TLDR
A crypto wallet is a software program or hardware that stores private and public keys. It communicates with various blockchain networks, enabling users to send and receive digital currencies.
There are several crypto wallets, including hardware, mobile, desktop, and paper.
Hardware wallets are physical devices designed to provide the highest level of security for storing private keys, like Ledger. These wallets are considered “cold wallets” because they are not connected to the internet.
Mobile and desktop wallets, known as “hot wallets,” stay connected to the internet and face higher hacking risks. Meanwhile, paper wallets are cold storage wallets. They print users’ private keys on paper for offline storage.
How does a crypto wallet work?
A crypto wallet stores users’ private and public keys to interact with various blockchain networks and manage their digital assets. The private key holds the utmost importance in a crypto wallet because it signs and validates transactions on the blockchain network.
On the other hand, the public key is used to receive digital currencies and is shared with others as a wallet address.
Users who want to send or receive digital currencies input their private key and initiate the transaction. The network participants validate the transaction, which is then broadcast to the network and recorded on the blockchain.
The transaction is considered complete once the network confirms it. The choice of the best crypto wallet depends on an individual’s specific needs and the level of security they require. Some users may prefer the security of a hardware wallet, while others may prefer the convenience of a mobile wallet.
Users need to research their options and select the right wallet for them.
Types of crypto wallets
Different cryptocurrency wallets, such as physical, software, and web wallets, exist for digital asset storage and transactions. Let’s take a closer look at the different types of wallets.
Software wallets
Software wallets are digital tools you install on a device like a desktop or a smartphone. In contrast, web wallets, also known as hot wallets, are internet-based applications accessible from any device with an internet connection.
They are the most commonly used type of crypto wallet because of their ease of use and accessibility.
Software wallets can be divided into two categories:
- Hot wallets
- Desktop wallets
With their constant internet connection, hot wallets grant users instant access to their cryptocurrencies wherever they are. Conversely, desktop wallets, installed directly onto a computer, provide higher security than hot wallets. Metamask wallet is the most popular hot wallet.
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MetaMask is a popular cryptocurrency wallet famous for its extensive support of Ethereum-based cryptocurrencies and NFTs. Even though it supports multiple blockchain networks, MetaMask does not currently support Bitcoin. It can be a turn-off for investors primarily focused on Bitcoin traders.
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Easy setup process.
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Rewards via staking and holding.
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Supports all of ERC-20 tokens.
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Go-to web3 wallet.
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In-build dApp hub.
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Doesn't support Bitcoin.
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Potential privacy and security risks.
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Complex for new users.
Users are responsible for protecting their private keys when using a software wallet. They should take appropriate measures to secure their devices, such as using a strong password and enabling two-factor authentication.
Software wallets are easy to use, and users can easily send and receive cryptocurrencies, view their balance, and monitor their transaction history. They are versatile and can store many cryptocurrencies, including Bitcoin, Ethereum, and other altcoins. Some software wallets even offer exchange services, allowing users to trade one cryptocurrency for another easily.
Despite their convenience, software wallets have some drawbacks, such as the risk of malware attacks or theft and the potential for errors in the wallet software. Users must research and choose a reputable wallet provider with solid security and a reliable track record.
Hardware wallets
Hardware wallets are a type of crypto wallet designed to store cryptocurrency offline securely. They are physical devices resembling a USB drive, often called “cold wallets.” Unlike online wallets or software wallets, hardware wallets are not connected to the internet, which reduces the risk of hacking and theft. The most popular hot wallets are Ledger.
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The Ledger Nano X is a must-have, secure hardware wallet for cryptocurrency. It features easy mobile pairing, a sleek design, Bluetooth support, and robust security features like a safe chip and two-factor authentication.
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Supports 5500 various cryptocurrencies.
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Private keys are encrypted.
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Desktop and mobile devices are supported.
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Bluetooth enabled.
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Allow 100 apps storage.
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Fairly overpriced against the competition.
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Only 100 apps are allowed.
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Bluetooth works solely with mobile.
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Ledger Stax is the markets most stylish cryptocurrency hardware wallet with NFT customized lock screen, user-friendly touchscreen, Bluetooth-enabled device and supports 5500+ altcoins. Its Qi charging technology makes a single last for months.
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Large-sized e-ink screen for easy usability.
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Bluetooth-enabled connectivity.
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Sturdy and transportable case
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Best design in the industry.
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Higher cost than its competitors
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Restricted scalability selection.
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Not broadly adopted.
