Count them: how many wallets do you actually have?
Suppose your setup looks like this: an extension wallet in the browser on your computer; an app wallet on your phone; a hardware wallet in a drawer; a steel plate in a safe engraved with 24 words, which is the backup for that hardware wallet; and an exchange account.
Here is the question: how many wallets is that?
Counting devices with wallet software on them, three. Counting places where you can see a balance, four, since the steel plate is not one. Counting independent sets of keys, you hold three yourself, because the steel plate and the hardware wallet are the same set, and the keys to the exchange account are not in your hands at all.
The count is unclear because the word wallet
is used for four things: the app, the device, the account and the seed phrase. When someone says I lost my wallet
, the first thing to ask is which of those was lost. Below, wallets are re-sorted by two questions: who holds the private key, and whether the device holding it is online at the moment of signing. Once they are sorted, the count at the end comes out clearly.
Does a wallet store coins?
A wallet does not store coins. Coins are on the blockchain. The blockchain is a ledger anyone can inspect, and your balance is just an entry in that ledger under a particular address. What the wallet keeps for you is the key that can change that entry, which is the private key.
A more accurate name for a wallet is therefore a private key manager: it generates private keys, stores them, uses them to sign transactions and sends the signed transactions to the network. From start to finish the coins never leave the blockchain, and the only thing the wallet handles is the key.
Why the distinction is useful
It determines what you have actually lost when you lose a wallet
. If your phone is smashed, the wallet app on it is gone, but as long as you still have the seed phrase you can restore on another device and the coins are still there. The other way round, the phone can be perfectly fine while someone has seen your seed phrase, and the coins may already be at someone else's address.
What decides who owns the assets is who holds the private key, or equivalently the seed phrase; the device, the app and the browser extension are only layers in between. For how private key, public key, address and seed phrase are computed from one another, see private key vs seed phrase.
Custodial vs non-custodial wallets: what is the difference?
The first question: who holds the private key.
Custodial wallets: the platform holds the key
An institution keeps the private key. You log in to its website or app and see a balance, and you can trade and withdraw, but the private key behind that balance has never passed through your device. An account at a centralized exchange is this kind: your wallet
on the exchange is an internal account the company has opened for you.
The benefit is less to worry about: there is no seed phrase to keep, and a forgotten password can go through the platform's recovery process. The cost is that a company stands between you and your coins. That company can be hacked, as Mt. Gox was in 2014. It can collapse, as FTX did in 2022. It can also freeze your account under its own rules.
Non-custodial wallets: you hold the key
You keep the private key yourself. Browser extension wallets, mobile app wallets and hardware wallets all belong here: the wallet generates a seed phrase on your device, and from then on only you know it. No back office can reset it for you and no company can freeze the money. Equally, nobody can help you get it back if the seed phrase is lost.
The familiar line Not your keys, not your coins
is about this difference. It does not mean custodial wallets should never be used. It means that when you use one you should be clear that the figure shown in the account is coins the company owes you. While the company runs normally the two look identical; when something goes wrong, that difference is all that matters.
Keeping on an exchange the part of your money that you trade or convert to fiat is reasonable. The part to watch is the large sum that is just sitting there
because withdrawing it felt like a chore. Once a platform suspends withdrawals there is no window left for a remedy; anything you can do has to be done before the suspension.
How hot and cold wallets are told apart
The second question: at the moment of signing, is the device that holds the private key connected to the internet? If it is, the wallet is hot; if it is not, the wallet is cold. Whenever this site talks about hot and cold, it uses this one definition.
Hot wallets
The private key is stored on an internet-connected device, and signing happens on that same device. An app wallet on a phone and an extension wallet in a computer's browser are both hot. The benefit is that it is ready the moment you open it. The cost is that malware on the device, or a tampered browser extension, has a chance of reaching the private key.
Cold wallets
The private key is stored on a device that is not connected to the internet, signing happens inside that device, and the only thing that comes out is the signed transaction. A hardware wallet is the most common way of doing this; a computer that never goes online also counts.
Is a hardware wallet still cold when plugged into an online computer?
Yes. The hardware wallet itself does not go online. Over USB, Bluetooth or QR codes it receives a transaction waiting to be signed from the computer or phone, signs it internally, and passes the signature back. The private key stays inside the device throughout, and the online computer cannot get at it.
Half of the risk remains, though: the transaction to be signed is prepared by that online computer. If the computer has been tampered with, what it hands over may not be the transaction you think it is. A hardware wallet can protect the private key, but it cannot protect you from personally confirming the wrong transaction.
Imagine a malicious browser extension installed on the computer. You fill in the recipient address on a web page and click send, and the extension swaps the address for the attacker's along the way. The pop-up on the computer still shows the address you typed; the hardware wallet's screen shows the one that is really about to be signed.
Press confirm at that point and the money goes to the attacker's address. Nothing on the device malfunctioned. You signed it yourself.
So for every signature, look at the device's own screen, check the full recipient address and the amount character by character, and confirm only if they match. If the device screen cannot show the transaction contents and only asks you to confirm a string of data you cannot read, stop and find out what the transaction is first.
