What Is a Crypto Wallet? All You Need To Know

Written by

Tamara T.

Senior Writer

Published Jul 31, 2023 at 11:47 AM
Last updated Feb 21, 2024 at 3:56 PM
KEY TAKEAWAYS
  • A cryptocurrency wallet securely stores your digital currencies
  • Blockchain technology and cryptographic keys are foundation of cryptocurrency wallets 
  • The importance of Crypto wallets lies in their security, privacy, ownership, accessibility, and diversity 
  • Main types of crypto wallets are hot, cold, custodial, non-custodial, and NFT wallets
  • Securing your crypto wallets is possible with several simple steps

 

What Is a Crypto Wallet? All You Need To Know 

A crypto wallet is your private vault for protecting your priceless digital possessions in the broad world of cryptocurrencies. You may store, manage, and interact with your bitcoins using it as a high-tech piggy bank.

A cryptocurrency wallet securely stores your digital currencies, such as Bitcoin, Ethereum, or any other crypto tokens you may own, just like a conventional wallet does for your actual cash and credit cards. But it serves as a doorway to the fascinating world of decentralized money, not just a location to store your digital fortune.

With the help of a crypto wallet, you can transfer and receive digital assets, keep track of your transaction history, and even take part in innovative new projects like decentralized applications (dApps) and decentralized finance (DeFi). It is your gateway to a world of opportunities where financial independence and power are at your disposal.

There is a perfect match for your needs and tastes, whether you like the ease of a mobile wallet on your smartphone, the increased security of a hardware wallet, or the accessibility of a web-based wallet.

So, get yourself a crypto wallet and get ready to embrace the financial future. It's more than just a tool; it's your entry ticket into a global movement where borders disappear, middlemen disappear, and the strength of decentralized technologies transforms how we interact with money. 
 
 

How Do Crypto Wallets Work?

Blockchain technology, along with cryptographic keys, is the foundation of how cryptocurrency wallets operate. You generate a set of cryptographic keys—a public key and a private key—when you build a cryptocurrency wallet.

The public key is comparable to the address on your wallet, which you may give out to others to get money. Anyone can use it to confirm that payments made to your wallet are legitimate and meant for you.

The private key, on the other hand, is your own code that enables you to sign transactions and access your wallet. It's essential to safeguard your private key and never divulge it to anyone else. You can approve transfers of money from your wallet to other addresses using the private key.

The blockchain network is a platform that cryptocurrency wallets use to track and store transactions. Your wallet produces a transaction, signs it with your private key, and broadcasts it to the network whenever you wish to send money. Using your public key, blockchain miners or validators on the network verify the transaction and add it to the blockchain's log.

Cryptocurrency wallets come in a variety of forms, including software wallets (such as mobile, desktop, and web wallets) and hardware wallets. While hardware wallets retain your keys offline on a safe hardware device, software wallets save your keys on your device or in the cloud.

Crypto wallets, which provide a secure and user-friendly interface for managing your digital assets, make it possible to see balances, start transactions, and maintain control over your cryptocurrencies.
 
 

Steps To Setting Up Your Crypto Wallet

Once you decide to set up a crypto wallet, you need to understand how the process works. It isn't a complicated task, and you’ll only need several minutes to complete it. First, you have to decide which type of crypto wallet you wish to use (hot and cold wallets are the most common). Next, you’ll have to follow several steps.

Let's see how the process works for both hot and cold wallets.
 

Setting Up a Hot Wallet

The process of setting up a hot wallet consists of the following steps:

  • Download the wallet. Before downloading the software, you should check whether it comes from a legitimate source. This is how you can avoid potential crypto scams that have recently increased in frequency. Many sites try to steal your information by creating fake versions of the software, so be aware of this. 
  • Open your account and secure it. If you opt for a non-custodial wallet, you’ll get a private key that includes a string of words. If you lose it, you won't have access to your funds. It is also possible to activate additional security features, such as two-factor authentication or biometrics. Choosing custodial wallets means that you have to complete the verification process or Know-Your-Customer (KYC) to confirm your identity.
  • Load money into your wallet. In the case of non-custodial wallets, you’ll probably have to transfer crypto from elsewhere, as many wallets do not accept fiat currencies. In the case of custodial wallets, you’ll also need to use a credit or debit card to load your wallet.

 

Setting Up a Cold Wallet

The process of setting up a cold wallet consists of the following steps:

  • Buy the wallet online. As part of the process, you should purchase a cold wallet from a  reliable source, to ensure the highest level of safety. 
  • Install the software. You have to finish the installation on your hardware device before using it. Choose the software from the provider’s official website, follow the instructions, and create a crypto wallet.
  • Deposit your money. This includes moving crypto into your hardware wallet from the crypto exchange or elsewhere. You can use wallets with an incorporated exchange, allowing you to trade crypto. At the same time, your device should be linked to your mobile/desktop. 

 

Why Are Crypto Wallets Important for You?

Anyone interested in utilizing and storing cryptocurrencies needs a crypto wallet. These are some of the factors that make crypto wallets crucial:

  • Security: Crypto wallets offer a safe method of managing and storing your cryptocurrency. You have control over your private keys, which are necessary for gaining access to and approving transactions, by keeping your assets in a digital wallet. Your chance of having your money stolen or compromised on centralized exchanges or other platforms is lower as a result.
  • Ownership and control: When you store your cryptocurrencies in a crypto wallet (non-custodial), you are completely in charge of them. Using a wallet gives you control over your assets as opposed to keeping your money on an exchange, where you must rely on their security measures. Independently, you can manage your portfolio, conduct trades, and move money.

Why Crypto Wallets Are Important

  • Accessibility: With a crypto wallet, you have 24/7, global access to your money. You can effortlessly manage your wallet and start transactions as long as you have an internet connection. Individuals who want to actively trade cryptocurrencies or use them in daily transactions would particularly benefit from this accessibility.
  • Privacy: Despite the fact that blockchain transactions are transparent, wallets let you maintain some level of anonymity by keeping your private information apart from your public address. For people who respect their financial privacy and prefer to keep their transactions under wraps, this privacy option may be crucial.
  • Diverse functionality: Beyond simple storage, cryptocurrency wallets enable a number of other features. In addition to engaging with non-fungible tokens (NFTs), they can be used for staking, taking part in decentralized finance (DeFi) protocols, voting in governance systems, and more. A flexible foundation for interacting with the larger cryptocurrency ecosystem is provided by wallets.

 

Variants of Crypto Wallets

While the main classification of crypto wallets includes the hot and cold wallets, there are other forms of wallets available too.
 

Hot Wallets

Hot wallets rely on an internet connection, so they are more accessible. Unfortunately, though, this makes your funds prone to hacking attacks. The best examples are web-based, mobile, and desktop wallets.

The main benefit of hot wallets is convenience. This means you can access your wallet anytime if you have a web connection. Simple access makes them perfect for traders and those who spend their crypto more often. 

If using hot wallets, your private keys remain on the online app. This comes with different risks. For example, your computer could be a target for malicious hacking attacks and other vulnerabilities. To mitigate risks, you can use an additional level of encryption, or choose devices that store your private keys securely. 

Let’s learn more about specific types of hot wallets:

  • Web wallets: These are wallets run by famous exchanges. Such platforms keep your private and public keys, and you can access the funds by logging into your account.
  • Desktop wallets: These store cryptographic keys in a web application on your computer.
  • Mobile wallets: Both private and public keys remain on mobile apps, allowing simple access to your cryptocurrencies.

 

Pros and Cons of Hot Wallets

Before deciding on hot wallets, you want to be aware of their pros and cons.

  • They are convenient and accessible from any place with a web connection
  • If you lose private keys, you can easily recover access

Hot wallets have some drawbacks, such as:

  • Being prone to hacking attacks and less secure options
  • In the case of custodial wallets, your keys stay on exchanges 

Crypto Wallets Types
 

Cold Wallets

Cold wallets keep your keys on an offline hardware. Hardware wallets appear in the form of a USB drive, which allows you to purchase, sell, or trade crypto whilst having an internet connection. When using “paper” wallets, you can access keys via QR codes situated on a piece of paper, or located on material like metal.

Cold storage wallets are harder to hack. Third parties cannot access your crypto, unless you fall into the trap of a phishing attack. In the case of a hardware wallet, a thief would first have to get the USB drive to access your crypto and then steal your password.

If you lose a USB/ sheet of paper and don’t have a backup of your key, you’ll also lose access to your funds. Unlike hot wallets, which allow you to regain access to your keys, you won't be able to recover access to your wallet because of a two-key security structure.

Let's take a look at the most common types of cold wallets:

  • Paper wallets: This is a physical location that keeps all private and public keys in written or printed form. It makes them safer than hot wallets, as hackers cannot access such keys. Yet there’s a risk that a piece of paper gets destroyed, which results in losing your funds. 
  • Hardware wallets: This is an external device (USB or Bluetooth-based) that keeps your keys. You just sign a transaction by pressing a button on this device. This makes them more secure thanks to the isolation from a non-stop connection. 

 

Pros and Cons of Cold Wallets

Using cold wallets is associated with the following benefits:

  • They provide higher security thanks to the offline storage
  • Hardware wallets are usually backed by hot storage

As for their benefits, you should pay attention to:

  • The fact that transactions are longer than expected
  • Currencies are irrecoverable without the backup of your keys

 

Custodial Wallets

Custodial wallets are the most common type of web-based wallets. You’ll find them on cryptocurrency exchanges, and they are known for convenience and simplicity. If you choose custodial wallets, however, you are no longer in full charge of your tokens, and the crypto exchange only holds your private keys.