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The Trezor Model T is a high-quality hardware wallet that offers top-notch security for cryptocurrency investors. Trezor is known for its transparency and trustworthiness. The ability to store 1500+ tokens and Non-Fungible Tokens (NFTs) justifies the premium price of $219. However, some users have reported issues with the MicroSD card slot. Trezor Model T is a solid pick to safeguard crypto despite minor concerns.
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It supports 1400+ crypto assets.
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Touch screen for a user-friendly operation.
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It supports NFTs storage.
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Too expensive when compared to its competitors.
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It has limited mobile compatibility.
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A bulky design that is quite hard to carry around.
Hardware wallets typically generate a public and private key to manage the crypto assets stored in the hardware wallet. The public key can be considered a digital bank account number. In contrast, the private key is similar to a password or PIN that gives the owner access to their cryptocurrency holdings.
Hardware wallets are a popular option for storing large amounts of cryptocurrency. They offer an added layer of security compared to online or software wallets. When used properly, hardware wallets can provide peace of mind for crypto investors who want to protect their investments from theft or loss.
Check out our list of the best hardware wallets.
NFT Wallets
NFT wallets are crypto wallets specifically designed to store and manage Non-Fungible Tokens (NFTs).
Unlike traditional cryptocurrency wallets, which only store fungible assets like Bitcoin and Ethereum, NFT wallets can store unique and irreplaceable digital assets like art, music, and collectibles. These crypto wallets offer enhanced security measures to ensure the safe storage of NFTs, making them a popular choice for NFT owners and collectors.
There are several types of NFT wallets, including online and custodial wallets. Web-based online NFT wallets enable you to access your assets from any location with an internet connection, offering unmatched convenience.
Meanwhile, third parties manage custodial NFT wallets and implement additional security measures, which makes these wallets an attractive option for high-value NFTs. Regardless of the wallet type, NFT owners must research and compare their options to determine the best fit for their needs, considering factors like security measures, ease of use, and support for different blockchain platforms.
Paper Wallets
Considered the most secure offline storage method for cryptocurrency, paper wallets involve printing the Bitcoin wallet’s public and private keys onto paper. Users then store this paper safely, ensuring their cryptocurrency remains inaccessible to hackers. This method is now outdated but still considered one of the OG ways to store your cryptocurrency.
However, if a user loses access to the paper wallet, they will also lose access to their funds. This makes paper wallets best suited for long-term storage of cryptocurrency rather than everyday use. It is important to store the paper wallet in a safe and secure place, as it is the only way to access the funds in the physical wallet.
Pros and Cons of Crypto Wallets
Pros
Hardware, paper, software, and web wallets represent various crypto wallets, each offering greater safety than crypto exchanges. Each type of wallet has its advantages and disadvantages. For example, hardware wallets offer greater security than others, as they store the private keys in a separate device. This makes them less vulnerable to hacking and theft.
Cons
One of the most significant disadvantages of using a crypto wallet is the risk of losing access to one’s funds if the private key is lost or stolen. Additionally, crypto wallets may not be compatible with all types of cryptocurrency and blockchain technology, which can limit their usability.
Last but not least, using a crypto wallet can be challenging for those who are not tech-savvy, as it requires a certain level of understanding of blockchain technology and cryptocurrency.
Public vs. private keys—what’s the difference?
Public and private keys are essential components in the functioning of crypto wallets. Crypto wallets function with two essential components: public and private keys. Others use a public key, a unique address, to send funds to your wallet. A private key, a secret code, lets you access your funds.
Think of the public key as your bank account number; you can share it freely. However, keep your private key secret – it’s like your bank account password.
The distinction between public and private keys is vital to ensure the security of the funds stored in a crypto wallet. If a private key is lost, there is no way to recover the funds stored in the wallet, as the private key is the only means of accessing the funds.
Therefore, you must store the private key securely and keep a backup in case of loss or damage. To summarize, you use the public key to receive funds and the private key to access and manage the funds in a crypto wallet.
How do I send crypto from my crypto wallet?
Sending crypto from a crypto wallet is a relatively simple process, but the exact steps you’ll need to take can vary depending on your wallet type.
You must input the recipient’s wallet address and the amount you want to send for many mobile wallets, then confirm the transaction using your private keys. If you have a hardware wallet, you may need to connect the device to your computer and use specialized software to initiate the transaction.
Regardless of your type of wallet, the basic idea is the same: you’re sending crypto from your wallet to another wallet, either within the same wallet platform or to a different wallet entirely.
