A cryptocurrency wallet refers to a physical medium, device, service, or application that maintains private and/or public passwords for crypto transactions. In addition to the basic purpose of storing keys, it also makes the owner of the digital pseudonymous.
It comes in various forms – from hardware crypto wallets like the Ledger, which resembles a USB stick, to applications on mobile devices that make purchasing and holding digital assets, such as cryptocurrencies, as easy as using a credit card online.
In addition to the basic purpose of storing keys, a cryptocurrency wallet usually adds the capacity to safeguard information and identity.
Cryptocurrency wallets range from simple apps to more extensive security solutions and can be hot (online) or cold (offline).
Some forms of cryptocurrency wallets include mobile, web, desktop, hardware, and physical media.
How It Works
While you might be familiar with a physical wallet that we keep in our pocket or purse that holds our paper money or coins, when it comes to cryptocurrencies, an important distinction is that the digital asset is actually never held by the owner but rather remains on the blockchain.
A digital wallet, in whatever form you choose, doesn’t really hold the currency, but it keeps your private key, which is created when you create your account. Your private key is not backed up on a server somewhere, so it cannot be recovered if it is lost. And that is a good thing as anyone with your private key can create digital signatures and spend your cryptocurrency.
Each digital wallet will also have a public key, which is a string of numbers and letters. It is an address that will appear within the blockchain as your transactions take place—no visible records of who did what transaction with who, only the number of a wallet.
You might liken a public key to your email address, which everyone on the internet can send emails to. Your private key would then be your email server password, which allows only you to access the email.
So, in theory, while the owner of an address is unknown, it is possible to trace transactions on a blockchain by the public key, and it is possible to create a profile of someone based on their behavior on the blockchain. Hence, cryptocurrencies are not truly anonymous but rather pseudonymous.
Types of Cryptocurrency Wallets
The different types of cryptocurrency wallets include:
1. Mobile wallets
A mobile wallet is an app that runs and stores your private keys for your cryptocurrencies on your smartphone, allowing ease of access to pay for goods or services and trade and buy crypto with your phone. The downside of a mobile wallet are fraud, malware and hacks, and obviously, losing your mobile device.
2. Web wallets
Web wallets store your private keys on a server, which is always online and controlled by a third party, such as a cryptocurrency exchange. Much like a mobile wallet, web wallets allow users to access their funds on the go as long as they can connect to the internet, so it can be very convenient.
However, there are also drawbacks, such as entrusting your private keys to a third-party and hackers gaining access to your “user ID” and password.
3. Desktop wallets
A desktop wallet is a program for your computer that store your private keys on your computer’s hard drive. The wallets will be more secure than mobile and web wallets since you don’t rely on a third party to store your precious private keys.
However, this type of wallet still needs to be connected to the internet should you ever want to buy or use your cryptocurrency and some programs that download the entire crypto blockchain onto your computer. It requires a fast internet connection and lots of disk space.
Now, we move on to COLD wallets. Whereas the previous three all need to be connected to the internet and are called HOT wallets, the next couple is purely storage solutions that are NOT online; hence, they are classified as cold wallets.
5. Hardware wallets
Hardware wallets are secure physical devices that look like a larger USB key. Sometimes, they include biometric locks, so they are believed to be the most secure way of storing any amount of crypto. When you use or receive cryptocurrency, you then need to connect the hardware wallet to your computer and run software to move the currency.
Also, as they are purely storage devices, they are more immune to malware and, when not connected to the internet, absolutely safe from hackers. You will need to secure the hardware wallet properly and not misplace it. Additionally, there are fake hardware wallets in circulation that will steal your private keys, so always be careful where you purchase hardware wallets from.
6. Physical media
While in the early days, we did see physical digital coins that could be preloaded with cryptocurrency, but such forms are not often seen nowadays. What is the most hacker-proof is to save your private key on a physical document that is completely offline.
They can be printed as QR codes so you can quickly scan them into a hot wallet to make a transaction. Once in a physical document, the important part is to safely store the document, for instance, in a dry, safe place like a safety deposit box.
Best Cryptocurrency Wallets
Various sorts of cryptocurrency wallets are available, including:
1. Ledger Nano X
It is widely regarded as the best hardware wallet for purchasing and exchanging cryptocurrency. It delivers feature-rich mobile and desktop apps when paired with the Ledger Live app.
Over 1,800 digital tokens and coins are supported by ledger wallets. The Ledger Nano comes with a Secure Element chip, which is similar to the technology found in passports and credit cards.
With over 21 million users, Metamask is one of the most popular cryptocurrency wallets on the market today. It is regarded as the best mobile wallet because it includes a browser extension, as well as a mobile app, as well as a key vault, a token wallet, a secure login function, and token exchange choices for managing your digital assets.
3. Trezor wallet
They are open-source cryptocurrency wallets that support over 1,600 cryptocurrencies in their cold wallet, including Binance coin, Bitcoin, Tether, Ethereum, and Dogecoin. The wallets link to desktop computers via USB and allow users can utilize them as cold wallets.
4. Coinbase wallet
It was created by the same individuals who created the Coinbase bitcoin exchange. You may use the Coinbase web wallet to store all of your cryptocurrencies and NFTs in one location, engage in Initial Coin Offerings (ICOs) and airdrops, send cryptocurrency to anyone, and shop at stores accepting cryptocurrencies.
Thank you for reading CFI’s guide to Cryptocurrency Wallet. To keep learning and developing your knowledge, we highly recommend the additional resources below: