In this article, we explain what a cryptocurrency wallet is, what the different types are, and how they are used. We’ll cover paper wallets, hot wallets, cold wallets, web3 wallets and more. Then, you’ll be on your way to crypto ownership, so buckle up and let’s get started.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet provides a way for you to own, secure, and use digital assets such as cryptocurrencies and NFTs. When a crypto wallet is issued, it is done so digitally through a software program that connects to a blockchain.
When you download a wallet, you will receive two sets of randomly selected of numbers and letters, called the public keys and the private keys:
- Your public keys allow you to receive cryptocurrency into your wallet. But no one can withdraw from it – it is deposit-only. A public key may be viewed on the blockchain ledger since it’s an open, public database. However, your personal information is not included. Only the public key and the transaction details such as amount and time transacted are viewable.
- Your private keys are the second string of letters/numbers. To access private keys, you must know the seed phrase, which are sometimes referred to as the private keys as well. These keys allow you to withdraw to make transfers, trade, cash out, or just to hold long term in your wallet.
No one can access your private keys without the seed phrase, and in most cases you must also provide a strong password and 2-factor authentication (i.e., through email or text verification). If you lose the seed phrase, you cannot access the digital assets in the crypto wallet. Therefore, it is important to know how all the different wallets work and what you can do to secure your crypto.
Not like a fiat wallet
When you have a crypto wallet, it is not like a physical wallet that physically holds your dollars and credit cards. A crypto wallet is merely a software program for storing the public and private keys to access your crypto and engage with a blockchain, such as Bitcoin, Ethereum, or Binance Smart Chain.
How does a cryptocurrency wallet work?
In a real life example, you may have downloaded a Bitcoin wallet such as Bread Wallet, a popular mobile app wallet. Now that you have a public key, you can give it to anyone (such as an individual or a company) and they can send Bitcoin directly into your wallet, peer-to-peer, without any bank or 3rd party in the way. These types of p2p transactions happen almost immediately, cost very little, and work globally 24/7.
Types of cryptocurrency wallets
Software wallets (also known as hot wallets)
Software wallets are online wallets that come in varying forms:
- A desktop wallet, such as Exodus, is something you download and install on your laptop or PC. You can attain a high level of security using a desktop wallet. That’s because your crypto assets can only be accessed through one device. But you still may be vulnerable to hackers or computer hardware failure.
- Other Online wallets are cloud based and can be accessed by multiple computing devices in multiple locations. They offer convenience but your private keys may be held by a 3rd party, giving the crypto owner less control over their security.
- Mobile wallets may be downloaded onto your phone and offer the convenience of going wherever you go. They may have limited features due to data storage space limitations and can also be vulnerable to SIM swap hacks.
Many crypto platforms and exchanges have their own online and mobile crypto wallet like those discussed above. Since most exchanges have been hacked at one time or another, it’s best to keep as little as possible in exchange wallets.
Hardware wallets (also known as cold wallets or cold storage)
A hardware wallet stores your private keys on a hardware device that you buy; it’s similar to a USB/flash drive. They can be plugged into your computer to make transactions while online, and taken offline and stored physically in a secure location. Hardware wallets such as Ledger and Trezor allow you to interface with many different exchanges and platforms. All while temporarily plugged in, keeping your digital assets safe while offline.
Paper wallets (type of cold storage)
If you don’t have a hardware wallet (they currently run about $120 each), a paper wallet provides the next best level of security. When you download a crypto wallet such as Wasabi or Electrum, you receive the seed phrase one time. You must write it down and physically store the paper (some people will laminate it) in a safe place as you would the hardware wallet.
Web3 wallets (browser wallets)
Web3 wallets such as MetaMask and Trust Wallet are accessed through a browser extension. But you maintain control of your private keys. This is a heightened level of crypto ownership because you can access not only different cryptocurrencies from your Web3 wallet, but you can also access different blockchains, such as Ethereum and Binance Smart Chain, and decentralized exchanges (DEXes) such as Uniswap and Bancor.
Tips for keeping your crypto safe
- You may find yourself downloading multiple wallets for different reasons. If you do this, make sure you check in on each wallet periodically for updates. Wallet developers and teams are constantly improving on the security of their wallets. So you always want to have the most updated version for this reason.
- Store only small amounts of crypto online. Enough for daily use and HODL the rest in offline storage (also known as cold storage).
- Always go for additional security measures offered by wallets and platforms. This could mean using Google authenticator or 2factor authentication with email.
- Set very strong passwords and store them in a password vault such as LastPass (there’s a free version).
- Always use the security features of your wallet. For instance use 2FA and generate a long and a strong random password. You can even choose desktop or mobile wallets that also have a hard wallet backup feature. Just always go whole hog on crypto security as a rule of thumb.
In crypto’s beginning years, a wallet would often hold just bitcoin or Ethereum. But today, you have a full range of wallets that access any number of digital assets from crypto to NFTs.
Bitcoin.org is a great place to start to choose your first wallet (and is also home to the famous Bitcoin Whitepaper). It guides you along according to your familiarity with blockchain technology. Then it recommends a wallet based on your level of understanding and comfort level.
We hope this helped explain what cryptocurrency wallets are and how they are used. Until next time, remember the golden rule of crypto: Not your keys, not your coins.