For those of you who actively trade, mine, or stake cryptocurrency, you have probably realized the benefits of using a crypto wallet. By using a wallet, users can conveniently take crypto assets off of the various exchanges and place them into a personal wallet. And once those crypto assets are placed in a wallet, they can be more easily managed and controlled.
The crypto markets have seen an explosion of popularity and innovation in recent years, which has encouraged crypto investors to get involved with multiple exchanges and trade many different types of coins. In today’s market, so many exciting opportunities are available that trading exclusively in one cryptocurrency seems overly limiting. But trading on multiple exchanges and in various currencies often means opening and managing several different crypto wallets simultaneously. As a result, many users wonder whether managing multiple crypto wallets is a good idea. And if so, what are some of the strategies that can be implemented to help them manage their wallets most effectively?
In this article, we plan on answering all of these questions and more. We also hope to convince you that having multiple wallets is actually a smart move. But first, let’s start with a brief overview detailing what crypto wallets are and discuss the various types of wallets that exist.
What is a Cryptocurrency Wallet?
When the blockchain was first created, sending and receiving cryptocurrency was a manual and time-consuming task. Advancement came in the form of the first crypto wallet, which made the process of transferring crypto much easier. Today, crypto wallets are used to conveniently send, receive, and trade cryptocurrency and NFTs on the blockchain. The process of transferring crypto is now nearly as easy as shopping online with a credit card.
In simple terms, “a cryptocurrency wallet is a device or program that stores your cryptocurrency keys and allows you to access your coins.” In some ways, a crypto wallet functions like a physical wallet in that it is something you reach for when you want to access your money. However, “Unlike a normal wallet, which can hold actual cash, crypto wallets technically don’t store your crypto. Your holdings live on the blockchain but can only be accessed using a private key. Your keys prove your ownership of your digital money and allow you to make transactions.”
As you might have gathered from the above definition, the concept of public and private keys is critical when it comes to understanding crypto wallets. The public key (also called a wallet address) is similar to a bank account number in that it allows others to send you funds. As the name implies, the public key is often available or shared publicly. In order to protect the wallet owner, the public key has limited functionality. For example, the public key only allows others to send funds to the wallet and does not allow them to move crypto out of the wallet. The private key, on the other hand, operates like a bank account username and password in that it provides complete access to and control over the wallet. With the private key, crypto can be sent, received, and moved from the wallet at will.
To recap, a crypto wallet interacts with the blockchain, stores your public and private keys, monitors your crypto balance, and allows you to send and receive crypto.
What are the Different Types of Cryptocurrency Wallets?
There are three main types of cryptocurrency wallets - hot wallets, cold wallets, and paper wallets. The difference between the three wallet types mostly has to do with their respective level of security and method of blockchain interaction.
Hot Wallet
A hot wallet (also referred to as a mobile/online wallet) is software-driven, always connected to the internet, and managed by a third party in most cases. The primary benefit of hot wallets is their convenience, as they don’t require any additional hardware and are intuitive for most people who have experience using online accounts or mobile applications. In fact, hot wallets are just about as easy to use as an online banking app or e-commerce account. These hot wallets function so seamlessly you might be wondering why there is a need for any other wallet type. Unfortunately, hot wallets suffer from a lack of security, which is obviously not a desirable attribute for an account that holds your money. While providers have made efforts to beef up security in recent years, there is still a troubling history of hacking and thefts associated with hot wallets. And unlike a traditional bank that provides federally-backed FDIC insurance, hot wallets have no such protection. When a wallet is hacked and funds are stolen, the crypto is gone for good. As a result, it is generally advisable to keep only small amounts of crypto in hot wallets at any given time and use them primarily for short-term trading and transferring of funds.
Trust wallet (i.e. Ethereum wallet) is one of the most popular hot wallets available today because it can serve as a central hub for many activities on the blockchain. Users can easily swap one type of cryptocurrency for another, buy crypto using a credit card, store crypto on the blockchain, stake crypto to earn rewards, and collect NFTs using the DApp browser. The Trust Wallet app is very convenient and available for both iOS and Android. While Trust Wallet is the official decentralized wallet of the Binance exchange, it is also fully compatible with dozens of other blockchains and supports thousands of cryptocurrencies.
Cold Wallet
Like hot wallets, cold wallets (also called hardware wallets) store the private keys that give you access to and control over your crypto. However, “with cold storage, the digital wallet is stored on a platform that is not connected to the internet, thereby protecting the wallet from unauthorized access, cyber hacks, and other vulnerabilities that a system connected to the internet is susceptible to.” In this way, cold wallets are attempting to provide a balance between convenience and security.
As the above definition implies, cold wallets generally involve hardware. The cold wallet devices look and function similarly to medium-sized USB drives (also known as flash drives). For the majority of their lifespan, these devices remain disconnected from computers or the internet. Additionally, “even when a hardware wallet is plugged into your computer or connected via Bluetooth, depending on the storage method, the funds stored on the drive are difficult or even impossible to steal. While technically connected to the internet, the signing of transactions is done “in-device,” and only subsequently broadcast to the network via your computer’s internet connection.” This means that your private key never leaves the cold wallet, even when plugged into your computer. As a result, cold wallets are a very secure method of ensuring that your private key information is not hacked.
Cold wallets really shine when it comes to the buy-and-hold strategy of crypto investing. Unfortunately, there are also some downsides to their use that make them less convenient and potentially prone to human error. First, they are too slow and cumbersome to use while actively trading crypto. Crypto traders would probably be better served by keeping their short-term assets on the exchange or in hot wallets. The second drawback to cold wallets involves their price. Cold wallet devices often cost upwards of $100-$200 per device. Although the price is not exorbitant, it is undoubtedly more costly than hot wallets, which are typically free to use. And finally, cold wallets can be lost. While the idea of losing a cold wallet device with a significant amount of crypto stored on it may sound unlikely to you, consider whether you have ever misplaced an important USB drive. It happens more often than you would think.
There are several reputable cold wallet brands available today. Trezor, the most popular brand, offers several cold wallet models and other private key storage products. Their flagship cold wallet, the Trezor Model T, supports over 1,000 cryptocurrencies and offers several great features. One of the strongest selling points of the device is its open-source code. Open-source code is widely considered to be the most secure coding method for cold wallet devices. The Model T also provides a touchscreen interface that allows users to set a pin code for secure access. While it feels strange to mention the lack of a feature as a positive, many users favor cold wallets like the model T because there is no wifi or BlueTooth functionality. In most instances, the simpler a device is, the less susceptible it is to hacking or other security breaches. And finally, the model T can also serve as a password manager and eliminate the need for a separate password device or service.
Paper Wallet
Speaking of simplicity, paper wallets are about as straightforward as it gets. A paper wallet is just “...a printed piece of paper containing keys and QR codes used to facilitate your cryptocurrency transactions.” Yes, that’s right, a paper wallet is just your public and private keys printed out on a piece of paper and often involving a level of encryption. The main selling point of paper wallets is that they are impervious to hacking. Unless mishandled in an egregious manner, it is nearly impossible for the information contained on paper wallets to be stolen digitally.
During the advent of cryptocurrency markets, paper wallets were considered the most secure method of securing private keys. Over time, however, the negatives of using paper wallets started to add up. For example, paper degrades over time and can be easily damaged by water, fire, or other environmental factors. Additionally, it is relatively easy to lose a single piece of paper. The threat of damage or loss is particularly concerning considering that these cold storage methods commonly store large amounts of crypto for the long term.
In recent years, hot wallets and cold wallets have increased in popularity and mostly replaced the use of paper wallets. However, paper wallets do still hold an important place in the history and development of crypto markets. In fact, some of the most colorful stories about the early days of crypto involve paper wallets. For example, some crypto holders have been known to store their paper wallets in elaborate fire-proof safes, in safety deposit vaults, or buried deeply in their backyards. Additionally, some early crypto pioneers randomly encrypted their paper wallets by repeatedly rolling a pair of dice. Others relied on paper wallet generator websites and unwittingly gave nefarious actors access to the entirety of their crypto assets.
While there are still paper wallet generator websites and strategies for DIY encryption available, we are reluctant to recommend them. Without any new advancements on the horizon, the time for paper wallets has probably passed.
Can You Have Multiple Cryptocurrency Wallets?
While managing multiple crypto wallets may seem overwhelming, there are many good reasons to consider using several at one time. Perhaps the most straightforward argument for using multiple wallets involves a common phrase - don’t keep all of your eggs in one basket.
Portfolio Diversification
As described above, crypto wallets suffer from a lack of security. Although they are very convenient to use, hot wallets are susceptible to hacking. Cold wallets are much less vulnerable to hacking but can be lost, stolen, or become defective. And paper wallets, while almost impossible to hack, are delicate and very easy to misplace. In light of the money involved and the lack of security, it just makes good sense to diversify your risk by using multiple wallets. In the event that you lose access to the funds in one of your crypto wallets, you will still retain access to the funds in your other wallets. Obviously, nobody wants to lose a portion of their assets, but it sure beats losing them all at once.
Access to a Wide Variety of Cryptocurrencies
Diversifying your use of crypto wallets has another great benefit involving access. While the largest crypto wallets are supporting more and more cryptocurrencies over time, it is still the case that you must have multiple crypto wallets in order to gain access to all the different cryptocurrencies. And with new and different cryptocurrencies becoming available at a rapid pace, it would be a shame to limit your choice to just a few of the most popular options. For example, “...Litecoin Core is a desktop app wallet that only stores Litecoin coins and tokens. So if you’re a Litecoin investor who has also branched out and purchased Ether on the Ethereum network, you’ll have to use a different wallet to manage keys and other information associated with those new coins.” By having multiple crypto wallets, you can invest in whichever type of coin appeals to you. This focus on unobstructed personal choice seems in keeping with the ideals that lead to the creation of cryptocurrency and the blockchain in the first place.
Organization
While it might seem like having multiple wallets would lead to disorganization within your financial portfolio, the opposite can be true if assets are allocated prudently within each wallet. The average crypto investor probably has some idea about how they want to use their crypto investments. For example, they may own some types of crypto for diversification purposes, other sums they intend to use for day trading, and the remainder they are holding for the long term, perhaps even for retirement. The same situation applies to businesses, although the intended uses will be different. For example, a company may keep some crypto for short-term liquidity, other crypto may be held just temporarily and regularly converted to other currencies, and some crypto may be held as long-term investments, perhaps to be used later for facility/equipment upgrades, as a hedge against downside risks, or for overall business expansion. By employing multiple wallets, the individual or business can designate all funds within a wallet for a specific and separate purpose. Separating funds according to the intended purpose can make accounting and daily usage of crypto wallets a much simpler and more organized process.
Are there Benefits to Consolidating Cryptocurrency Wallets?
It might sound counterintuitive to consolidate your crypto wallets just after diversifying them, but it can be a smart move for several reasons. In fact, we think consolidating your crypto wallets is a crucial final step that will allow you to gain complete control over your crypto portfolio.
Let’s start the discussion of crypto wallet consolidation by explaining precisely what it is and is not. It’s important to understand that consolidating your crypto wallets does not change the structure of the underlying wallets themselves. All of the efforts you have undertaken in order to diversify your crypto wallets remain intact even after consolidating them. And you will continue to reap all of the benefits described above. Consolidating your wallets simply means that you will be able to track your investments from one place.
In practice, crypto wallet consolidation generally involves connecting or linking your various crypto wallets within a singular tool. The digital tool will then track and update as changes occur within your wallets and provide a central dashboard allowing a high-level view of all your crypto investments. The ability to see all of your crypto investments in one place can yield significant benefits, especially if you manage a sizable amount of crypto or more than just a few crypto wallets.
Easier to Manage All Assets in One Place
The only negative associated with using multiple crypto wallets is the time and energy it takes to manage all of your wallets separately. In order to keep track of your investments, you would probably need to create a detailed master spreadsheet with all of your crypto holdings. Once constructed, the spreadsheet would need to be constantly updated to reflect any changes in the composition or value of your assets. And unless you are diligent about tracking and updating your portfolio, it is quite easy to lose sight of the type and amount of crypto assets you own especially considering the volatility in the crypto market in recent months. The problem is compounded if you happen to day trade crypto on a regular basis. For trade traders, it is nearly impossible to stay organized while keeping pace with their activity on the market.
After consolidating your crypto wallets, however, you will be able to effectively manage your assets in a much more efficient manner. Crypto wallet consolidation provides you with a high-level view of your portfolio while simultaneously freeing you from the burden of having to track and update your own investments separately. With the tracking technology provided by crypto wallet consolidation, you will have an up-to-date and accurate picture of your holdings at all times.
Protect Your Assets
Without the use of tracking technology, it can be challenging to monitor all of your crypto investments, especially when using multiple wallets. And as described above, many crypto exchanges and hot wallets are susceptible to hacking and other mischief. So, if you haven’t consolidated your wallets, how will you know whether you have been hacked or lost significant asset value? Unfortunately, you probably will not discover the hack or considerable drop in value before it is too late to do anything about it. This outcome would be disastrous for large holders of crypto assets. Luckily, the issue can be avoided altogether by consolidating your wallets and ensuring that you have an up-to-date view of your investments. In order to have success in today’s volatile crypto market, you must know precisely what you own and have the agility necessary to make changes quickly should the need arise.
Capitalize on Trends in Your Portfolio
By having an accurate view of your holdings, you will be able to track which assets are performing well and which ones are not producing as intended. These insights can help you learn from your data and instruct you on which investment moves to make in the future. By capitalizing on successful trends within your portfolio and trimming back on losing bets, you may be able to increase your return on investment (ROI) and generate more income. Because the cryptocurrency markets are a nascent opportunity, there are fewer research and analytical tools available to investors as compared to more traditional investments like stocks and bonds. As a result, your own portfolio insights can be some of the most essential information at your disposal.
Consolidate Assets from Multiple Wallets and Track Them in Real-Time with Bitwave
Bitwave provides the perfect all-in-one financial tool for crypto wallet consolidation and tracking. Our tool will allow you to benefit from the diversification of using multiple wallets while also capitalizing on the efficiency and optimization that comes along with wallet consolidation. What’s even better is that our wallet consolidation tool integrates seamlessly with our best-in-class tax and accounting solutions. If you are looking for a one-stop shop for all of your crypto management needs, Bitwave is the place to be! Contact our team to set up a demo and learn more about all the great things we can do for your business.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
