What is a crypto wallet? – Forbes Advisor

Crypto wallets hold the private keys of your cryptocurrencies and keep them safe. These can be of several types and can be physical devices, software programs, or online services.

However, like cryptocurrencies, the concept of a crypto wallet is very abstract. Let's take a closer look at these important encryption tools and how they work.

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Understanding cryptocurrency wallets

The first lesson about a cryptocurrency wallet is that it's very different from a wallet or back pocket billfold where you keep your cash and credit cards. Rather, a cryptocurrency wallet is a type of digital storage that secures access to your cryptocurrencies.

Cryptocurrency is a highly abstract store of value that does not have physical tokens like cash coins or banknotes. It's just a string of code on a larger blockchain.

What do you actually own when you buy Bitcoin (BTC)? The public and private keys on the BTC blockchain.

Think of your public key like a bank account number. Your public key can be shared with anyone, but it doesn't give them access to your money.

Your private key is like your bank account password. Please don't share it with anyone. If you share, all your money may be stolen.

If you lose your private key, you may lose access to your encryption. Similarly, whoever holds the private key has full access to the crypto. It is essential to keep your private keys safe within your crypto wallet.

“Coins and tokens are part of the blockchain system in the form of data, and wallets serve as a means to access them,” said Martin Leinweber, Digital Asset Product Strategist at MarketVector Indexes.

How do crypto wallets work?

Crypto wallets store the public and private keys needed to send, receive, and store cryptocurrencies.

When you purchase cryptocurrency, the company you purchase from will likely provide you with a wallet to hold your digital coins. It is called a hot wallet because it is online and connected to the internet.

“To avoid the risk of hackers stealing your online wallet, you can obtain a cold wallet that is not connected to the internet,” says Rick Edelman, founder of the Digital Asset Council of Financial Professionals.

A cold wallet is essentially a thumb drive or another type of hardware device. “Once you have it, you just move the coins from your hot wallet to your cold wallet,” Edelman said.

Types of crypto wallets

As mentioned above, there are two broad categories of cryptocurrency wallets: hot wallets that are connected to the internet, and cold wallets that are not connected to the internet. Let's take a closer look at these.

paper wallet

Paper wallets are the easiest cold wallets to understand and operate. It would sound like this: A piece of paper with a key written on it.

“It's just a piece of paper, so it's a cold wallet, so it's safe from hackers, but paper can be lost, stolen, torn, or wet and become unreadable,” Edelman said. Considering this, “as cold wallets go, paper is not ideal.”

hardware wallet

A more secure type of cold wallet is a hardware wallet. Like USB drives, hardware wallets can help protect your private keys from hackers who would need to steal your physical wallet to access them, Reinweber says.

Hardware wallets also have an additional layer of security compared to paper wallets by requiring users to enter a PIN to access the device's contents. These PINs provide an extra layer of protection, but if you forget your PIN you will no longer be able to access your coins. “So you have to be tech-savvy to use a wallet like this,” Reinweber says.

“The idea behind hardware wallets is to isolate private keys from online storage, such as computers or smartphones, which are vulnerable to hacking,” Reinweber says. “Hackers would need to physically steal your cryptocurrency hardware wallet to access your private keys, so storing your private keys offline prevents this.”

Hardware wallets are typically available for $50 to $150, but there are more expensive options as well. For example, you can buy the Trezor Model One for $72. Some are more economical, such as the $49.99 SafePal wallet.

online wallet

Online wallets, also known as software wallets, are hot wallets. With desktop, mobile, or web-based applications, these wallets require an internet connection and are more accessible than cold wallets, but also at a higher risk of hacking.

“Passwords are stored online on servers, which can increase your risk,” Leinweber says.

If you only trust your own infrastructure, it makes sense to create a desktop wallet like Electrum or Wasabi Wallet, he says. This avoids third party involvement and allows you to be solely responsible for the security of your wallet.

Leinweber said mobile wallets are often preferred by people who use cryptocurrencies on a daily basis. These wallets are “positioned as apps on smartphones, similar to Apple Wallet, and utilize QR codes to enable easy transactions.”

Web-based wallets, on the other hand, are primarily accessible through a browser and can be transacted anywhere with an internet connection, he said.

Custodial wallets and non-custodial wallets

Now let's explain a little more about virtual currency terminology. A non-custodial wallet is a type of wallet that allows you to manage your own data. These are often the preferred type of wallet among cryptocurrency enthusiasts because there is no third party involved to protect your private keys.

Exodus or MetaMask offline wallets are both offline storage options and are examples of non-custodial options. These wallets are highly rated for security, meaning they are less likely to be hacked.

Custodial wallets, on the other hand, are wallets offered by cryptocurrency businesses such as Gemini Wallet, BlockFi Wallet, and cryptocurrency exchanges such as eToro.

If you choose this type of wallet, you are essentially outsourcing your private keys to the wallet. However, these wallets have some advantages when it comes to accessibility. If you want to access this type of wallet and send coins, log into your account and enter the location where you want to send your cryptocurrency.

These hot wallets usually come with other features as well, such as free usage and the ability to stake cryptocurrencies.

How to get a crypto wallet

It is not difficult to obtain a cryptocurrency wallet. Some cryptocurrency exchanges, such as Coinbase and Gemini, offer online crypto wallets. If you need a cold wallet, you can buy it online directly from the manufacturer or you can also buy it on Amazon.com. If you peruse Amazon.com, you might notice that you can buy the Ledger Nano S cold storage stick for nearly $60 or the Trezor Model T hardware wallet for $250.

If you want to get your own cryptocurrency wallet, check out Forbes Advisors' list of the best cryptocurrency wallets to help you make your decision.

There are several factors to consider when choosing a cryptocurrency wallet.

• customer service: Especially if you are new to owning cryptocurrencies, it is best to choose wallet support as it is always available and convenient.
• Fee: Third-party hot wallets charge transaction fees, which can ultimately reduce your profits.
• safety: Make sure your wallet provider is trustworthy and takes sensible security measures to protect your cryptocurrency keys.
• Supported cipher types: Some wallets may support only 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 your wallet supports that crypto.

Considering these factors, there is no clear “best” cryptocurrency wallet, says Reinweber, as each wallet has its strengths and weaknesses.

“Many users even choose to use multiple wallets in parallel, which can ultimately lead to a more secure distribution of holdings,” he says. “But everyone has to decide which wallet is best and most suitable for them, depending on their preferences.”

How to use a crypto wallet

The process of using a crypto wallet for cryptocurrency trading depends on the type of wallet you have. Still, like transferring any other currency digitally, it's usually a simple process.

“Simply enter the recipient's public address, the amount of cryptocurrency you want to transfer, and confirm the transaction,” Reinweber said.

The difference between trading in cryptocurrencies and trading in fiat currencies is that there are fewer remedies if something goes wrong.

“Cryptocurrency transactions cannot be reversed, so be careful when entering addresses,” Reinweber says. “If you enter the wrong address, you won't get your coins back.”