As a business owner, you’re always looking for new and innovative ways to reduce costs and increase profits while providing better service and more value to your customers. You’ve probably heard of Bitcoin and other digital currencies and how you can use them to pay for goods and services. While digital currencies are still in their early stages, they offer opportunities for businesses to save on fees associated with traditional payment methods like credit cards and make cross-border payments easily and quickly.
One downside of digital currencies is that they can be tricky to store and use securely. If you’re thinking of accepting Bitcoin or other cryptocurrencies as payments from your customers, you’ll need to set up a crypto wallet for your business. But how do you choose and set up your first crypto wallet for business transactions? And what’s more, how do you ensure your funds are safe? Keep reading, and you’ll find the answers to these questions and more.
What are crypto wallets, and why do businesses need them?
A crypto wallet is a digital wallet that stores cryptocurrencies. Like a real-world wallet, it provides a way to keep track of your funds and keep them safe. The difference is that, instead of keeping your hard cash safe, crypto wallets safeguard your private keys, which are used to access your cryptocurrency funds.
When you want to send or receive Bitcoin or other digital currencies, your transaction is broadcast to a network of computers that maintain the blockchain through a process called crypto mining. These computers then verify the transaction using your private key, and if everything checks out, the transaction is processed and recorded in the blockchain until the end of time.
So, as you can see, your private keys are essential to accessing and using your digital currency funds. If you lose your private key, you will never again have access to your money; your coins will be lost for good. On the other hand, if someone steals your private key, they’ll have access to all your funds, so you’ll probably lose your coins as well. That’s why it’s so important to store your keys safely, and crypto wallets are specifically designed to do just that.
It doesn’t matter if you’re an average Joe or a big entertainment business trying to set up better payment channels for your customers; if you want to use cryptos, you need a crypto wallet. But, while individuals like you and me can choose almost any of the many good wallets out there, businesses have particular needs that only some crypto wallets offer. That’s why businesses need to choose the right crypto wallet from the start.
The different types of crypto wallets
Now that you know what a crypto wallet is and why your business needs one, let’s look at the different types of wallets available. Crypto wallets can fall into several categories, each with its pros and cons. They can be either hot wallets or cold wallets, software wallets or hardware wallets, and custodial wallets or noncustodial wallets.
Hot vs. cold storage
The first distinction is between hot wallets and cold wallets. A hot wallet (or hot storage) is a digital wallet connected to the Internet. That means it’s convenient and easy to use, but it also means that it’s more vulnerable to hacking. After all, if your computer or phone can connect to the Internet, so can a hacker.
On the other hand, cold storage or cold wallets refers to wallets that are not connected to the Internet and, therefore, are much less vulnerable to hacking. The trade-off is that they’re not as convenient to use; you can’t just open up your cold wallet and send or receive crypto whenever you want. You need to take your offline wallet, connect it to the Internet, make your transaction and then disconnect it from the Internet again.
Software vs. hardware wallets
The next distinction we can make is between software wallets and hardware wallets. Software wallets are digital wallets that are stored on your computer or phone. They’re computer programs that run on top of your device’s OS. These are convenient and easy to use, but they’re also vulnerable to hacking since your devices are likely always online.
On the other hand, a hardware wallet is a physical device, like a USB stick, that stores your private keys offline and is therefore also a type of cold storage device. These run on their own OS, and are a lot more secure than software wallets.
Custodial vs. noncustodial wallets
The last distinction we can make is between custodial wallets and noncustodial wallets. Custodial wallets control and safeguard your private keys and handle transactions while providing you with a normal online user account you can access from anywhere. The thing with custodial wallets is that your cryptos are basically held by a third party, like an exchange or a wallet provider. This requires a lot of trust on your end.
On the flip side, when you use a trusted custodial wallet, you have the peace of mind that you won’t lose your private key (because you don’t even have it). What you do have is a password or passphrase and any other common authentication mechanism to access your wallet account. If you lose or forget any of those, getting your account back is as simple as calling customer service.
