What is a cryptocurrency wallet? Understand the software that allows you to securely store and transfer cryptocurrencies.
What is a cryptocurrency wallet?
A cryptocurrency wallet is software or hardware that allows you to use cryptocurrencies. There are different types of wallets for different uses.
- A cryptocurrency wallet is a device or program that allows you to transfer and store cryptocurrencies.
- There are different types of cryptocurrency wallets, such as paper wallets, hardware wallets, and software wallets.
- The security of a cryptocurrency wallet depends on how the private key is stored.
You cannot fold a bitcoin and put it in your wallet. Yet, you can hold the keys to your crypto using your own cryptocurrency wallet.
Public key and private key
A crypto wallet is software or a physical device that allows you to store your crypto and send and receive crypto transactions. A crypto wallet consists of two key pairs: private keys and public keys. The public key is derived from the private key and serves as the address for sending cryptocurrency to the wallet.
Wallets have multiple public keys. This means that you can give several different public addresses and use them to receive cryptocurrencies in the same wallet.
The important part of a wallet – and the one where new users often get into trouble – is the private key. The private key is like the key to a safe. Anyone with access to a wallet’s private key can take control of the balance held there.
But unlike a vault, cryptocurrency users who hold their own private key and transact using non-custodial wallets (i.e. a wallet that is not hosted by a stock exchange or another third party) become their own bank.
While the very idea of crypto is still new to many people, cryptocurrency wallets themselves are designed to be user-friendly. Web wallets like MetaMask and desktop wallets like Electrum feature a graphical user interface (GUI) designed to be as simple as possible.
Understand how a cryptocurrency wallet works
The blockchain is a public ledger that stores data in what are called “blocks”. These are records of all transactions, balances held at a given address, and who holds the key to those balances. Cryptocurrencies are not stored “in” a wallet, per se. The coins exist on a blockchain and the wallet software allows you to interact with the balances held on that blockchain. The wallet itself stores addresses and allows their owners to move the coins elsewhere while allowing others to see the balance held at a given address.
Tip: When sending a crypto transaction, always make sure you are sending it to an address that matches a wallet of the same type of cryptocurrency. If you send bitcoin (BTC) to a bitcoin cash (BCH) address, for example, those funds will be lost forever.
Send and receive cryptocurrencies
While each wallet has its own specific nuances, here are the general steps for sending or receiving funds using a cryptocurrency wallet:
- To receive funds, you need to retrieve an address (also known as a public key) from your wallet. Locate the “generate address” function in your wallet, click on it, then copy the alphanumeric address or QR code and share it with the person who wants to send you crypto.
- To send funds, you need the receiving wallet address. Locate the “send” function in your wallet and enter the address of the wallet you want to send coins to. Select the amount of crypto you want to send, then click “confirm”. Consider sending a small test transaction before sending large amounts of crypto. Note that sending coins requires a fee that will be paid to miners in exchange for processing the transaction.
Sending money via QR codes or long strings of numbers and letters can seem strange at first. But after doing it several times, the process becomes quite simple.
Types of Cryptocurrency Wallets
Cryptocurrency wallets fall into two general categories: software wallets and hardware wallets.
Software wallets are simply desktop programs or browser extensions that make it easy to send, receive, and store cryptocurrencies. Hardware wallets serve a similar purpose but are physical devices that can be plugged into a computer.
Software wallets are sometimes referred to as “hot” wallets because the funds are held online. Hardware wallets keep private keys offline or in “cold” storage.
A hardware wallet is a small device that stores cryptocurrencies offline. A hardware wallet keeps your keys off your phone or computer. Typically, you plug the hardware wallet into a USB port. It’s much safer because all the signing is done outside of your computer. »
The typical hardware wallet costs around $100, or so. They tend to be slightly more complicated to use than software wallets.
Most hardware wallets interact with a computer in one of three ways:
- A web interface
- An application created by the company
- A separate software wallet
A software wallet is a computer program or mobile application that holds private keys online. Software wallets are unique to each cryptocurrency, while hardware wallets often support multiple currencies.
When using software wallets, be sure to create backups regularly. If something goes wrong with your web browser or hard drive, you could lose your wallet’s private keys, which could lead to permanent loss of funds.
The three main types of software wallets are:
- Web-based wallets, like MetaMask, that work like a browser extension and can send ETH transactions, allowing users to easily interact with things like decentralized apps and decentralized finance (DeFi) protocols.
- Desktop wallets, such as the Electrum Wallet, which can be used on a desktop computer or laptop.
- Mobile wallets, such as the Blockchain.com wallet , which allow users to store cryptocurrency, send/receive transactions, and “swipe” private keys from an existing wallet into the app by scanning a QR code on their smartphone.
Each type of cryptocurrency wallet has its own use case depending on the user’s goals, although they all accomplish the same things.
Paper wallets are another way to store your private keys. But creating and using paper wallets comes with a high risk of user error, and is too dangerous for storing a significant amount of cryptocurrency. It is generally advisable to use other types of cryptocurrency wallets.
Advantages and disadvantages of cryptocurrency wallets
Here are some benefits of using custodial cryptocurrency wallets:
- The self-ownership of money. If you hold your own private keys, then that cryptocurrency is yours and yours alone. In comparison, money in a bank is technically the property of the bank.
- The ability to send transactions to whoever you want, when you want. Decentralized cryptocurrencies are resistant to censorship because no one controls the network, making it difficult for anyone to stop transactions.
Here are some disadvantages of using cryptocurrency wallets:
- The responsibility of the user. Becoming your own bank means you have to take 100% responsibility for everything that happens.
- Learning curve. Using a cryptocurrency wallet requires basic computer knowledge, as well as familiarity with a new type of financial ecosystem.
To conclude on the cryptocurrency wallet
The answer to the question “what is a crypto wallet” is that it is a crypto bank account that only you control. Software wallets are designed to be convenient, while hardware wallets are designed to be secure. To get started, you need to research the types of wallets that are best for you. Investigate the options available to you, including cost and security.
Those who want to take it a step further can invest in a hardware wallet, as it’s one of the best ways to own your own private keys. Learning to use them might take a little longer for beginners, but it’s worth it for the added security. For those who hold large sums of money in the form of cryptocurrencies, most experts agree that using a hardware wallet is a must.