What is a Crypto Wallet?

Summary

A crypto wallet allows a user to store, track, and display cryptocurrency.

A crypto wallet is (1) software installed on your computer or smartphone, or
(2) physical hardware.

A digital wallet keeps your private keys safe and accessible. Private key pairings allow users to sync their wallets across multiple devices in order to send and receive cryptocurrencies.

The best wallet will combine ease of use with a high level of security.

How do Crypto Wallets Work?

Crypto wallets technically don’t “store” crypto – holdings exist on the blockchain, but can be accessed using a private key. Or to put it more simply, a wallet holds both public and private information needed to carry out various transactions. And different wallets are used for different cryptocurrencies.

*The blockchain is a digital ledger that serves as the basis for how many decentralized cryptocurrencies work. There are two types of wallets- hot wallets and cold wallets. And broadly speaking, crypto wallets come in either software or hardware forms.

Some wallets require users to allow a company to hold the cryptocurrency, while others may offer offline storage.

Public versus Private Keys – what’s the difference?

A public key is a string of random numbers that can be shared with a third party, such as a cryptocurrency exchange, without having to worry about the security of the wallet. It operates in a similar way to your bank account number. This key will allow users and investors to transact using a wallet address, which is a compressed version of the wallet’s public key.

Private keys, as the name implies, should always be kept private. This key allows access to the actual cryptocurrency on the blockchain.

Sending crypto between wallets requires knowing the recipients wallet address.

What are the different types of crypto wallets?

There are, broadly speaking, two types of crypto wallets: (1) Hot wallets and (2) Cold wallets. You can think of these categorically as (1) software and (2) hardware. And there are a number of different wallet types that fall into each of these categories.

A hot wallet is one that is actively connected to the internet. With this type of wallet, it is very easy for investors to make transactions. It is, however, more vulnerable to attack. Users will store private keys on a server, owned by an exchange, which makes these wallets potentially more accessible to nefarious activity.

Hot wallets are also synonymous with online wallets, cloud wallets, or hosted wallets. The later may also be known as a custodial wallet and exist on the exchange where the user buys cryptocurrency.

Hot wallets are likely the simplest and easiest to use, which helps to explain their popularity. They can be a mobile wallet or a desktop wallet.

An example of a hosted wallet would be Coinbase or Kraken. Exchanges tend to provide a mobile app for investors to allow them to easily access and transact with their assets. Coinbase, for example, provides investors with a mobile app wallet is Coinbase Wallet.

Check out the Coinbase Wallet here. (https://www.coinbase.com/wallet)

As aforementioned, for hot wallets, the private key or keys are held by a service provider. Users have access and can spend money on it, but do not have complete control over the asset. The service provider could even stop the user from transferring funds. Hosted wallets may be more limited in their activities. For example, users may not be able to use their wallet to buy NFTs with cryptocurrency.

There is also something called a non-custodial (non-hosted) wallet. They allow users to have complete control over their digital assets with limited or no third-party involvement. A defining feature of non-custodial wallets is their ability to provide users with more freedom and features than hosted wallets.

Cold wallets are not connected to the internet, which largely eliminates the risk of being hacked. This does mean, however, that they need to be physically stored. Cold wallets are also known as hardware wallets. Think of a USB stick. A hardware wallet lets users store private keys in a secure physical device. Hardware wallets allows users to keep their crypto safe without the need for complex technical knowledge. Examples of popular hardware wallets include products from manufacturers Ledger and Trezor.

Check out Ledger here. (https://www.ledger.com/)

There is also a product called a paper wallet, which involves storing coins as a QR code that is printed out.

Desktop, Mobile and Web Wallets

Desktop wallets are apps that run on your computer. Typically there is no third party involved and that makes users and investors responsible for their own security.

Mobile wallet apps let users store and control cryptos on their mobile devices. They are available for both iOS and Android. Mobile wallets are very convenient for person-to-person payments. They may also be used for QR codes, as they can be scanned for quick transactions.

A web wallet is stored online and can be accessed via desktop or mobile, which allows users to store and send crypto from anywhere.

What happens when users lose their cold wallet keys?

Losing your hard wallet isn’t the end of the world if you have a recovery seed. The seed is needed to regain access to your crypto. Without this seed you are completely out of luck. I’m sure you have heard the stories, however, of what happens when users misplace their keys or…gasp… throw them away accidentally. Do a quick Google search for James Howells, who threw away a hard drive from a broken laptop containing 7,500 bitcoin mined in 2009.

What’s the safest type of crypto wallet?

At first glance it may seem like hot wallets are the riskiest, as users are dependent on the security of a provider. When you leave your cryptocurrency on an exchange, you are trusting the company. The same issue exists if you transfer the funds to a web wallet or app service.

Cold storage devices are susceptible to external damage, theft or loss. Additionally, setup can me more complex to novice users; funds still need to be transferred online for transactional purposes. And paper wallets require investors to literally store pieces of paper. QR codes are created for the digital currency before printing them out and storing them.

Safety is, in part, determined on how the investor plans on using the cryptocurrency. Novice users that are interested in basic trading should consider online storage. However, for investors looking to invest and store significant sums of cryptocurrency, cold, offline storage may present the best option. The later option is also convenient provided the investor does not plan on trading frequently.

We will follow this article up with how to set up a crypto wallet and examine some of the more popular wallets that investors are using today.