Crypto Wallets: More Than Just a Place to Store Your Coins. Separating Myth from Reality!

If you’ve ever held any cryptocurrency, you sure know that a crypto wallet is a software or hardware that stores users’ crypto holdings. Additionally, crypto wallets are secure equipment that keeps track of coin spending and allows them to transfer coins from one account to another.
So, if that’s what you thought a crypto wallet was, you’d be correct.

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What Are Crypto Wallets

Illustration: Milica Mijajlovic

But also, kind of wrong.

See, cryptocurrency is held on a blockchain, and it doesn’t move from there, ever. Not into your wallet, nor mine, or someone else’s– it simply exists on a decentralized public ledger.

So, although having a wallet allows you to exchange cryptocurrencies, all those coins aren’t going from one wallet into the other during a crypto transaction. In other words, crypto wallets don’t carry your crypto in the same way physical wallets carry your fiat money.

How Does a Crypto Wallet Work?

A crypto wallet is a tool that keeps track of our crypto holdings and allows us to use them in any way possible. And as crypto is an intangible currency that only exists on a blockchain, this wallet doesn’t work the same way physical or other digital wallets work.

It’s obvious why crypto and physical wallets don’t work the same way– one is for digital currencies, and the other is for cold hard cash.

Regular wallet

Photo illustration: Freepik

But, as you can’t touch cryptocurrency, many confuse it with digital fiat money, and therefore crypto wallets with digital wallets.

For starters, fiat is government-controlled money that changes its value based on what central banks decide. Conversely, supply and demand dictate cryptocurrency’s value.

Additionally, digital wallets represent digital replicas of your debit and credit cards, allowing you to make payments, store funds, and view transaction history on your devices, whether it be a smartphone, tablet, or computer. On the other hand, crypto wallets store keys users need to utilize their coins that reside on a blockchain.

Still with me?

Good.

Two Types of Keys Matter in this Crypto Universe – Public and Private Keys

Think of public keys as bank account numbers. The other party needs your account number to complete the money transfer. And if you’ve ever sent money to someone, you know that you can’t do it without the account number– it’s an unvarying set of numbers that identifies a person as the holder of a specific account.

As the name says, public keys are public for the same reason a bank account number is available to third parties needing to transfer money into your account. These credentials are public, but they don’t violate your privacy or put crypto wallet owners at risk of losing all their coins.

But just like a bank account number is unique to the owner, so is the pin code tied to that account. A pin code allows bank customers to access funds in their accounts, initiate money transfers, log into their digital wallets, and shop in person or online.

So, in a way, a private wallet key is similar to a pin code– it allows access to specific asset types– in this case, crypto assets. However, it’s worth noting that while a pin is usually a 4-digit code, a private wallet key is drastically longer– hence the need to keep it in a wallet.

PIN code

Photo illustration: Freepik

So, now that we’ve established the fundamental components of a crypto wallet let’s take a closer look into why they matter.

Blockchain uses a public key infrastructure (PKI) model of cryptography, in which each coin or asset has a private key that can only be held by the user who holds it. To access and send cryptocurrency, users need both public and private keys. Public keys exist to allude to the wallet addresses, and they’re the key to sending crypto transactions to one another.

Similarly, a private key is required to access the asset kept for you onto a blockchain, the same way a pin is essential to access funds from a bank account. So just like your pin is useless without a card containing your bank account number, public and private keys complete each other and allow users to manage their coins.

What are Crypto Wallets: A Summary
Crypto wallets hold users’ private keys and information containing the location of public key pairs on a blockchain network. These keys go hand in hand together. Combined, these keys allow users to distribute their crypto as they please.
Only the crypto wallet owner holds the private keys. These data strings are used in crypto transactions, and as they enable the holder to make said transactions, they shouldn’t be exposed to third parties, including family or friends.

Crypto Wallet Types

When choosing storage for your digital assets, you’ll have to choose between the two main wallet types- hot or cold storage solutions. These wallets are nothing alike, and the primary difference between the two lies in Internet connectivity. A hot crypto wallet is connected to the Internet, whereas the latter doesn’t require an Internet connection.

Hot vs Cold Crypto Wallets

Depending on your needs or preferences, you might prefer one crypto wallet type over the other. If you’re wondering what the main differences between hot and cold wallets are, here are the three main ways in which they differ:

  • Convenience
  • Safety
  • Price

Simply put, a hot crypto wallet is accessible online, offering convenience to the user. But this convenience comes at a price, as hot wallets are much easier to hack. So, in a way, it’s not always a good idea to store large amounts of crypto in this wallet type.

Crypto wallet

Photo illustration: Freepik

Of course, hot wallets are ideal for those about to dip their toes into investing. They’re easy to use and set up and usually don’t cost any money.

On the other hand, a cold crypto wallet is an offline cryptocurrency storage. Cold crypto wallets are also called hardware wallets, as the private keys reside in a physical storage space. These wallets are less vulnerable to cyberattacks, making them an ideal choice for those with a decent amount of crypto assets.

