Coinbase’s Josh Hornthal speaks with Boardroom about the different types of crypto wallets, how to start one up, and tips for keeping your digital assets protected.
Unlike dollar bills and debit, credit, and rewards cards, you can’t easily store cryptocurrencies in your physical wallet. If you’ve tried, we apologize.
A crypto wallet is a software program or physical medium to safely store the public and private keys you need to make cryptocurrency transactions. Crypto wallets also let you send and receive select cryptocurrencies, from Bitcoin to Ethereum to Solana and beyond. You can also keep a portfolio of your non-fungible digital assets using one of these tools.
“It’s your identity on the blockchain, and it’s how you hold your crypto,” Hornthal told Boardroom. “We’re working towards a future where everyone has a self-custody wallet, not just the people who are deep and hardcore into crypto.”
Hornthal said the crypto industry has one of the most passionate yet misunderstood communities he’s ever experienced. This is why he invests so much of his time in education and making sure people understand things like crypto wallets as they step foot in this space.
“Crypto as a technology and as a way for people to transact and interact is here to stay,” he said.
There are already many moving parts to understand in the crypto industry, but setting up a wallet is arguably one of the more essential aspects. By the end of this article, our goal is to ensure that you (1) better understand what a crypto wallet is, (2) how to set one up, and (3) why it’s crucial to have one in crypto investing.
What Are the Types of Crypto Wallets?
Before we go further, let’s break down some general terms you need to know about crypto wallets:
- Custody: a concept of holding and guarding assets. Crypto custody focuses on the holding of your private keys.
- Public key: a numerical value that allows you to receive cryptocurrency transactions. Think of this as your crypto email address that you can safely share with folks to send and receive funds.
- Private key: this is typically a string of letters and numbers that is never to be shared with anyone. Your private key is what you’ll use to sign and agree to transactions. “So it’s kind of like swiping your card or signing your signature,” Hornthall said.
For the context of this article, we’ll be focusing on how to set up software wallets. It’s worthy to note that you can store your keys on hardware wallets – or write them down and hide them under your bed – if you don’t want them living online. No matter the type, every crypto wallet has a public and private key, which are kind of like two-part passwords used to unlock and access your crypto wallet assets.
There are two kinds of wallets in crypto: a self-custody wallet and a hosted/custodial wallet. Some notable companies that manage different types of crypto wallets are Coinbase, Ledger, Trezor, and Exodus.
With a self-custody wallet, individuals take sole responsibility for protecting their keys in whichever way they see fit. The advantage with these wallets is that you entirely control your keys and funds.
“With a self-custody wallet, you have your own address on the blockchain, and you can interact with decentralized apps,” Hornthal said. “But if you lose your recovery phrase, that private 12-word phrase that’s generated by your wallet the first time you use it, no one can help you.”
Hosted wallets, meanwhile, involve entrusting another party to control your keys. Every centralized crypto exchange automatically provides you with one of these, Hornthal said.
“It’s almost like when you go to your bank or log into your bank account online,” Hornthal explained. “You see your money, and you know it’s there, but it’s actually in custody with the bank. That’s traditionally what we’re used to.”
How to set up a self-custody wallet
Setting up one of these doesn’t need ID verification right away; that comes later when you want to put some crypto into it.
Here’s a rundown on setting up a self-custody mobile wallet:
- Choose a wallet app such as Coinbase Wallet, Mycelium, or Metamask.
- Create an account and record your recovery phrase.
- Some wallet apps may allow you to add an extra layer of security, like facial recognition or creating a passcode.
- Begin sending, receiving, or trading crypto.
I set up a Coinbase Wallet to test the setup process out, and after about four minutes tops, I was up and running.
Unfortunately, you can’t press “forgot password?” with a wallet like this if you lose access. Your only chance of getting control is by entering your private key, the string of 12 random words generated for you when you signed up for the wallet.
Given the distributed, decentralized nature of blockchain technology, providers don’t keep these stored on any sort of server, either. And further, “If someone gets those 12 words, they have access to all of the stuff in your wallet. Crypto, identity, whatever it might be,” Hornthal said.
As long as you have your recovery phrase on call, you can log into your wallet on as many devices as you’d like.
Additionally, not every wallet is going to be compatible with every last cryptocurrency under the virtual sun, so make sure you know that the coin you want to trade with or the network you want to interact with is compatible with the wallet you’re using. For example, Solana is written in a different programming language and uses a different network than Coinbase Wallet, so it’s incompatible and won’t work in that wallet.
Most importantly, you need a self-custody wallet and Ethereum if you plan on interacting with decentralized applications. Hosted wallets cannot do this.
“If you want to take that step into Web3, you need a self-custody wallet.”
Self-custody wallets can also be browser-based, software installed on a desktop, or even hardware devices depending on your preference.
How to Set Up a Hosted Wallet
This is the easier option if you plan to buy and transfer crypto. When you set up an account with crypto exchanges like Coinbase, Crypto.com, and Binance, you automatically get a hosted wallet usually accessible through mobile apps. While this sounds similar to the wallet explained above, it’s not since you’re entrusting another entity to keep your keys safe.
It’s essential to choose a platform you trust that can do what you desire to do with your crypto portfolio. After that, all you need to do is create an account, verify your identity, and transfer your crypto if you already own some.
“If you’re just looking to buy, hold, and invest in crypto, a hosted custody wallet may meet all of your needs,” Hornthal said.
Hosted wallets may be seen as less secure since someone else controls your keys, but on the upside, it means less responsibility for you.
Choosing the best crypto wallet boils down to how you want to secure your crypto and what you plan to do with it in the long run. Luckily, the transition from a hosted wallet to a self-custody wallet doesn’t have to be made into a complicated, intimidating process.