Noncustodial wallets, on the other hand, are held by the user; you have full control over your private keys. These types of wallets don’t store or manage your keys for you. This significantly lowers the need for trust, but it also means that if you lose your private keys, there’s no customer service to help you recover your account; your cryptos are gone for good.
How to choose the safest wallet for my business’s crypto?
Now that you know the different types of wallets, how do you choose which one is best for your business? The answer to that question depends on a few factors, like what type of business you have, the particular coin or coins you plan to work with (Bitcoin, Ether, Litecoin, etc.), how much money you’re dealing with and how much experience you have with crypto.
Choosing between hot and cold storage
When choosing between hot and cold wallets, it depends on how much money you plan to move with your crypto and how frequently you expect to make transactions. If you have a small business that only deals with a limited amount of crypto, a hot wallet could be enough.
If you have a larger business that deals with more money or plan on holding (HODLing) your cryptos as an investment for a long time, you might choose a good cold storage crypto wallet instead. One of the most trusted cold storage hardware wallets for businesses and individuals is the Ledger Nano S, which supports more than 700 coins.
Choosing between custodial and noncustodial wallets
If you’re starting out with crypto and don’t have much experience making transactions and keeping track of your funds, much less your private keys, it’s probably a good idea to go for a custodial wallet like Coinbase Wallet or Exodus. These are good, user-friendly wallets that will help you get the hang of how everything works without worrying about losing your crypto.
As your business grows and you level up with crypto, you might want to consider switching to a noncustodial wallet, which gives you full control of your crypto.
Specific business-related features to look for in a crypto wallet
Besides choosing a wallet that will keep your cryptos safe, when looking for a crypto wallet for your business, there are a few specific features you might want to keep an eye out for:
- Multi-signature (multisig) support: This feature allows multiple people to approve a transaction before it’s executed. That way, no single person in your business has control over the funds, therefore reducing the risk of theft.
- Segregated Witness (SegWit) support: SegWit is a technical improvement of the Bitcoin protocol that allows cheaper and faster transactions. If you plan on frequently moving crypto around, look for a wallet that supports SegWit.
- Payment Protocol (BIP70-73) support: The Payment Protocol is a set of standards that improve the security and efficiency of Bitcoin transactions. Support for these protocols is important for businesses to make it easier for their customers to pay them.
Risks to look out for when setting up a crypto wallet for your business
The blockchain itself is almost impossible to hack, so your crypto’s vulnerability is mostly related to losing your private key or having it stolen. Even though crypto wallets help in this regard, there are still some risks to keep in mind when setting up a crypto wallet for your business:
- Hacking: If you’re using a hot wallet connected to the Internet, hackers can gain access to your funds. You can avoid this by using cold storage.
- Phishing: This is when someone tries to trick you into giving them your private keys or login information by masquerading as a legitimate website or service such as a crypto wallet. To avoid this, double-check every website address you type into your browser and avoid signing up to crypto wallets from a link coming from an untrusted source.
- Malware attacks: Malicious software designed to steal your crypto can infect your computer or mobile device if you’re not careful. One example is copy-paste malware that detects when you copy a crypto address to the clipboard and replaces it with someone else’s address when you paste it, stealing your funds. You can easily detect these changes by double-checking the address when you paste it before making a transaction.
- Physical theft: If you’re using a hardware wallet, someone could physically steal it from you and gain access to your crypto. The same goes for those that write their keys on paper. If anyone steals that little piece of paper (or if you lose it), you lose your money.
The bottom line
Setting up a crypto wallet for your business starts with choosing the right wallet. The safest option for your business’s cryptos is a cold-storage hardware wallet that provides all the necessary features for a business like multisig support, SegWit support and Payment Protocol support, among others. While there are risks associated with setting up a crypto wallet for your business, you can minimize them by knowing what they are and taking the proper precautions. Provided you don’t share your private key with anyone, keep your hardware key in a safe (place) and keep an eye out for potential phishing, hacking or malware attacks, you’ll be able to make the most of crypto’s many business applications without putting your money at risk.