It’s worth noting that cold wallets don’t offer the same convenience you’ll enjoy if you opt for a hot wallet. Cold wallets can be accessed via a pin code, and users might have to install several apps on the wallet to access different digital assets (such as crypto or NFTs).

Additionally, a cold crypto wallet isn’t connected to the Internet unless the user plugs the device into their computer to complete the transaction. So, if you keep your crypto wallet in a safe deposit box at home, you can’t really do anything with it when traveling.

Cryptocurrency example

Photo illustration: Freepik

But do you have to choose between convenience and security?

Not necessarily.

Many crypto holders keep most of their digital assets in cold crypto wallets while preserving a small amount of crypto in a hot wallet if, for example, they need it for day trading.

So, if you’re a day trader, having two crypto wallets might be the right solution. After all, you can always transfer your holdings back into a cold wallet or vice versa.

What Is an Example of a Crypto Wallet?

If you’re wondering what makes a crypto wallet capable of supporting digital assets, here are the standards a product (software or hardware) must meet to qualify as a crypto wallet.

  1. Purpose: A crypto wallet must enable the storage of private keys associated with public keys that exist on the blockchain ledger
  2. Interaction: A cryptocurrency wallet must offer interaction with blockchains. That way, users may store, send or receive cryptocurrencies and check their balances.
  3. Security: Crypto wallet’s safety is of utmost importance to the user. A wallet must have security mechanisms that protect users’ private keys from prying eyes.

A product can be considered crypto storage if it offers all three features.

If you’re ready to install or purchase a wallet, you should first decide what type of wallet most suits your needs. Here are some choices to consider:

  1. MetaMask: With a neat user interface and excellent security, MetaMask is a common choice for first-time traders. However, it supports Ethereum, ETH-compatible tokens, and non-fungible tokens (NFTs) only, making it an inadequate option for Bitcoin or any other crypto holders.
  2. Coinbase Wallet: Coinbase is one of the most trusted crypto exchanges, and its wallet is as reputable as its platform. With a neat user interface and support for several digital currencies, this is the next big thing after MetaMask.
  3. Exodus: Exodus allows users to store over 250 cryptocurrencies on this crypto wallet. If you aim to diversify your portfolio, Exodus will most likely support the assets you want to purchase.
  4. Crypto.com DeFi Wallet: This wallet will give you complete custody over your funds and private keys. It has a 4-star rating on the Apple Store and is often referred to as a wallet for beginners. Still, it’s a decent crypto storage, and since MetaMask’s last policy update, definitely a better deal than this competitor.

For advanced players, these are brief reviews of some of the most favored hardware crypto wallets among holders:

  1. Ledger Nano S Plus: This hardware crypto wallet is undoubtedly the most praised crypto storage. It allows you to manage up to 5,500 digital assets and offers 1.5 MB storage, supporting up to 100 crypto apps.
  2. Leger Nano X: Here, we have another Ledger wallet with a sleek and minimalist design. Ledger Nano X is a Bluetooth-enabled wallet offering security, versatility, and control all in one product.
  3. Trezor Model T: If you’re looking for an easy-to-use hardware wallet, Trezor Model T offers this type of convenience. It also features a polarized screen filter that prevents prying eyes from peeking at your screen while in use.
  4. SafePal S1: According to its official website, SafePal’s S1 wallets can store unlimited tokens. These wallets also support 15 languages and don’t require KYC (know your customer procedure) or registration.

How Do I Set up A Crypto Wallet?

When choosing a crypto wallet, it’s imperative to research and compare your options before making a purchase. Choosing the exact type of wallet you need can be challenging, but here are some guidelines that will point you in the right direction:

  • Determine which digital assets you want to purchase: Some wallets support a wider range of tokens. Some are made for crypto only, while others can be used as storage for NFTs or other digital assets. It is best to check whether the wallet of your choice supports crypto/other digital assets you want to buy.
  • Think about how much crypto you want to store: Just as physical wallets, crypto storage spaces have limits too. If you don’t want to end up with full storage, it’s advisable to find a wallet with sufficient storage space.
  • Decide on the level of security you’re aiming for: Do you own a lot of crypto and need a secure space for your precious assets? Or are you just about to dip your toes into investing and need a crypto wallet for your first purchase? As stated earlier, hardware wallets are more secure, but a hot wallet will suffice if you don’t need that level of security.
  • Don’t forget about the budget: In most cases, hot wallets are free, while a single cold wallet may cost you up to $200, with some exceptions, of course. Still, it’s worth noting that paying $200 extra would make a worthwhile contribution to your assets’ safety.

Now that we’ve covered the basics let’s see how to set up a wallet.

