Rounding it up
A crypto wallet is a storage system for private keys and public addresses associated with your digital assets.
Since all crypto exists on the blockchain, a crypto wallet doesn’t physically “store” crypto.
There are three kinds of crypto wallets: online, hardware, and paper.
Each crypto wallet offers varying levels of security and convenience.
Regardless of what kind of wallet you use, keeping your wallet secure at all times is critical if you want to prevent theft and hacking attempts.
In comparison to regular ol’ banking, buying and selling crypto is complicated stuff. When you dabble in the world of digital assets, not only do you have to find a quality exchange to buy crypto, but you also have to find a secure way to store it. That’s where a crypto wallet comes into the picture.
A crypto wallet is effectively a storage system for the private keys and public addresses of your crypto and other digital assets, like NFTs. With a quality crypto wallet, you can store, send, stake, and in some cases, even trade crypto with ease and security.
But as is the case with most things in the crypto world, there’s more to crypto wallets than meets the eye. In this article, we’ll take a close look at what a cryptocurrency wallet is, how it functions, and what you need to know before you use a crypto wallet for the first time.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a type of storage system for anyone that owns cryptocurrencies and other digital assets like NFTs. It can take the form of an app on your smartphone, a small USB stick-like device, or even a sheet of paper.
The key point here is that, contrary to popular belief, crypto wallets don’t actually store your crypto like a normal wallet would store your cash money. Rather, a crypto wallet simply stores your crypto’s private keys and public addresses where anyone can send you cryptocurrencies.
That’s because your crypto assets are digital entities that are always stored on the blockchain. These private keys tell everyone who uses the blockchain that crypto associated with those private keys belongs to you.
These private keys are what give you full control of your Bitcoin and other cryptocurrencies. When you have access to your private keys, you can send and receive crypto from anywhere in the world. If someone else gets access to your private keys, they can also do what they like with your funds. This includes sending your crypto to their personal wallet without your knowledge.
That’s where crypto wallets come into play. These wallets give you a theoretically secure method of storing your private keys so no one else can move your digital assets without your permission. At the same time, crypto wallets give you the tools you need to send and receive cryptocurrencies at a moment’s notice.
Types of Crypto Wallets
At this point, you know what a crypto wallet is and the basics of how one works. So now let’s dig a little deeper; crypto wallets are complex tools and there are a number of different kinds available on the market today.
Each type of crypto wallet provides different benefits and drawbacks for investors. As a general rule, what you gain in security features with certain crypto wallets, you lose in convenience. With that in mind, here are the basic types of crypto wallets that you ought to know about:
The first type of crypto wallet is called an online wallet. An online wallet is a method of hot storage, which is when you store your private keys on an internet-connected device. This is the opposite of cold storage, which is when you store your private keys on a device that isn’t connected to the internet.
Hot storage methods, like online wallets, are incredibly convenient. Since your private keys are already online, it’s easier to send and receive cryptocurrencies (which are also stored online on the blockchain) than it would be if your private keys were offline in a cold storage system.
The downside to online wallets is that your private keys are more susceptible to hacking and theft. To be fair, there are some hacking methods that work on certain cold storage devices, too, but there’s a much higher risk of theft when you use an online wallet. The key is to find an online wallet that has security systems you trust.
Do note, however, that not all online crypto wallets are created equal. In fact, there are two broad categories of hot wallets. These include:
Personal hot wallets – Personal hot wallets are a type of online storage system that gives you full control of your crypto’s private keys. Most of these personal hot wallets are mobile apps, but there are also some desktop models. Many personal hot wallets now come with additional features, such as access to decentralized finance (DeFi) tools like decentralized exchanges (DEXes) and decentralized apps (dApps).
Hosted hot wallets – Hosted hot wallets are a type of online storage system that’s operated by some company—usually a crypto exchange. In fact, when you buy crypto on an exchange, it’s usually automatically sent to your hosted hot wallet until you withdraw your crypto. What’s interesting about these wallets is that you actually give up control of your private keys when you use them. Effectively, you give a company control of your keys and, in exchange, you get a convenient crypto storage system.
Online wallets are a potentially suitable choice for anyone that prioritizes convenience above all else. They are helpful for people that want quick access to their private keys for making daily transactions.
But always remember that storing your private keys online leaves your assets vulnerable to theft. This is particularly true with hosted hot wallets, which involve you signing over complete control of your funds to a company.
Also note that, while crypto is regulated in Canada, there are currently no country-wide crypto wallet regulations and many companies don’t provide insurance coverage for lost assets.
So, If you don’t trust the company that operates a hosted hot wallet or if you don’t trust the security behind a personal hot wallet, you might want to look elsewhere for your crypto storage needs.