Some crypto enthusiasts prefer to send their crypto to a crypto exchange where they can trade it for other cryptocurrencies or fiat currencies. In contrast, others keep their crypto in a hardware device for maximum security. Ultimately, the choice of how to send crypto from your wallet is a personal one that depends on your goals and comfort level with different wallet options.
Custodial and Non-Custodial Wallets
A third party manages custodial wallets, while non-custodial wallets give users full control over their private keys. While custodial wallets may offer a more user-friendly experience than noncustodial wallets, they pose a higher risk of loss or theft as the third party holds the users’ private keys.
On the other hand, non-custodial wallets offer greater security but require the user to be responsible for their private keys and backup. It is important for users to carefully consider the trade-offs and choose the type of wallet that best suits their needs.
Multi-Signature Wallets
Multi-signature wallets, or multi-sig wallets, are cryptocurrency wallets that allow multiple people to share control over a single wallet.
In these wallets, more than one private key is required to access the funds in the wallet. This added security feature is useful for businesses and organizations, as it allows for the decentralized control of funds among multiple parties.
The use of multiple signatures can also help to prevent fraud or theft. For example, a company could require three of its five partners to sign off on a transaction before funds can be moved from the wallet.
For a transaction to take place, multiple parties must agree on it, reducing the risk of unauthorized transactions. Various crypto wallet apps and web-based wallets support multi-sig wallets, available in hardware and software forms.
How to set up a crypto wallet
Setting up a crypto wallet is essential for anyone looking to manage their cryptocurrency holdings. A wallet ensures you control your private keys and can easily access your digital assets.
The process for setting up a wallet may vary slightly depending on the type of wallet you choose. Still, several vital steps are needed to ensure increased security for your crypto holdings.
The first step in setting up a crypto wallet is researching and comparing different cryptocurrency wallet options to find the best one for your needs. Many wallets are available, including hardware, mobile, desktop, and web-based.
Each type of wallet offers different levels of security, ease of use, and accessibility, so choosing a wallet that meets your specific requirements is important. Once you’ve chosen a wallet, you’ll need to create an account and follow the instructions provided by the wallet provider to set up your wallet.
You may also need to verify your identity and connect a payment method to your wallet if you plan to purchase cryptocurrency. By following these steps, you can ensure that your crypto holdings are secure and easily accessible.
Risks of using a Wallet
Using a crypto wallet, whether mobile, desktop, hardware, or web-based wallet, comes with certain risks. A significant risk comes into play when you lose access to your non-custodial crypto wallet; losing access to the private keys results in the irreversible loss of your crypto holdings.
Another risk is that, despite the security measures taken by many wallet providers, crypto wallets can still be vulnerable to cyber attacks, especially an online wallet.
Hackers may try to gain access to your private keys or directly hack your crypto wallet app, resulting in losing your crypto holdings. To minimize these risks, it’s important to be vigilant and follow best practices for securing your crypto wallet.
Conclusion
In conclusion, crypto wallets are essential to cryptocurrency as they are a safe deposit box for your keys. With various wallet types, selecting a wallet that best fits your needs and provides the level of security you’re comfortable with is crucial. When it comes to your crypto holdings, it’s important to prioritize security measures to ensure the safety of your funds.
In light of this, we encourage you to research and educate yourself on the different wallet types and security measures available. When selecting a wallet, please consider the types of assets you’ll be storing, your preferred level of security and accessibility and the user interface and experience of the wallet.
With the correct information, you can make an informed decision and feel confident in your wallet choice. Don’t wait; take control of your crypto holdings today!
How does a crypto wallet function? Just like a physical wallet can store cash and cards, a crypto wallet stores vital access keys. However, instead of storing actual cryptocurrency, it stores private keys, the privileged credentials required to interact with a particular cryptocurrency's blockchain.
Why Do You Need a Crypto Wallet? The safety of your cryptocurrency depends heavily on your storage method. It's possible to store crypto on an exchange, but it's not recommended unless you're dealing with small amounts or intending to trade often.
A crypto wallet holds the vital public and private keys needed to transact and hold cryptocurrency. When you purchase crypto, it's likely that the provider supplied you with a 'hot wallet'—an online, internet-connected storage—to hold your digital coins.
Susan Oh
Susan Oh is a leading figure in the integration of AI and blockchain for social good, serving as the CMO for BeOmni by Beyond Imagination and a civic technologist dedicated to creating scalable solutions. She is a board member of the Blockchain Commission For Sustainable Development supported by the UN GA Office of Partnerships, and a member of the Global Sustainability Network, a joint initiative by the Vatican and the Church of England to combat human trafficking. Recognized with the...