For more on hot and cold, and on how to split money across several tiers, see cold wallet vs hot wallet.
By form: the eight types of wallet
The two questions above are enough to classify any wallet. When actually choosing one, people are more used to talking in terms of form, so here are eight types along those lines.
1. Browser extension wallets
An extension installed in the browser; MetaMask and Rabby are both this type. It is a hot wallet, with the private key encrypted and kept in the browser's local storage.
The main thing it has to guard against is a phishing approval: you open a spoofed website, the page pops up an approval request, you click confirm, and a token is now approved to the other party's contract, which can then transfer it away. For how to check and revoke approvals, see how to check and revoke token approvals.
2. Mobile app wallets
A wallet app installed on a phone; Trust Wallet, imToken and the mobile version of Phantom are all examples. It is also a hot wallet. The convenience is that it goes where you go and can scan codes. The risk is the phone itself: it can be lost, it can be stolen, and it can end up with things installed on it that should not be there.
One setting deserves a deliberate look: whether the wallet has backed the seed phrase up to the cloud. Some wallets offer a cloud backup feature, with the backup encrypted under a password you set. With a weak password and cloud backup switched on, the safety of the seed phrase comes down to your cloud account. For what to do with backups when changing phones, see moving a wallet to a new phone.
3. Desktop wallets
A standalone application installed on a computer that does not depend on a browser; Electrum and Sparrow, popular with Bitcoin users, belong here. Used on its own it is a hot wallet. These applications can also serve purely as an interface, with a hardware wallet attached to do the signing, in which case the private key is inside the hardware wallet.
4. Hardware wallets
A small dedicated device that stores the private key and signs internally. It is non-custodial and cold. How it connects varies by maker: some plug in over USB, some use Bluetooth, and some pass data only by QR code and memory card. For the specs of individual models, see the hardware wallet comparison table.
What it stops is malware on an online device reading the private key directly. What it does not stop is you confirming the wrong transaction on the device with your own hands. When to buy one: when the amount you hold has reached the point where you could not afford to lose it.
5. Paper wallets
A paper wallet is a private key printed or written directly on paper. Few people use one now, and the problem comes at the moment of use: to spend the coins you have to import the private key into a software wallet, and from then on that key lives on an online device. The current practice is a seed phrase plus a hardware wallet, where everyday signing never requires taking the private key out.
Do not confuse it with writing a seed phrase on paper as a backup. That is only the medium for the backup; see how to store your seed phrase.
6. Multisig wallets
A transaction can only be sent once several of a set of private keys have signed it. Take 2-of-3: three keys, any two of which are enough. The benefit is that no single key decides everything: lose one and the other two can still spend, and a thief with one cannot move anything. The cost is a more involved setup, one more signature on every transaction, and one more thing to back up: the multisig configuration has to be kept alongside each key (see the multisig section of the storage article).
It suits two kinds of money: large long-term holdings that move only a few times a year, and funds managed jointly by several people. For small and medium everyday amounts, one hardware wallet is enough.
7. Smart contract wallets and account abstraction (ERC-4337)
An ordinary wallet address is an externally owned account, controlled by one public-private key pair. A smart contract wallet makes the account itself a contract, and who may spend from it, and how, is decided by rules in the contract: a daily limit, a requirement for approval by several parties, or the ability to replace the key, for example.
According to ethereum.org's explanation of account abstraction, EIP-4337 lets Ethereum support smart contract wallets natively without changes to the core protocol, and its EntryPoint contract was deployed to Ethereum mainnet on 1 March 2023. For users, what is added is flexibility, along with the risk of one more layer of contract code.
8. Social recovery wallets
One use of a smart contract wallet. As defined in Vitalik Buterin's 2021 article: a single signing key approves transactions day to day, and there are at least three guardians, a majority of whom can cooperate to change the account's signing key to a new one. Guardians can be your own other devices, friends and family, or institutions that verify identity.
It solves the problem of a lost key meaning everything is lost. The cost is that you have to choose guardians well, and trust that a majority of them will not collude against you.
One table: where each type of wallet keeps the private key
Here are those types in one table, with the exchange account from the custodial section added and social recovery folded into the smart contract row. The rows are lined up by where the private key is kept and whether the device holding it is online when signing. When you meet a wallet you have not seen before, ask those two questions first and you will know which row it belongs in.
| Wallet type | Where the private key is kept | Is the device online when signing? | Examples | Main risks |
|---|---|---|---|---|
| Exchange account | In the exchange's systems, not in your hands | Decided by the exchange | Accounts at centralized exchanges | The platform being hacked, collapsing or freezing the account |
| Browser extension wallet | Browser local storage (encrypted) | Yes | MetaMask, Rabby | Phishing approvals, malicious extensions |
| Mobile app wallet | Local storage on the phone; with cloud backup on, a second copy in the cloud | Yes | Trust Wallet, imToken | A lost phone, a compromised cloud account |
| Desktop wallet | An encrypted file on the computer's disk | Yes | Electrum, Sparrow | Malware on the computer |
| Hardware wallet | Inside the hardware wallet device | No (the device does not go online; the transaction to sign arrives over USB, Bluetooth or QR code) | Ledger, Trezor, OneKey and others | Confirming the wrong transaction, a leaked seed phrase backup |
| Multisig wallet | Several private keys, kept separately | Depends on where each key is kept | Setups such as 2-of-3 | Misconfiguration, being unable to gather enough signatures |
| Smart contract wallet (including social recovery) | The rules are in an on-chain contract; the signing key is on your device | Depends on where the signing key is kept | ERC-4337 wallets, social recovery wallets | Contract bugs, the signing key being phished |
| Paper wallet | A sheet of paper | Paper is not online, but spending means importing the private key into an online device | Rarely used now | Destruction, being seen |
A little, a lot, a great deal: which types to use
Choosing a wallet is not about which product is best. It is about how much this money matters to you and how often you move it. Three tiers follow.
