Some investments are simple and hassle-free, like putting money into a high-yield savings account or buying some silver coins. Others? Not so much.
If you’re investing in real estate, you can expect to deal with mortgage applications, home inspections, property taxes, and other headaches. If you’re thinking of building a nest egg through a Gold IRA, you better get ready to understand a slew of regulations. And if you’re interested in getting started with the stock market, there’s even more to wrestle with.
Cryptocurrency is really no different. If you want in, there’s a lot to learn. The jargon itself can be a little scary, but the technology on which it runs is unbelievably complex — if you’re not a math genius or developer, anyway. On the upside, you never have to truly grasp all the ins and outs of crypto tech to buy and sell Bitcoin or other cryptocurrencies. Learning how to use crypto is a whole lot easier than learning how it all works.
Crypto wallets are a key piece of that — and you’ll have to have at least one to get started with crypto. Here’s a basic and simple but also uber-practical overview to get you on the right track.
What Is a Crypto Wallet?
The concept of crypto wallets instinctively makes sense to people new to Bitcoin and other cryptos. It immediately seems logical, after all. If you buy crypto, you’ll also need a place to put it. That place is your crypto wallet.
Except it isn’t.
That’s because cryptocurrency coins or tokens don’t technically exist at all. They don’t just fail to exist in any physical form (something you already knew), but they don’t exist as files, either — and they cannot be stored. Your cryptocurrency exclusively exists as data on the blockchain, and that’s public, so it doesn’t require a wallet.
What’s a crypto wallet for, then? It does two things:
- Crypto wallets do store something — the private and public keys they generate. You give the public key to others so they can send you crypto. You keep the private key to yourself so you can authorize transactions. Never share it with anyone, or your crypto will go Missing In Action.
- Crypto wallets also act as a portal. You use your wallet to interact with your crypto balance — to check it, to send crypto, to receive crypto, and to gain access to dApps.
So, a crypto wallet isn’t really analogous to a regular wallet. It’s a lot closer to a debit card (which can access data that shows your bank balance, but doesn’t directly contain your funds) and your PIN code (which you use to access your funds). Even this analogy is imperfect, though. You have options if you lose track of your bank card, but if you lose track of your crypto wallet, you’re out of luck.
Now that you have a rough idea of what a crypto wallet actually does, it will also immediately be clear that many different types can exist. We’ll look at those in a little while so that you can start deciding which kinds of wallets might be the right choice for you. First, though, you’ll want to understand where your crypto is stored. If it isn’t your wallet, then where?
How Crypto Coins Are Stored in the Blockchain
As we already saw, cryptocurrency only exists on the blockchain — a decentralized digital ledger with public transaction data that everyone can access and nobody can alter at will. Every cryptocurrency has its own blockchain (with some exceptions because many memecoins use tokens on a main blockchain, but that’s for another time). The blockchain stores data about all transactions that have ever taken place within it.
A large network of computers all around the world is responsible for maintaining this complex database. Each computer within the network is a node, and all nodes work together to confirm the integrity of the blockchain using complex math. This is what makes cryptocurrency decentralized. Once a transaction is verified, it’s moved into a “block” (batch), which is cryptographically linked to another — hence “blockchain.”
Aside from transaction and block data, the blockchain also stores wallet data — including your public key. The wallet itself uses your private key to make a digital signature that nodes can check up on.
This process makes crypto secure and resistant to both unauthorized access and any attempt by a single entity to control the currency. Your crypto wallet isn’t nearly as secure, by default, as the blockchain itself, though, and that’s why it’s absolutely essential to make a smart choice about your options.
So, What Types of Crypto Wallets Can You Choose From?
Not only do many different types of crypto wallets exist, but you also have many different options within most of these types. Choosing one or more kinds of crypto wallets is among the first steps you’ll take as you stumble into the crypto-verse, so let’s look at all your options in their full glory — including one type you might just be tempted to play with, but which is likely to cost you dearly sooner or later.
