What Is A Crypto Wallet? – Forbes Advisor

Crypto wallets store the private keys to your cryptocurrency and keep them secure. They come in several forms and can be physical devices, programs, or online services.

But like cryptocurrencies, the concept of a crypto wallet is rather abstract. Let’s take a closer look at these important crypto tools and how they work.

What is a crypto wallet?

The first lesson of cryptocurrency wallets is that they are nothing like a wallet in your wallet or back pocket that holds cash and credit cards. Rather, a crypto wallet is a form of digital storage for secure access to your cryptocurrency.

Cryptocurrency is a highly abstract store of value that does not have a physical token similar to cash coins and banknotes. It exists as nothing more than a line of code on a larger blockchain.

When you buy Bitcoin (BTC), what do you actually own? Public key and private key in the BTC blockchain.

Think of the public key as your bank account number – you can share it with anyone, but it doesn’t give you access to your money.

The private key is like the password to your bank account. Please don’t share it with anyone else they might steal all your money.

If you lose your private key, you may lose access to your cryptocurrency. Similarly, the person who has the private key has full access to cryptography. Keeping your private keys safe in a crypto wallet is essential.

“Coins and tokens are part of the blockchain system in the form of data, and wallets serve as a means of accessing them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.

How crypto wallets work

A crypto wallet stores the public and private keys needed to send, receive, and store cryptocurrencies.

When you buy cryptocurrencies, the company through which you purchased it probably provided you with a wallet to store your digital coins. It is called a hot wallet because it is online and connected to the internet.

“To avoid the risk that hackers can steal your online wallet, you can get a cold wallet that is not connected to the Internet,” says Rick Edelman, founder of the Council of Digital Asset Finance Professionals.

Cold wallets are essentially flash drives or another type of hardware device. “Once you have it, you simply transfer your coins from the hot wallet to the cold one,” says Edelman.

Types of crypto wallets

As noted above, there are two broad categories of crypto wallets: hot wallets that are connected to the internet and cold wallets that are not. Let’s look at them in more detail.

paper wallets

A paper wallet is the easiest cold wallet to understand and operate. This is what it looks like: a piece of paper with your keys written on it.

“Because it’s just a sheet of paper, it’s a cold wallet and thus protected from hackers, but the paper can be lost, stolen, torn, or made illegible if it gets wet,” says Edelman. With this in mind, “paper is not ideal for cold wallets.”

Hardware wallets

A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help protect your private keys from hackers who need to steal a physical wallet to gain access, Leinweber says.

Hardware wallets also have an extra layer of security over paper wallets by requiring users to enter a PIN to access device content. While these PINs provide an extra layer of protection, if you forget your PIN, you will lose access to your coins. “So you need to be tech-savvy to use a wallet like this,” says Leinweber.

“The idea behind hardware wallets is to isolate private keys from online storage, such as a computer or smartphone, which are more vulnerable to hacking,” says Leinweber. “Storing the private keys offline prevents this as hackers would have to physically steal the cryptocurrency’s hardware wallet in order to gain access to the user’s private keys.”

You can usually get a hardware wallet for between $50 and $150, although there are more expensive options. For example, you can buy the Trezor Model One for $72. You can also find more economical ones like the $49.99 SafePal Wallet.

Internet wallets

Online wallets, also called software wallets, are your hot wallets. Desktop, mobile, or web-based, these wallets require an internet connection, are more accessible, but are also more prone to hacking than cold wallets.

“Your password is stored on servers on the network and thus represents a potentially increased risk,” says Leinweber.

He says that if you only trust your infrastructure, it makes sense to create desktop wallets like Electrum and Wasabi Wallet. This avoids the involvement of third parties and allows you to be solely responsible for the security of your wallet.

Leinweber says mobile wallets are often preferred by people who use crypto on a daily basis. These wallets are “marketed as an app on your smartphone, similar to Apple Wallet, and simply allow you to make transactions using QR codes.”

Meanwhile, web wallets are mostly accessible through browsers and allow transactions to be made anywhere there is an internet connection, he says.

Custodial wallets vs non-custodial wallets

Now for some more crypto jargon. Non-custodial wallets are types of wallets that allow you to control your own data. This is often the preferred type of wallet among crypto enthusiasts because they don’t involve a third party to protect your private keys.

Offline wallets from Exodus or MetaMask, both offline storage options, are examples of non-storage options. These wallets are advertised as secure, meaning they are less likely to be hacked.

Custody wallets, on the other hand, are wallets offered by cryptocurrency companies such as crypto exchanges such as Gemini Wallet, BlockFi Wallet or eToro.

If you choose this type of wallet, you are essentially handing over your private keys to them. But these wallets do have some advantages when it comes to affordability. If you want to access and send coins from this type of wallet, you log in to your account and specify the location where you want to send your cryptocurrency.

These hot wallets usually also have other features, such as being available for free and allowing you to stake your cryptocurrency.

How to get a crypto wallet

Getting a crypto wallet is not difficult. Some crypto exchanges, such as Coinbase and Gemini, offer an online wallet for cryptocurrencies. If you need a cold wallet, you can buy it directly from the manufacturer online or even Amazon.com. If you’re browsing Amazon.com, you might notice yourself buying a Ledger Nano S cold storage flash drive for almost $60 or a Trezor Model T hardware wallet for $250.

But there are several factors to consider when choosing a crypto wallet:

• Customer service: It is recommended to choose wallet support, which is always available and useful, especially if you are new to owning cryptocurrencies.
• Fees: Third-party hot wallets can charge transaction fees, which ultimately reduces your profits.
• Safety: Make sure your wallet provider is trustworthy and has reasonable security measures in place to protect your crypto keys.
• Supported types of cryptocurrencies: Some wallets may only support a few crypto projects, while others may support hundreds of crypto projects. For example, if you want to buy Cardano (ADA), you need to make sure that the wallet supports this cryptocurrency.

Given these factors, there is no single “best” crypto wallet, according to Leinweber, as each wallet has its own strengths and weaknesses.

“Many users even choose multiple wallets in parallel, which can ultimately lead to a more secure distribution of assets,” he says. “However, which wallet is the best and most suitable for someone is up to everyone to decide based on their preferences.”

How to use a crypto wallet

The process of using a crypto wallet for cryptocurrency transactions will depend on the type of wallet you have. However, this is generally a simple process, not unlike how you would send any other digital currency.

“All you have to do is enter the recipient’s public address and the amount of cryptocurrency you want to transfer and confirm the transaction,” says Leinweber.

The difference between crypto and fiat transactions is that there are fewer safeguards if something goes wrong.

“Be careful when entering an address, as cryptocurrency transactions are irreversible,” says Leinweber. “If you enter the wrong address, you will not be able to get your coins back.”