Understanding Crypto Wallets: Types, Features, and Functionality
Crypto wallets provide a safe place to store cryptocurrency, although they work a little differently than tucking cash into a billfold.
There are also countless options to choose from among crypto wallets—deciding which one fits your needs is the first step. Different wallets support different types of coins—most hold Bitcoin, some only handle Ethereum, and a few can hold any type of crypto—and they come in two main flavors: hot wallets, which are internet-enabled, and cold wallets, which live offline.
To help you find the right wallet
What Is a Crypto Wallet?
A crypto wallet, also known as a digital wallet, is a software program that stores private and public keys used to interact with a blockchain network and manage cryptocurrency. It allows users to send, receive, and store digital assets such as Bitcoin, Ethereum, and other cryptocurrencies.
Crypto wallets can be divided into two main categories: hot wallets and cold wallets. Hot wallets are connected to the internet and are more vulnerable to hacking, while cold wallets are offline and offer greater security.
Some popular types of crypto wallets include desktop wallets, mobile wallets, web wallets, hardware wallets, and paper wallets. Each type of wallet has its own set of advantages and disadvantages, and users should choose a wallet that best fits their needs based on factors such as security, ease of use, and accessibility.
Compatibility between wallets helps if you’re looking to access additional features. But a word of caution: If you have multiple wallets for the same crypto or token, you may have heightened security risks, since there are more touchpoints to reveal the keys to your crypto.
How Do Crypto Wallets Work?
Crypto wallets work by storing the private keys for your cryptocurrencies. A wallet holds the credentials needed to prove you own the cryptocurrencies. You can also use the wallet to send cryptocurrencies to or receive them from others.
There are different types of crypto wallets, ranging from online services and programs to simply printing the keys on a piece of paper. The key function is that the crypto wallet holds the keys needed to access the blockchain to transact with your cryptocurrencies.
Types of Crypto Wallets
There are two main types of crypto wallets: hot and cold. Hot wallets are connected to the internet. These include:
- Online wallets. These wallets connect to other websites/online services. For example, many crypto exchanges offer online wallets through their platforms.
- Mobile wallets. Mobile wallets can be downloaded to your mobile device. You then store your keys on the mobile app.
- Desktop wallets. With a desktop wallet, you download a program to your computer, which you then use to store your keys.
Cold wallets are wallets that are not connected to the internet. For example, you could buy a USB key that stores your keys. You could also print off your private keys on a piece of paper.
In addition, crypto wallets can either be custodial or noncustodial. A custodial wallet is one where a third party controls and manages the wallet, including security, on your behalf. An online wallet from a crypto exchange would be custodial.
A noncustodial wallet is one where the cryptocurrency owner manages the wallet. A USB hard drive or a paper wallet would be non-custodial. You’re responsible for storing and protecting your keys on a noncustodial wallet.
Why Do You Need a Crypto Wallet?
Cryptocurrency exists as nothing more than a string of code on a larger blockchain. When you purchase cryptocurrencies, such as Bitcoin or Ethereum, your proof of ownership is based on a public key and a private key.
The public key is like your bank account number: It tells you where your crypto is, but it doesn’t provide access to it. The private key identifies you as the “true owner.”
If you lose the private key, you could lose access to your crypto. Likewise, any person who gets ahold of your private keys has full access to your crypto.
There’s a popular expression in the crypto world, “Not your keys, not your coins.” If you don’t control your keys, you don’t have full access to your crypto assets.
How To Get a Crypto Wallet
How to get a crypto wallet depends on what kind you want. If you’d like an online, mobile or desktop wallet, you download the necessary software from the crypto wallet company. You’ll also need to set up an account.
Your wallet should give you a digital address or QR code for accepting asset transfers. Some wallets can also integrate directly with major crypto exchanges. Follow the wallet’s process for transferring over your assets. The crypto private keys will then be stored in your wallet versus the exchange.
You follow a similar process with a cold, offline wallet. You’ll need to buy the physical hardware wallet first. The hardware will tell you what program you need to download to set up the wallet. You then use this program to transfer your cryptocurrency keys to the hardware storage device.
Alternatively, there are paper wallet generator websites online. You can use those to create and print off a paper crypto wallet with your keys.
How To Set Up a Crypto Wallet
Just like there are many ways to store your cash, there are many ways to stash your crypto.
Opening a crypto wallet will vary by the type chosen. If you’re using an exchange wallet, for example, you’ll pick a platform that you trust and then create an account. Generally, personal information and a two-step verification process are required.
For a hardware wallet, you’ll need to purchase the hardware first. You’ll typically need to install software to set up the wallet, too.
What Is a Hot Wallet?
A hot wallet is a type of crypto wallet that is connected to the internet and used for storing cryptocurrency or other digital assets that are actively traded or accessed frequently.
This type of wallet is designed for convenience and ease of use, allowing users to quickly and easily send and receive funds without having to go through a lengthy process of transferring funds from a cold storage wallet.
Since hot wallets are connected to the internet, they are more vulnerable to hacking and other security risks compared to cold wallets, which are offline and therefore more secure. As such, it is important to take precautions to secure a hot wallet, such as using strong passwords and two-factor authentication, and not keeping large amounts of cryptocurrency in it for extended periods.
What’s a Cold Wallet?
A cold wallet is a type of crypto wallet used to store cryptocurrencies offline. This is done to enhance security by reducing the risk of hacking, malware, and other security threats that come with being connected to the internet.
Cold wallets are either hardware devices like USB sticks or paper wallets that store private and public keys to your crypto via non-electronic means. Either way, your private keys are kept completely offline and secure from any online threats.
While cold wallets offer a high level of security, they are less convenient to use for regular transactions than hot wallets. Cold wallets are ideal for storing large amounts of cryptocurrency for extended periods.
It is important to note that users must take adequate precautions when setting up and using a cold wallet to ensure that they do not lose their private keys and can recover their cryptocurrency in the event of loss or damage to their hardware device.
How To Choose a Crypto Wallet
If you’re buying crypto, then you’ll want to explore the crypto wallet best suited for your needs.
You might be interested in holding a whole portfolio of different coins and tokens in one wallet. Or maybe you’re just looking for a crypto wallet that supports only a few big cryptos with myriad features.
Overall, it’s important to find a crypto wallet with a strong, stable history and a high level of security.
