Understanding Crypto Wallets

Crypto wallets hold the private keys to your cryptocurrency and keep them safe. They come in several varieties, and they can be either physical devices, software programs or online services.

But like cryptocurrency, the concept of a crypto wallet is pretty abstract. Let’s take a closer look at these essential crypto tools and how they work.

What Is a Crypto Wallet?

The first lesson of crypto wallets is that they are nothing like the billfold in your purse or back pocket, holding cash and credit cards. Rather, a crypto wallet is a form of digital storage to secure access to your crypto.

Cryptocurrency is a highly abstract store of value, without a physical token similar to cash’s coins and bills. It exists as nothing more than a string of code on a larger blockchain.

When you purchase Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.

Think of the public key as something like your bank account number—you can share it with anybody, but it doesn’t provide access to your money.

The private key is like a password to your bank account. Please don’t share it with anyone, or they could steal all your money.

If you lose your private key, you could lose access to your crypto. Likewise, the person who holds a private key has full access to the crypto. Keeping your private keys secure in a crypto wallet is essential.

“Coins and tokens are part of a blockchain system in the form of data, and the wallets serve as a means to access them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.

How Do Crypto Wallets Work

A crypto wallet stores the public and private keys necessary to send, receive and store cryptocurrency.

When you buy cryptocurrency, the company you purchased it through probably gave you a wallet to hold the digital coins. This is called a hot wallet because it’s online and connected to the internet.

“To avoid the risk that hackers might steal your online wallet, you can get a cold wallet which is not connected to the internet,” says Ric Edelman, founder of Digital Assets Council of Financial Professionals.

Cold wallets are essentially thumb drives or another type of hardware device. “Once you have one, you simply transfer your coins from your hot wallet to your cold wallet,” Edelman says.

Types of Crypto Wallets

As noted above, there are two broad categories of crypto wallets: hot wallets that are connected to the internet and cold wallets that are not. Let’s take a look at these in more depth.

Paper Wallets

A paper wallet is the simplest cold wallet to understand and operate. It is what it sounds like: A piece of paper with your keys written on it.

“As this is just a piece of paper, it’s a cold wallet and thus safe from hackers, but paper can be lost, stolen, torn or made illegible by getting wet,” Edelman says. Given this, “as cold wallets go, paper is not ideal.”

Hardware Wallets

A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help keep your private keys safe from hackers who would need to steal the physical wallet to gain access, Leinweber says.

Hardware wallets also have an additional layer of security over paper wallets by requiring users to enter a PIN to access the device’s content. While these PINs provide an extra layer of protection, if you forget your PIN, you lose access to your coins. “So you need to be tech-savvy to use such a wallet,” Leinweber says.

“The idea behind hardware wallets is to isolate the private keys from online storage like on a computer or smartphone, which are more vulnerable to hacking,” Leinweber says. “Storing the private keys offline prevents this, as hackers would have to physically steal the cryptocurrency hardware wallet to gain access to a user’s private keys.”

You can typically get a hardware wallet for between $50 and $150, although there are some much higher price options. For instance, you can buy the Trezor Model One for $72. You can also find more economical ones, such as a SafePal wallet for $49.99.

Online Wallets

Online wallets, also called software wallets, are your hot wallets. Desktop, mobile or web-based applications, these wallets require an internet connection and are both more accessible but also more prone to hacking than cold wallets.

“Your password is stored on servers online and thus represents a potentially increased risk,” Leinweber says.

If you only trust your infrastructure, he says it makes sense to have desktop wallets like Electrum and Wasabi Wallet created. This avoids involving a third party and lets you be solely responsible for your wallet’s security.

Leinweber says that mobile wallets are often favored by people who use cryptocurrency daily. These wallets are “positioned as an app on your smartphone, similar to Apple Wallet, and simply enables transactions with the help of QR codes.”

Meanwhile, web-based wallets are mostly accessible through browsers and let you transact anywhere you have an internet connection, he says.

Custodial Wallets vs. Non-Custodial Wallets

Now for some more crypto lingo. Non-custodial wallets are the types of wallets that put you in control of your own data. These are often the preferred wallet type among crypto enthusiasts because they don’t involve a third party to secure your private keys.

Offline wallets from Exodus or MetaMask, both offline storage options, are examples of non-custodial options. These wallets are touted for security, meaning they’re less prone to hacks.

Custodial wallets, on the other hand, are wallets offered by crypto businesses such as crypto exchanges like Gemini Wallet, BlockFi Wallet or eToro.

If you choose this type of wallet, you’re essentially outsourcing your private keys to them. But these wallets have some perks when it comes to accessibility. If you wish to access and send coins from this type of wallet, you log into your account and enter the location where you want to send your crypto.

These hot wallets usually also come with other features, such as being available for free and allowing the ability to stake your crypto.

How To Get A Crypto Wallet

It’s not hard to get a crypto wallet. Some crypto exchanges, such as Coinbase and Gemini, offer an online crypto wallet. If you want a cold wallet, you can buy one directly from a manufacturer online or even at Amazon.com. If you’re perusing Amazon.com, you might notice you buy the cold storage stick Ledger Nano S for nearly $60 or the Trezor Model T hardware wallet for $250.

But there are a few factors to consider when choosing a crypto wallet:

  • Customer service: It’s a good idea to choose wallet support that is always available and helpful, especially if you’re new to cryptocurrency ownership.
  • Fees: Third-party hot wallets may charge transaction fees, ultimately reducing your profits.
  • Security: Make sure your wallet provider is trustworthy and has sensible security measures in place to protect your cryptocurrency keys.
  • Types of cryptos supported: Some wallets may only support a handful of crypto projects, while others may support hundred of crypto projects. For instance, if you want to buy Cardano (ADA), you’ll need to ensure that the wallet supports that crypto.

With these factors in mind, a categorical “best” crypto wallet does not exist, Leinweber says, as each wallet has its strengths and weaknesses.

“Many users even opt for multiple wallets in parallel, which can ultimately lead to more secure distribution of possessions,” he says. “However, which wallet is the best and most suitable for someone has to be decided by everyone depending on their preferences.”

How To Use Crypto Wallet

The process of using a crypto wallet for cryptocurrency transactions will depend on the type of wallet you have. Still, it’s generally a straightforward process, not unlike how you’d send any other currency digitally.

“All you need to do is enter the recipient’s public address and the amount of cryptocurrency you want to transfer and confirm the transaction,” Leinweber says.

The difference between transacting in cryptocurrency versus fiat currency is that there is less recourse if things go awry.

“Be careful when entering the address, as cryptocurrency transactions are irrevocable,” Leinweber says. “If you enter an incorrect address, you will not be able to get your coins back.”