Crypto wallets store the private keys of your cryptocurrency and keep them safe. They allow users to send, receive and use several cryptocurrencies such as Bitcoin and Ethereum, Ripple, among many others. They come in several variants, and they can either be physical devices, software or online services such as exodus, ledger, nano and among others.
However, like cryptocurrency, the concept of a crypto wallet is quite abstract. Let’s take a closer look at these essential crypto tools and how they work.
What is a crypto wallet?
The first lesson of crypto wallets is that they are not like the bill in your purse or back pocket, with cash and credit cards. Rather, a crypto wallet is a form of digital storage to secure access to your crypto.
Cryptocurrency is a highly abstract store of value, without a physical symbol similar to cash’s coins and notes. It exists as nothing more than a string of code on a larger blockchain.
When you buy Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.
Think of the public key as something like your bank account number – you can share it with anyone, but it doesn’t give access to your money.
The private key is like a password to your bank account. Please don’t share it with anyone else they may steal all your money.
If you lose your private key, you may lose access to your crypto. Similarly, the person who has a private key has full access to the crypto. It is important to keep your private keys safe in a crypto wallet.
“Coins and tokens are part of a blockchain system in the form of data, and the wallets act as a means to access them,” said Martin Leinweber, digital asset product strategist at MarketVector Indexes.
How crypto wallets work
A crypto wallet stores the public and private keys necessary to send, receive and store cryptocurrency.
When you buy cryptocurrency, the company you bought it through probably provided you with a wallet to hold the digital coins. This is called a hot wallet because it is online and connected to the internet.
“To avoid the risk of hackers stealing your online wallet, get a cold wallet that’s not connected to the internet,” says Ric Edelman, founder of the Digital Assets Council of Financial Professionals.
Cold wallets are essentially memory sticks or some other type of hardware device. “Once you have one, you simply transfer your coins from the hot wallet to the cold wallet,” Edelman says.
Types of crypto wallets
As mentioned 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 take a closer look at these.
Paper wallets
A paper wallet is the easiest cold wallet to understand and operate. It’s what it sounds like: A piece of paper with the keys written on it.
“Since this is just a piece of paper, it’s a cold wallet and thus safe from hackers, but paper can be lost, stolen, torn, or rendered unreadable by getting wet,” says Edelman. Given this, “as cold wallets go, paper isn’t ideal.”
Hardware wallets
A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help keep your private keys safe from hackers who have to steal the 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 the device’s contents. Although these PINs provide an extra layer of protection, you lose access to your coins if you forget your PIN. “So you have to be tech savvy to use such a wallet,” says Leinweber.
“The idea behind hardware wallets is to isolate the private keys from online storage like on a computer or smartphone, which are more vulnerable to hacking,” says Leinweber. “Storing the private keys offline prevents this, as hackers must physically steal the cryptocurrency hardware wallet to gain access to a user’s private keys.”
You can usually get a hardware wallet for between INR 3,000 and INR 17,000, although there are some much higher priced options. For example, you can buy the Trezor Model One for around INR 10,000. You can also find more economical ones such as a SafePal wallet for INR 5500.
Online wallets
Web wallets, also called software wallets, are your hot wallets. Desktop, mobile or web-based applications, these wallets require an internet connection and are both more accessible but also more vulnerable to hacking than cold wallets.
“Your password is stored on servers online and thus represents a potentially increased risk,” says Leinweber.
If you only trust your infrastructure, he says it makes sense to create desktop wallets like Electrum and Wasabi Wallet. This avoids involving a third party and leaves you solely responsible for the security of your wallet.
Leinweber says that mobile wallets are often favored by people who use cryptocurrency on a daily basis. These wallets are “located as an app on your smartphone, similar to Apple Wallet, and simply enable transactions using QR codes.”
Meanwhile, online wallets are mostly accessible through web browsers and allow you to transact anywhere you have an internet connection, he says.
Custodial wallets vs. non-custodial wallets
Now for some more crypto language. Non-custodial wallets are the types of wallets that give you control over your own data. These are often the wallet type of choice among crypto enthusiasts because they don’t involve a third party to secure your private keys.
Offline wallets from Exodus or MetaMask, both offline storage options, are examples of non-custodial options. These wallets are designated for security, which means they are less prone to hacking.
Custodial wallets, on the other hand, are wallets offered by crypto companies such as crypto exchanges such as BlockFi Wallet.
If you choose this type of wallet, you are essentially outsourcing your private keys to them. But these wallets have some advantages in terms of accessibility. If you want to access and send coins from this type of wallet, you log into your account and specify the location where you want to send your crypto. These hot wallets usually also come with other features, such as being available for free and allowing the option to stake your crypto.
How to get a crypto wallet
It is not difficult to get a crypto wallet. Some crypto exchanges, such as WazirX, Zebpay, Unocoin and CoinDCX, offer an online crypto wallet. If you want a cold wallet, you can buy one directly from a manufacturer online or even on Amazon.com. If you peruse Amazon.com, you might notice that you are buying the Ledger Nano S cold storage stick for almost INR 7,000 or the Trezor Model T hardware wallet for around INR 21,500.
But there are a few factors to consider when choosing a crypto wallet:
- Customer service: It is a good idea to choose wallet support that is always available and useful, especially if you are new to cryptocurrency ownership.
- Charges: Third-party hot wallets may charge transaction fees, ultimately reducing your profits.
- Safety: Make sure your wallet provider is reliable and has reasonable security measures to protect your cryptocurrency keys.
- Cryptotypes supported: Some wallets may only support a handful of 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.
With these factors in mind, a categorical “best” crypto wallet does not exist, says Leinweber, as each wallet has its strengths and weaknesses.
“Many users even choose multiple wallets in parallel, which can ultimately lead to a more secure distribution of assets,” he says. “But which wallet is best and most suitable for someone has to be decided by everyone depending on their preferences.”
How to use Crypto Wallet
The process of using a crypto wallet for cryptocurrency transactions will depend on the type of wallet you have. Still, it’s generally a simple process, not unlike sending any other currency digitally.
“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 transactions in cryptocurrency versus fiat currency is that there is less recourse if things go wrong.
“Be careful when entering the address, as cryptocurrency transactions are irreversible,” says Leinweber. “If you provide the wrong address, you will not be able to get your coins back.”
