differences that distinguish cryptocurrency exchanges from cryptocurrency wallets. Read more.