Cryptocurrency wallets: The ultimate beginner’s guide
Are you wondering about crypto wallets? Cryptocurrency wallets provide access to cryptocurrency and other digital assets. They may be online or offline. Software and web-based wallets are often referred to as hot wallets, while hardware and physical paper wallets are classified as cold.
Trying to decide whether to keep your crypto in hot or cold storage? Perhaps both? Here’s what you need to know.
Key Points
- A crypto wallet may be hardware, software, Web-based, or paper; it provides access to crypto assets.
- Cryptocurrency wallets can be hot or cold, meaning online or offline.
- Your personal preferences determine which crypto wallet is right for you.
What is a crypto wallet?
You might think that a cryptocurrency wallet stores crypto assets, but that’s not exactly true. Instead, crypto wallets store private keys—long strings of letters and numbers—that can be paired with public keys to enable access to cryptocurrency on a blockchain. Crypto wallets can store the private keys to multiple cryptocurrencies and other digital assets, such as non-fungible tokens (NFTs), which can be used to signify ownership of almost anything.
There are several different types of cryptocurrency wallets:
- Hardware wallet. A hardware wallet is a physical device that stores cryptocurrency private keys in an offline, “cold” format. Crypto hardware wallets can connect to the Internet to send and receive digital assets, but the default storage state is offline. Hardware wallets are typically non-custodial, meaning that no person or entity other than the crypto owner has custody over the wallet’s assets.
- Software wallet. A cryptocurrency software wallet is electronic and lives on one or more of your devices. Software wallets are “hot” when they are connected to the Internet. Software wallets can be non-custodial, providing the owner full control over their digital assets.
- Web-based wallet. Web-based cryptocurrency wallets exist only online—they are not supported by any software or physical device. Web-based wallets are always “hot,” and are usually custodial wallets that are controlled by a host platform.
- Paper wallet. A paper cryptocurrency wallet is the ultimate cold, offline, non-custodial crypto wallet. A paper wallet is simply a physical print version of the wallet’s private keys. Paper wallets may have QR codes to simplify connection to the Internet.
If you own cryptocurrencies, you don’t necessarily need a crypto wallet to access them. But you do need a crypto wallet to ensure safe, uninterrupted, uncompromised access. Be sure to choose your crypto wallet carefully.
Hot wallets vs. cold wallets
Let’s look at the pros and cons of hot versus cold wallets. Which type of wallet is most convenient, and which is most secure? And what about the costs? Here’s how they stack up:
| Wallet type | Convenience | Security | Price |
|---|---|---|---|
| Hardware wallet | Low | High | Moderate |
| Software wallet | Medium | Medium | Low or free |
| Web-based wallet | High | Low | Low or free |
| Paper wallet | Low | High | Free |
Convenience. The most convenient crypto wallets are generally the least secure. Web-based wallets require no software installations and are always online, making them easy to access from any device. Software wallets require app installations on your chosen devices, but can be convenient to use once the software is installed. Hardware wallets must be physically retrieved and connected to a device, plus require software installation. Hardware and physical paper wallets are the least convenient of the crypto wallet options.
Security. Using a hardware or paper wallet may feel inconvenient, but these types of crypto wallets are the most secure. Cold storage is more secure because private keys to digital assets are held offline without any Internet connection. Software and Web-based wallets—those in hot storage—are less secure. Software wallets may be considered somewhat more secure than Web wallets because users have greater control over software on their devices than Web-based platform environments.
Price. Price is likely a factor that will influence your views on various crypto wallets, but you don’t need to break the bank—or even spend a dime—to establish a crypto wallet. Plenty of software and Web-based wallets are free. If you decide to purchase a hardware wallet, there are many options available at affordable price points.
How cryptocurrency wallets work
With so many types of cryptocurrency wallets available, you may be questioning exactly how crypto wallets work. The most important thing to understand about cryptocurrency wallets is that, unlike the wallet in your pocket, they don’t store any currency. Cryptocurrency wallets store extremely long strings of letters and numbers—private keys—that can be paired with public keys on a blockchain to access your cryptocurrency or other digital assets.
Suppose you want to use a digital wallet to buy cryptocurrency. After funding the crypto wallet, here are the basic steps you would follow to use your digital wallet:
- Identify the cryptocurrency you want to buy.
- Choose a reputable exchange that supports the cryptocurrency.
- Establish an account with the exchange and provide your personal information.
- Link your cryptocurrency wallet to the exchange account.
- Initiate a cryptocurrency transaction.
- Check the cryptocurrency balance in your crypto wallet to verify the transaction is complete.
What are the risks of crypto wallet storage?
So you want to hear the horror stories. What happens if you lose your hardware wallet or forget your password? Cryptocurrency wallet providers know that uninterrupted access to your crypto is crucial, and must be maintained even when mishaps occur or memories fail. Wallet makers use various methods to keep you and your crypto securely connected.
If you lose access to a cryptocurrency hardware wallet, you can use the recovery phrase—a manufacturer-provided string of words, often 12 to 24 words in length—to access your cryptocurrency from another hardware or software device. If you lose access to a software wallet, you may only need to reinstall the software. Forgotten password? You may only need to follow the typical steps for password recovery.
The primary unmitigated risk of owning a crypto wallet is the risk that the manufacturer or developer could suddenly cease to operate or support the product. Users can minimize—but not eliminate—this risk by establishing crypto wallets only with credible and well-established entities.
The bottom line
Feeling unsure about which cryptocurrency wallet to choose? That’s understandable. But here’s the thing: You don’t need to limit yourself to just one wallet. Perhaps you want a hot wallet for your tradable crypto assets and another one for your long-term (“HODL”) assets. This may be particularly relevant if you hold significant crypto assets.
The right crypto wallet—or wallets—for you will match your needs for convenience, security, price, and other factors. Step one is to educate yourself on the differences among crypto wallets—and if you’ve read this far, then you’re already ahead of the game.