Types of online and offline cryptocurrency wallets, advantages of remote storage, ways of cryptocurrency wallet protection
Cryptocurrency exchanges are vulnerable to frequent breaches and DDOS attacks, and they cannot provide a 100% guarantee that the funds will be safe. Wallets are an alternative to exchanges. Even if they make the execution of transactions more complicated, they secure higher protection than exchanges can do. Our review will introduce you to the advantages and drawbacks of online wallets, types of offline wallets, and their simplest examples. Also, you’ll get to know a couple of ways to protect your private wallets keys from an eventual breach.
How to choose and protect a cryptocurrency wallet
One of the world’s biggest cryptocurrency exchanges BTC-e became suddenly unavailable in July 2017. Trading volumes had equalled about $56.7 million dollars the day before the accident. The official reason for BTC-e suspension was the FBI charging Alexander Vinnik with money laundering by use of cryptocurrencies. The exchange’s accounts and servers were arrested and confiscated. Approximately 1 million client accounts were compromised and it was really hard to get back the money from those accounts. The exchange management had been examining money refunds for over 1.5 months.
Just after BTC-e, another big exchange, Poloniex, amended its agreement by adding a separate item saying the exchange couldn’t be hold liable for any money lost by a trader (stolen or lost in any other way) and did not guarantee safety on the platform. In other words, the representatives of the exchange chose to avoid responsibility and did not exclude breaches. This new item gave investors a reason to suppose that the exchange itself may be glad to use prohibited methods for taking hold of accounts in the guise of breach.
Unsurprisingly, investors’ confidence in uncontrolled and unregulated exchanges was undermined. E-wallets may be an alternative to exchange accounts. Read on to find out their advantages, disadvantages, and protection methods.
Best cryptocurrency wallets
An e-wallet for cryptocurrencies is a wallet where you store your personal key to cryptocurrencies. It is a kind of a password that provides access to cryptocurrencies kept on the blockchain. Making it public means losing cryptocurrencies. E-wallets may be reserved for a particular cryptocurrency or they may be multicurrency. They may be subdivided into 2 groups: online and offline wallets.
1. Online wallets
They are a service owned by a third party. In this case, keys are stored on remote servers. Not only do they allow opening several wallets for different cryptocurrencies, they also enable converted operations, trading on exchanges and calculation of commissions by use of embedded calculators.
Advantages:
- Fast registration;
- Anonymity. Verification is not required, a wallet owner remains unknown.
- Opportunity to work with several cryptocurrencies.
- High speed of transactions.
Disadvantages:
- Risks associated with cryptocurrency exchanges. Some wallets are created for fraudulent purposes from the very beginning; there are still risks of breaches.
- Extra expenses. Besides the exchange’s fee, you will have to pay a commission to the service.
There are no reliable ways to protect your money on those platforms. Therefore, the money protection advice comes to risk diversification, i.e. work with several wallets at the same time. However, taking into account the profitability of 100% that can be reached in just a few months, this is an optimal option.
Examples of popular online wallets:
- HolyTransaction. Multicurrency wallet designed in 2014 and compatible with over 10 most popular cryptocurrencies. User-friendly interface, moderate fee as compared with other wallets;
- Coinbase. Wallet based in 2012, compatible with bitcoin and ethereum.
- Cryptonator. The most popular multicurrency wallet in CIS countries.
2. Offline wallets
They store keys on their own mediums without Internet access. There can be several options:
1. Desktop wallets. The wallets that store keys on a hard drive. They are considered to be one of the most secure options among offline wallets. They are a program installed on a computer and allowing to access the data on a cryptocurrency account. Their disadvantage is a need in constant updates, which require much memory (from 100 GB). Therefore, desktop programs are subdivided into “thick” and “thin” ones. “Thick” (”heavy”) programs are those that download themselves all the blockchains from the beginning and constantly update them. “Thin” (”light”) programs download necessary information from third-party resources. Despite storing the file with a key on the computer, there is a risk of downloading wrong data from the services.
Examples of wallets:
- Exodus. Equipped with the ShareShift platform, compatible with 7 cryptocurrencies;
- Bitcoin Core. One of the best bitcoin wallets that functions under all OS.
- Armory. Add-on for Bitcoin Core, increases the safety of private keys storage.
2. Hardware wallets. These are portable mediums, a kind of a flash drive. This key storage method hasn’t been very popular so far as it’s convenient only for a long-term storage, not for trading. On the other hand, it doesn’t overload the computer.
Examples of devices:
- KeepKay. Compatible with 4 major cryptocurrencies;
- Flash Ledger USB Bitcoin Wallet;
- Trezor.
3. Browser wallets. These are programs designed as adds-on for Chrome and Firefox. They are minimalist and eye-friendly.
Example:
- Jaxx, compatible with 14 cryptocurrencies. An open-source wallet which allows you to export and import keys and also provides a desktop version for Windows and Linux.
4. Mobile wallets. These are programs installed on mobile carriers (gadgets). They can be interesting for those who use cryptocurrencies for making payments. This is rather a transit option for storing cryptocurrencies as mobile devices don’t provide for regular blockchain updates.
Examples of wallets:
- Coinomi. One of the best wallets for Android, supporting over 50 cryptocurrencies. An opportunity to use a seed phrase for restoring a wallet is a real advantage.
- Xapo. A wallet designed by a Californian company, compatible with bitcoin. Money kept in a wallet is insured. There’s also an opportunity to have a debit card issued. Requires a phone number.
5. Paper wallets. They are a unique option for storing keys, a printout equipped with a QR-code and containing a public address and a private key. This is an option for long-term storage for those who do not rely on electronic equipment.
Example: bitaddress.org.
Every type of a wallet has its advantages and disadvantages. Which one to choose depends on purposes. Desktop versions are more convenient for keeping big sums of money while paper carriers suit those who got used to cash. The latter are also considered to be less vulnerable to breach.
Top 5 cryptocurrency wallets, according to “CryptoCompare”
Ways of protecting cryptocurrency wallets
Online platforms are always exposed to the risks related to third parties. However, cold wallets are not fully safe either. There exist a lot of viruses that can read the data and transfer them to third parties. Some viruses not only provide access to passwords, but also install hidden software that uses a computer’s power for mining. Unfortunately, antivirus software is not always efficient, and the best protection therefore is autonomy and control over which sites are opened and which programs are downloaded.
Other ways to protect cryptocurrency wallets:
- Encryption. A wallet is protected through a password. This is a classical, yet minimal protection medium. There is no absolute guarantee of security as there exist viruses that can read the pressure of keys. Any password can by cracked.
- Backup. The data on changes in transactions can be stored in different places and thus not be available to a user. That’s why a wallet shall be fully backed up.
- Multisignature. The best protection from security breach as transactions are signed by two or more people. Multisignature is used in a business environment where an account can belong to several partners. Two accounts may be created on different devices for an investor to ensure a multilevel protection.
And, finally, the most reliable option is to avoid e-wallets and cryptocurrency exchanges at all. LiteFinance offered traders a new service not long ago - trading in leading cryptocurrencies. Your trading account is secured against breaches while the broker itself is under regulators’ and an independent auditor’s strict control. Join professional traders and earn from modern technology! Good luck in trading!
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