As the name suggests, a hardware wallet is a piece of hardware that’s designed to store private keys. Hardware wallets are a method of cold storage, which means that they store your private keys on a device that isn’t connected to the internet.
There are dozens of hardware wallets on the market today, each with its own unique features. However, while the external design and added features of hardware wallets can differ from model to model, they all effectively do the same thing: store your private keys.
What’s important to remember with hardware wallets is that they don’t physically store your cryptocurrencies. Rather, hardware wallets, which normally look like USB sticks, store your private keys and other security information completely offline.
Due to the fact that hardware wallets store your private keys offline, they are generally much more secure than online wallets.
For the most part, with a hardware wallet, someone can only gain access to your private keys if they physically steal your wallet or if they somehow infect your wallet with malware. Both of these events are uncommon if you take standard security precautions, like storing your device in a secure location.
Now, you might be asking yourself how an offline wallet could possibly be useful if your crypto is stored on an online blockchain. If your wallet can’t connect to the internet, how can you use it to send your crypto online?
The best way to explain how this works is to look at the process of sending yourself Bitcoin from an exchange using a hardware wallet. Although each device is different, most have similar operating procedures. To send yourself Bitcoin for storage using a hardware wallet, you’ll usually do the following:
Set up your hardware wallet by following the manufacturer’s instructions.
Download your hardware wallet’s desktop or mobile app.
Connect your hardware wallet to the app using Bluetooth or a USB cable.
Follow your hardware wallet’s instructions to unlock it. This usually involves entering a passcode or using 2-factor authentication.
Open the hardware wallet’s desktop or mobile app. In the app, you should have access to information about your device’s public addresses and private keys.
Navigate to your crypto exchange’s crypto withdrawal page.
Enter your hardware wallet’s public address and how much Bitcoin you want to withdraw to your external wallet.
Verify the transaction and wait for your transaction details to get verified on the blockchain.
Go to your hardware wallet’s app to view the crypto that you just sent yourself. Note that this process can take seconds, minutes, or even hours, depending on how busy the Bitcoin network is at any given time.
Disconnect your hardware wallet and store it in a safe location.
We should point out here that your private keys never leave your hardware wallet during this process, even when you connect your wallet to your computer or phone. Rather, the hardware wallet simply sends digital signatures and verification information to the app to process your transaction. Your private keys are always stored offline when you use a hardware wallet.
Furthermore, keep in mind that some hardware wallets are only able to support select cryptocurrencies. Some wallets only support Bitcoin addresses while others can support addresses on the Ethereum blockchain. Always verify that the wallet you buy can support the cryptocurrencies that you’re interested in buying.
The final major type of crypto wallet is a paper wallet. Paper wallets are a type of cold storage system that stores your private keys and public addresses on an old-fashioned piece of paper.
If the concept of storing access information for digital assets on a piece of paper sounds a bit weird to you, you’re not alone. However, since crypto wallets don’t actually store crypto, just private keys and addresses, anything that can hold this information counts as a wallet—even if it’s just a piece of paper.
Most paper wallets are generated online using something called a private key generator. These generators create a unique private key and public address for your crypto. They also usually give you a QR code for easier access to your information. Once your keys and addresses are generated, you can print out your paper wallet and store it somewhere safe.
The primary benefit of a paper wallet is that they’re impossible to hack when created properly since they’re pieces of paper, not hardware or software. The downside is that paper wallets can get lost, stolen, or damaged, and they’re not terribly convenient.
Additionally, there are real risks associated with the generation of paper crypto wallets. When you generate private keys using an online service, you run the risk of using a fraudulent private key generator. This could expose your assets to theft if a hacker gains access to your keys through a malicious private key generator.
Note that paper wallets were particularly popular in the early days of cryptocurrencies, but they've since fallen out of favour. They’re simply not practical for most investors. So, you’ll usually only see paper wallets used by ultra-high net worth crypto investors and institutions that want a super-secure form of long-term crypto storage.
Do I Need a Crypto Wallet?
Anyone looking to buy or sell crypto should consider a crypto wallet to store their private keys and public addresses. Without a crypto wallet, you can’t actually own Bitcoin or any other type of cryptocurrency. That’s because, without a wallet, you won’t have any way of verifying that you own coins that exist on the blockchain.
There are dozens of different crypto wallets out there, each of which offers advantages and disadvantages for investors. What’s important is that you select a wallet that provides the right mix of security and convenience for your crypto investing needs.
Gaby Pilson is a writer, educator, travel guide, and lover of all things personal finance. She’s passionate about helping people feel empowered to take control of their financial lives by making investing, budgeting, and money-saving resources accessible to everyone.