Sep 6, 2022
What Is a Crypto Wallet?
A crypto wallet is a program or physical device that stores the keys you use to send, receive, and access your cryptocurrency. Each crypto wallet is equipped with two types of keys: public and private. The public key is visible to anyone on the blockchain, allowing you to make crypto transactions. You might think of it like a bank account number, which you’d share in certain situations, like setting up direct deposit with your employer. The private key proves your ownership of the public key. You should keep your private key safe, as it’s akin to your PIN or password for a regular bank account. Together, the public and private keys encrypt and decrypt the data that gives you access to your cryptocurrency through your crypto wallet.
In this article, we’ll cover:
How does a crypto wallet work?
When you’re paying for things with traditional currency, you have lots of options: actual cash, a debit cart, or even a digital wallet that lets you use an app on your phone at the cash register. But crypto coins don’t usually have a physical existence, so how can you store and spend them? A safe, secure crypto wallet uses blockchain technology to make it possible.
Crypto wallets allow you to interact with blockchain. They’re not directly akin to physical wallets, because you don’t technically put anything in them. Instead, they read the public ledger so you can see your balance and enable you to initiate and receive transactions, which are then stored on the ledger.
Your public key provides the address other users need to find your wallet; you can find other people’s wallets with their public keys. Your private key is used to initiate transactions, also known as signing. Your private key proves that you own your crypto holdings, so it’s vital to keep it safe at all times. When used together, the public and private keys allow you to move and store crypto data securely and enable other users to view the balance held at any given time and make transactions with you.
Types of crypto wallets
Crypto wallets come in two varieties: hot and cold. A hot wallet is continually connected to the internet or to another device that has a direct online connection. That makes them convenient to use, but also means they’re more vulnerable to hacking attempts.
Cold wallets, on the other hand, are physical storage devices that are not connected to the internet. Your private key lives in your cold wallet; generally speaking, the only way for a hacker to get ahold of it would be to steal the physical wallet.
|Hot wallets||Cold wallets|
|Always connected to the internet||Physical storage, no internet connection|
|More convenient, faster transactions||Less convenient, slower transactions|
|Less secure||Extremely secure|
Hot wallet types
A hot wallet is always connected to the internet and the blockchain network. They are easy to use, especially for making purchases with cryptocurrency. While convenient, hot wallets are more vulnerable to attack because both your public and private keys are stored online. Hot wallets come in a few different types: web, mobile, and desktop.
- Web wallets: Web wallets are website-based online wallets that generally require you to log in with a username and password. They’re convenient because you don’t need to install any software to access them; however, web wallets are only as secure as your web browser and server. Examples of web wallets include MyCryptoWallet, MetaMask, and MyEtherWallet.
- Mobile wallets: Mobile wallets are accessed via an app on your mobile phone. This type of wallet is convenient, as it can be used to make in-person payments to merchants who accept crypto. But mobile wallets are vulnerable to security risks. If you lose your phone or the app security is compromised, you could lose everything in your mobile wallet. Types of mobile wallets include Exodus, Coinomi, and Mycelium.
- Desktop wallets: Desktop wallets store and manage your public and private keys from your PC or laptop. These software wallets are considered more secure than web and mobile wallets, but less secure than any type of cold wallet. Because desktop wallets are on downloaded to your computer, they may be vulnerable to malware. Additionally, transactions may be slow depending on your network speed. Popular desktop wallets include Exodus, Atomic, and Electrum.
Cold wallet types
Cold wallets are known for being extremely secure. Because they are completely offline, they’re incredibly hard for hackers to compromise. Cold wallets shouldn’t be able to communicate with any other electronic device unless it is physically plugged into that device when you’re accessing your keys. Any transaction initiated online is temporarily transferred to a storage device like a USB drive, CD, or hard drive. Then the transaction is digitally signed and transmitted back to the online network. You can get a hardware or paper cold wallet.
- Hardware wallets: Hardware wallets are specifically designed for crypto security. These physical devices connect to your computer via a USB port; they often look like a small hard drive. Your private key never leaves the hardware wallet, protecting it from hackers and malware. Additionally, the user must approve all transactions on the device itself, often by literally pushing a button. Hardware wallets include Trezor and KeepKey.
- Paper wallets: Paper wallets are exactly what they sound like: physical pieces of paper that have public and private keys written on them. The paper document usually has an embedded QR code that can be easily scanned and signed to authorize a transaction. Paper wallets are considered quite secure, as there is no way to connect them to the internet. That said, they can be easier to lose, so it’s important to store this kind of cold wallet in a safe place.
Keeping your crypto wallet secure
Your cryptocurrency is only as secure as your wallet. It’s important to take extra precautions to protect your investment. Due to the nature of decentralized finance, once your crypto is gone, there’s currently no way to get it back. With that in mind, here are some tips to help keep your crypto wallet secure.
- Use a cold wallet. Because cold wallets are not connected to the internet, they’re a more secure way to store your data.
- Keep your private key private. Much like a PIN or the key to your safe deposit box, you must not share your private key with anyone.
- Avoid public wifi. Public networks are unprotected, making any transaction you initiate on them vulnerable to hackers.
- Use strong authentication. Enable two-factor authentication (2FA) for your crypto wallet; for additional security, use multi-factor authentication (MFA). 2FA goes the extra mile to prove you are who you say you are and that your crypto holdings are your own. MFA goes even further, adding one or more additional requirements to authenticate your identity.
- Protect all your devices from malware. If you’re using crypto, you’ll be using an electronic device at some point, even if you’re using a cold storage wallet. Ensure that your computer, laptop, phone, and any other devices that connect to the internet are protected against malware to keep your crypto data secure.
Do you need a crypto wallet?
Technically, you don’t have to set up a software wallet or put your coins in cold storage to buy and use cryptocurrency. Many crypto exchanges will let you store your cryptocurrency in a wallet within the exchange. Whether or not to use a crypto wallet, and the best kind for you, depends on the level of security you’re comfortable with and how much convenience you need.
That said, there are benefits to having your own crypto wallet: it can be more secure, and you’ll have access to your data even if the exchange goes down. This can be especially important if you want to get involved in crypto as an investment strategy, such as buying coins for your investment portfolio or engaging in activities like crypto staking.
The good news is, that you don’t have to decide on a crypto wallet right away. Many people who are new to the world of crypto opt to keep their coins on the exchange until they have a good handle on how public and private keys work so they can make an informed decision about the right type of crypto wallet for their needs.
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