The crypto wallet setup consists of a few steps only, including:

  1. Buying or downloading a wallet
  2. Installing the software
  3. Setting up the account
  4. Funding the wallet

If you decide to go for a desktop or mobile hot wallet, you must download the app and install it on your device. On the other hand, if you choose a browser crypto wallet, you’ll likely only have to install an extension, create a new account, and write down your recovery phrase. In both cases, users are usually allowed to receive crypto almost immediately after installation.

However, if you opt for hardware, the process is slightly different and sometimes even requires technical knowledge. For example, most hardware wallet holders must install the necessary software associated with the hardware wallet. This allows you to connect your wallet to the Internet when you need to confirm a crypto transaction.

Hardware wallet

Photo illustration: Freepik

The next step, of course, would be to fund your account. Suppose you already own some crypto that’s stored in a custodial wallet owned by your preferred crypto exchange. In that case, you will log into your account and initiate a transfer.

Remember that you don’t have to transfer all your crypto to a wallet. You know best whether you should continue to keep a portion of your assets in a custodial wallet, so act accordingly.

Those who are about to buy their first crypto asset should first create and fund an account on their crypto exchange of choice. Transfer can be initiated as soon as the bought crypto appears in your account.

What Happens When You Put Crypto in a Wallet?

As I mentioned earlier, crypto wallets don’t really store crypto. They, however, store crypto keys that allow you to utilize your coins. Private keys are unique, and they allow owners to control all coins associated with that address.

So, when you “put crypto in a wallet,” you’re essentially just creating another line on a blockchain that verifies that you’re, indeed, the owner of that crypto. Until you send crypto to somebody else, your private keys will be associated with these coins, making you the rightful owner of these digital assets.

That is, of course, if you keep your private keys private. You must remember that blockchains and financial institutions don’t record asset ownership the same way. So, if you lose private keys, you usually can’t use other credentials to confirm ownership or initiate a recovery. In other words, once they fall into the wrong hands, consider your crypto gone.

Pros and Cons of Crypto Wallets

Some may love them, and others might refuse to use them – either way, crypto wallets have pros and cons, and we need to address them.

Let’s begin with hot wallets and my love-hate relationship with them.

Hot Crypto Wallets
ProsCons
Convenient; offer instant accessTarget to hackers
User-friendlyThird-party dependence
Free (usually)Users can lose assets quickly
Can store a decent number of crypto 

As presented, hot crypto wallets are helpful to those who engage in day trading practices or simply prefer convenience over safety. For example, those who only have a couple of hundred dollars’ worth of crypto would instead opt for convenience because they don’t have a lot to lose if someone hacks into their wallet.

Additionally, as most hot crypto wallets are free, beginners should consider choosing them over cold storage solutions. These wallets are easy to use and offer decent storage space, allowing first-timers to learn about crypto trade by purchasing different crypto assets.

Cold Crypto Wallets
ProsCons
Better securityCan’t use it on the go
RecoveryCan be a bit pricey
 Not as versatile as hot wallets

At first glance, you may think that cold wallets have more cons than pros, and although you’d technically be correct, these pros outweigh the cons.

If you value security over any other feature (which, by the way, you should, especially if you own a decent amount of crypto), cold wallets have everything you need to know that your assets are safe.

For example, the wallet isn’t connected to the Internet, so the chances of someone hacking into your device are slim to none. And the wallet password is typed directly into the hardware device, not your computer, making it resistant to malware.

Most cold wallet devices feature pin protection. And the best part is– you can use your recovery phrase to retrieve coins in case you lose or damage your cold wallet.

Crypto Wallets and NFTs

NFT wallets – what are they, and why do you need one?

Simply put, NFT wallets are regular crypto wallets that also support blockchain protocols upon which NFTs are built. The only trick with these wallets is that they must support the currency users need to purchase NFTs. But as that’s usually ETH, that means most ETH wallets can be used as NFT storage.

NFT example

Source: OpenSea

That said, you will most definitely need an NFT wallet if you want to dabble in NFT trade. So, overall, it would be best to explore what you want to do with your wallet and check its limits before purchasing one. Free wallets can be easily replaced, but there’s no need to waste hundreds of dollars just to realize that your cold storage isn’t compatible with NFTs and less popular coins.

If you’re thinking about storing crypto in a wallet that can be used as a shared pool of storage for different crypto, these are some of your options:

  • MetaMask
  • Coinbase Wallet
  • Ledger Nano X
  • Enjin
  • ZenGo

Crypto Wallets – The Ultimate Investment

So, if we consider everything, it’s safe to conclude that wallets could be an excellent investment. Cold wallets will protect your crypto and other digital assets, such as NFTs, and ensure only you have access to them. Still, they aren’t always necessary, as a hot wallet will often suffice.

Ultimately, the user decides what wallet type they should use, provided they even want to use a crypto wallet.

What do you think, though; which wallet do you prefer?

Let us know in the comments below!

Jelena is a content writer dedicated to learning about all things crypto. Her hobbies are playing chess, drawing, baking, and going on long walks. During winter, she usually spends her leisure time reading books.

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