This means you have to trust the platform to safely store your tokens and use strong security features to hinder unallowed access. Some of the most common measures to secure your holdings are two-factor authentication (2FA), biometrics (both facial or fingerprint), and email confirmation. You can only make a transaction if you complete all the security steps. 
 

Non-Custodial Wallets

Non-custodial wallets allow customers to keep control of their funds, since the user keeps private keys. Before launching a non-custodial wallet, the user has to write down and store a ‘seed’ phrase - a randomly generated string of words. This allows users to generate public and private keys, thus acting as a backup if they lose access to their device.

If you have a seed phrase, you can regain complete control of your money in that wallet. However, the opposite is also true: losing seeds means that you also lose access to your money. This emphasizes the importance of keeping the mnemonic phrase in a safe place, but also avoiding keeping a digital copy. 
 

NFT Wallets

If you're looking to collect or invest in NFTs (non-fungible tokens), all you need is an NFT wallet. It allows you to display your tokens and keep them away from third parties. This makes NFT wallets a safe environment, allowing you to keep private keys to authorize transactions. With an NFT web wallet like MetaMask, you can benefit from a smooth interface and engage in buying and selling your digital assets. It also provides full access to collectibles and art.

Before choosing the right NFT wallet, you should consider the following elements:

  • Compatibility with NFT marketplaces: It’s important to find a wallet that provides simple integration with existing NFT marketplaces. 
  • High security: This includes additional measures such as two-factor authentication (2FA), biometrics, or email confirmation.
  • Simple interface: This includes a simple to use platform with comprehensive features.
  • Availability on different devices: You can access many NFT wallets via online extensions or mobile/desktop apps. 
  • Cross-chain support. Although most wallets are compatible with Ethereum, you should ensure cross-chain compatibility on different networks.

 

Pros of Crypto Wallets

Setting up your crypto wallet comes with multiple benefits, as discussed below:

  • Simplicity of use. It is very simple to manage your cryptocurrencies in the wallet while keeping several coins at the same time.
  • Convenience: When using crypto wallets, you enjoy hassle-free experience. Before deciding on a certain wallet, however, you should do some research and base your decisions on this.
  • Security: Choosing the appropriate wallet means that you’ll take advantage of secure transactions to and from your wallet. You should only trust reputable providers and check their security features several times. 
  • Availability: Crypto wallets have never been more available. You can find different online and offline versions and make the most out of your experience.

 

Guide to Using Crypto Wallets

Each wallet is specific in terms of its features. However, some general rules apply when using them to send and receive money. Let's take a closer look at how to receive and send funds using cryptocurrency wallets.

  • Receiving Funds: To get funds, you have to retrieve a public key or crypto wallet address. Head to the "generate address" option, choose it, and copy this address or QR code. Next, you just share it with an individual who would be sending some crypto.
  • Sending Funds: You’ll need the wallet address of the receiver. Just go to the "send" option in your wallet and insert an address where you want to send some crypto. Choose the sum and press confirm. Before sending big amounts, you may want to check how it works by making smaller transactions. 

 

How To Pick A Crypto Wallet For You

Selecting the right crypto wallets could be a time-consuming process, especially if you've never tried them before. Which wallet you are going to choose depends on your preferences and relevant experience with cryptocurrencies and their management. However, you should check some features before deciding on the best option:

  • Security Level: Crypto wallets have different levels of security, so you should check all the features before picking one of them. The best options are those with multiple authentication steps.
  • Existing Fees: The amount that you’ll pay for your crypto transactions varies, depending on the fees. They can be either automatic or customizable according to the provider. You may also want to discover which crypto wallet has the lowest fees.
  • Accepted Cryptocurrencies: Some crypto wallets offer more currencies than their competitors. This is another factor to consider when choosing the right storage option. Think about how often you’d like to swap between various currencies, and this will guide you through the process.
  • Customer Support: Crypto wallet providers deliver different levels of customer support. Some are available all the time, while others have only limited operational times. You may want to know more about a specific provider by reading reviews from other users or testing the platform’s support on your own.
  • Accessibility: Your trading habits are key in selecting the best type of crypto wallet. If you spend more time on the desktop, you may wish to select hardware wallets. Those who spend more time on mobile devices should stick with smartphone apps or browser wallets.

 

Securing Your Crypto Wallet 

When you decide to use crypto wallets, you should always aim for safety. This is one of the main priorities both for beginners and experienced users. By following some measures, you can keep your wallet away from unauthorized parties and ensure your funds remain in your hands.

