Despite the name, a crypto wallet has very little in common with the wallet you have in your pocket.
A crypto wallet is a place, either digital or physical, where you store the private keys to your cryptocurrency. There are several different ways to store this information – as simple as a piece of paper or as complex as a web-linked wallet.
Crypto wallets aren’t like a bank account because they don’t help you earn money on your cryptocurrency or even hold the cryptocurrency itself. Instead, wallets are more like a safe deposit box for your crypto passwords.
Here’s what you need to know about crypto wallets and how to tell if you should have one.
How Do Crypto Wallets Work?
A crypto wallet stores private keys while your cryptocurrency lives on the blockchain. “It’s not like your wallet even holds your Bitcoin,” says Douglas Feldman, chief investment officer at Stash in New York City. “All your wallet does is holds the password where the key is, and that enables you to reach out and transact on the blockchain where your cryptocurrency is held.”
That said, the private keys that your wallet holds are absolutely critical. These alphanumeric passwords prove cryptocurrency ownership and are used to sign transactions on the blockchain. “If you lose your keys, it’s virtually impossible to get your crypto back,” Feldman says.
Do You Need a Crypto Wallet?
There are two main uses for crypto wallets: to heighten security and to make it possible to send and receive cryptocurrency.
If you’ve bought crypto from an exchange, the crypto is likely stored in a custodial or third-party wallet. Rather than giving each customer an individual wallet, cryptocurrency exchanges store crypto in these wallets for customers.
Keeping crypto in a third-party wallet is an option.
“I use a third-party wallet provider,” says Carmelle Cadet, chief executive officer and founder of financial technology company EMTECH in New York City. “That means I leave it to companies to manage a wallet infrastructure that makes it easy for us to get a crypto wallet. That offers convenience but leaves me exposed to the strength of the company I choose.”
For those wanting extra security and control, moving crypto into your own cryptocurrency wallet may be the right move.
What Types of Crypto Wallets Are Available?
There are many different crypto wallets available, ranging in price from free to over $100. They can be as simple or as complex as you want them to be.
But the type of crypto wallet you want to get will depend on two things. First, it will depend on how secure you want your cryptocurrency to be. Then, you’ll need to consider how easily you want to be able to transact with your cryptocurrency. There are two main types to consider: software wallets (also called hot wallets) and hardware wallets (called cold wallets).
Hardware wallets. Hardware wallets, or cold wallets, store cryptocurrency offline. “Examples of a cold wallet would be a paper wallet. That’s as simple as you writing your private keys down on a piece of paper. Or it may be a thumb drive that you’re storing in a safe somewhere,” Feldman says.
With private keys stored offline, it’s much more difficult for hackers to obtain. But it also complicates things when it comes to using crypto as a currency.
“In exchange for this theoretical increase in security, you give up accessibility,” Feldman says. “When you have cryptocurrency stored offline, in order to use it – let’s say you have a thumb drive and you put in a safe deposit back in your bank – you have to go to your bank, go to the safe deposit box, get the thumb drive, plug it in, and connect it to use (the cryptocurrency).”
Software wallets. For people who want more accessibility and want to easily make trades, a software wallet – also called a hot wallet – might be a better option.
“A hot wallet is when your keys are stored online in an app, on your mobile device, on the web, or on some other software,” Feldman says.
While it has the convenience of being already connected to the internet, it also means that your private keys are stored online. “The tech is new and there will be breaches. It’s all about the recovery and integrity of the data,” Cadet says.