Just starting, not much money, still learning the ropes
At this stage, get the operations down and get the seed phrase backup right:
- Protect the money in your exchange account with a strong password plus an authenticator app or passkey, and turn SMS verification off wherever you can;
- Install an extension wallet or mobile wallet for practice, and put a small amount in to get used to transfers, approvals and revoking approvals;
- Write the seed phrase out by hand twice and keep the copies in two different places. No photos, no screenshots, no cloud drive.
There is no rush to buy a hardware wallet. Buy one once the amount you hold has reached the point where you could not afford to lose it. Once it has, do not put it off any longer.
Holding long term, and the money is now a real part of your savings
At this tier I suggest keeping money in separate places according to what it is for:
- The bulk that will not move for a long time: a hardware wallet, with an additional metal backup of the seed phrase;
- The small amount you use on-chain day to day: an extension wallet or mobile wallet, on a separate seed phrase of its own;
- The small amount you trade or convert to fiat: an exchange account.
Move money between the three only as needed. When sending from the hardware wallet to a hot wallet, for instance, send only what you will use soon each time, and do not put all your funds into the hot wallet. That way, if any one place has a problem, the loss is confined to that place.
The bulk of your net worth, or funds managed jointly by several people
At this tier you are managing process as well as devices:
- Put the main funds into a multisig such as 2-of-3;
- Keep the keys in different locations, on different devices where possible, so that one burglary or one fire cannot take two at once;
- Run a recovery drill once a year: assume one key has been lost and actually go through the recovery process;
- Write a note that contains no seed phrase, so that your family knows these assets exist and whom to turn to if something happens.
Long-term tier: one hardware wallet, with the 24 words engraved on a metal plate and locked away. The bulk of the long-term holdings sits here and normally does not move.
Everyday tier: a mobile wallet or extension wallet on its own separate seed phrase, not shared with the hardware wallet. Give it a ceiling and send anything above it back to the long-term tier.
Trading tier: an exchange account holding only what is needed for trading and for deposits and withdrawals, with an authenticator or passkey, a withdrawal allowlist and an anti-phishing code all set up.
Money moves between tiers along fixed routes. For large transfers you can set yourself a rule: wait overnight before sending. Its purpose is to block an impulse.
Five common assumptions about wallets
| The assumption | What is actually the case |
|---|---|
| Once I have a hardware wallet I am safe | A hardware wallet keeps the private key from being read. It has no say over you confirming the wrong transaction. A swapped recipient address or a forged approval request works just as well on hardware wallet users. Look at the device screen for every signature. |
| A cold wallet means a hardware wallet | Cold means the device holding the private key is offline at the moment of signing. A hardware wallet is one way of doing that, and a computer that never goes online is another. A hardware wallet used while plugged into an online computer still keeps the private key inside the device and is still cold; the thing to watch is the transaction that computer hands over. |
| Keeping the seed phrase in a cloud drive is convenient, and encrypting it is enough | The safety of that file in the cloud drive depends on your cloud account and on the encryption password you set. Once someone signs in to the cloud account the file is in their hands, and all that remains is how long the password holds. See can you photograph a seed phrase or keep it in a cloud drive. |
| I do not trade, so leaving coins on the exchange is the least trouble | If you rarely log in, you will not see it when something is wrong with the account, and if the platform runs into trouble you will be among the later ones to find out. Money that sits untouched for the long term is exactly the money that belongs in a wallet you hold yourself. |
| Multisig is too much hassle and no use to one person | For modest amounts that is true. But when the bulk of your net worth depends on a single key, there is no way back if that key is lost or stolen. An individual using multisig should choose 2-of-3 and not 2-of-2: with 2-of-2, losing either key means the money can never be moved again. |
Count again
Back to the setup at the start: an extension wallet, a mobile wallet, a hardware wallet, a steel plate and an exchange account.
Now it can be stated clearly. You hold three sets of keys yourself: one for the extension wallet, one for the mobile wallet, and one shared by the hardware wallet and the steel plate. The exchange account is custodial, and its keys are not in your hands. The first two sets are hot and the third is cold.
The number itself is not important. What is important is that for every set of keys you can say what it is for and where its backup is. Count your own the same way. If along the way you find a wallet where you cannot remember why you created it, how much is left in it or where its seed phrase is, move the money into a wallet you can account for and stop using that one.