  • Selecting a reputable wallet: The first step is to choose a trustworthy and safe wallet. Choose wallets with a proven track record, stellar user ratings, and solid security features. Use well-established software wallets or hardware wallets that place a strong emphasis on security.
  • Enable two-factor authentication (2FA): Adding 2FA gives your wallet an additional layer of security. When accessing your wallet, it often requires you to enter a second form of identification in addition to your password, like a special code created by a mobile app or obtained via SMS.
  • Create a strong password: For your wallet, choose a strong, one-of-a-kind password that combines upper- and lowercase letters, digits, and special characters. Avoid using information that is easy to guess, and avoid using the same password on many sites.
  • Protect your private keys: The most important part of your cryptocurrency wallet is your private keys. Keep them private and safe. Think about keeping them offline, as in an encrypted file on an offline device or in a hardware wallet. Avoid giving up your private keys to anyone, and watch out for malware or phishing scams that might try to steal them.
  • Software upgrades: Install the most recent security patches and upgrades to keep your wallet software current. Developers frequently release updates to fix potential flaws and enhance overall security.
  • Back up your wallet: Create routine backups of the private keys or seed phrases for your wallet. Keep these backups in a variety of safe places, including offline devices, encrypted external drives, and paper wallets, among others. This makes sure that if your main wallet is lost or damaged, you may still get your money back.
  • Beware of phishing attempts: Be cautious if you get unsolicited emails, texts, or links that have anything to do with your wallet in them. Scammers frequently use phishing attempts to lure you into disclosing your private keys or sensitive information in the cryptosphere. Before acting on any communication, make sure it is genuine.
  • Maintain device security: Make sure the PCs, cellphones, and tablets you use to access your wallet are safe. Install reliable antivirus software, update your operating system regularly, and stay away from downloading files or going to dubious websites that could jeopardize the security of your device.
  • Stay informed: Keep abreast of the most recent security procedures and advancements in the cryptocurrency sector. To learn about prospective dangers, fresh security measures, and recommended practices for wallet security, follow reliable sites, forums, and groups.

 

Examples of Crypto Wallets

Most common examples of cold crypto wallets include:

  • Ledger provides multiple wallet options, such as the Nano S and Nano X devices 
  • Trezor provides the beginner-friendly Trezor Model One and the pro Trezor Model T hardware crypto wallets
  • SecuX has a robust portfolio of hardware wallets, involving the V20, W20 and W10 device
  • SafePal offers S1 hardware wallet as a cost-effective option

When it comes to the types of hot wallets, the best examples are:

  • Coinbase, which has three variants of crypto wallets, online, desktop, and mobile
  • Exodus, which offers desktop and mobile cryptocurrency wallets and is also compatible with the Trezor wallet
  • Crypto.com features different services within its exchange, such as a crypto wallet with a web-based model and a mobile app
  • MetaMask comes with a mobile app, and a desktop wallet that represents the Firefox extension
  • Trust Wallet comes with a mobile cryptocurrency wallet option and is compatible with NFTs

 

Common Mistakes To Avoid With Crypto Wallets

Once you set up a cryptocurrency wallet, you should take some precautionary measures to keep your money safe. That said, take a look at my list of the most common mistakes people make when using their wallets:

  • Forgetting seed phrases or private keys. Keeping your cryptocurrency safe is only possible if you remember your seed phrase/private keys. Otherwise, you risk losing hard-earned cash in your wallet.
  • Connecting a crypto wallet with malicious websites. Setting up a crypto wallet also comes with scam possibilities. At some point, you’ll start receiving scam messages to connect your wallet with malicious websites. Avoid such messages, as they probably want to steal your tokens.
  • Inserting the wrong wallet address. Once you decide to complete the first transaction, you should enter the right address and network. Failing to do this means that you risk losing your crypto.
  • Accessing the crypto wallet from public connections. Connecting your device and crypto wallet to publicly available WiFi connections puts your funds at risk. This is a reason to always select trusted and private networks. 

 

FAQs:

What crypto wallet should I choose?

You should choose crypto wallets with robust security features, such as a simple to use interface, as well as those from trusted providers, for instance, Ledger or Coinbase.
 

What are the different variants of crypto wallets?

You can find multiple types of crypto wallet, including hot and cold variants, custodial and non-custodial wallets.
 

How do I set up a crypto wallet?

You can set up a cryptocurrency wallet in several steps. These include downloading the software, opening your account, and loading money into your wallet.
 

Where are your public keys kept?

The public key is maintained on a public key server. Its function is to encrypt data before sending it through the internet.
 

How do I send money via a crypto wallet?

The process consists of several steps: you should open your wallet, choose the ‘send payment’ option, insert the desired amount, insert the QR code/wallet address, and press send.