Before we do that, we need to look at two overarching options — hot wallets vs cold wallets. Hot wallets are connected to the internet, where they can quickly be used for crypto transactions. They’re very convenient but more vulnerable to attack, and that’s why they’re best for small amounts. Cold wallets are not connected to the internet. That means they cannot be hacked remotely, although they can still be subject to theft or on-location hacking. Cold wallets are best for the long-term storage of crypto assets. Depending on the type, they essentially become hot as soon as you connect them to the internet.
1. Software Crypto Wallets
Software wallets are apps that you install. Software wallet options are available for desktop computers and smartphones. A software wallet generates and stores your private key on the device you use. This is where you’ll probably start if you are completely new to crypto.
Software wallets are easy to install, and generally also pretty easy to use. They’re handy. If you expect your crypto experience to be broadly similar to online banking and you’re looking for quick access, this is what you’ll want as your workhorse. Many hot software wallets also have extra features like staking, dApp integration, and in-app transactions, that make them even more appealing.
Reputable examples include Electrum (for Bitcoin), MetaMask (for Ethereum), and the Trust Wallet (Binance-owned).
2. Hardware Wallets
These are physical devices that securely store your private keys and are offline by default. They can range in physical size from pretty large (like the Ledger Flex) to as small as a USB drive (like BitBox02). While hardware wallets can connect to your computer or phone with a cable, they’re stand-alone. This is what makes them so secure compared to software wallets. Your crypto will be safe even if your device is attacked.
Hardware wallets generate private keys offline and securely, but they also require you to press a button as confirmation. They’re very diverse — some are Bitcoin only with a very minimal interface, while others can handle many different cryptocurrencies and have touchscreens.
They’re the gold standard, especially for cold storage, but hardware wallets do have one serious drawback. If you lose the wallet or it’s damaged, your crypto is gone. In that sense, you swap one security responsibility (keeping your device safe when you have a software wallet) for another (physical protection of the hardware wallet). A safe or bank safety deposit box adds an additional layer of security.
3. Custodial Wallets
New to crypto? You’ll probably research popular coin exchanges, choose one, and buy your first crypto. Centralized coin exchanges like Coinbase, Kraken, Gemini, and Binance work like this — you make an account, (usually) verify your identity, and start trading. Those platforms have custodial wallets by default — that is, the exchange holds your private key for you.
If you’ve done your research and taken the time to choose a reputable crypto exchange, it’ll be insured. You’re essentially outsourcing the responsibility for the wallet’s safety to the exchange, and if the funds you hold are lost in a major hack, the exchange is responsible for replacing your funds.
One major plus? If you lose track of your account or password, a coin exchange that’s already confirmed your identity can usually help you get your access back.
A custodial wallet is a typical starting point. Once you hold crypto within one, you can withdraw it and deposit it into another wallet at will (although there will be fees).
4. Paper Wallets
These are indeed exactly what they sound like — with a little bit of variation, because you can also use plastic or laminate the paper. Paper crypto wallets involve storing your public and private keys on a piece of paper. In practice, that usually takes the form of a QR code. You can generate these kinds of wallets, which are single-use only, through dedicated websites like bitaddress.org. You’d disconnect from the internet before generating a wallet.
Paper wallets can be handy for travel. You could also store a paper wallet in your bug-out bag. Besides the single-use nature, paper wallets are also quite prone to damage, loss, or theft — so be careful. Your paper wallet is only as secure as your weakest link, and this type of crypto wallet definitely isn’t suitable for everyone.
5. Brain Wallets
Brain wallets are the no-no of crypto wallets. In case you’re scratching your head right now, your first instinct was probably spot-on — they involve memorizing private keys, often using special mnemonic techniques. One concussion or simple memory slip later, you can kiss your crypto balance goodbye forever.
Proponents say brain wallets can’t be hacked. They’re wrong. Google “behavioral engineering” and have a quick look around if you don’t believe us. This particular threat doesn’t only arrive in the form of someone tricking you into revealing your private key, as real as that possibility is, but there’s also another risk. You may use things very personal to you as your passphrase to make it easier to remember, and if you can remember it, others may just be able to figure it out.
Just don’t do it. OK?
Crypto Wallet Security: What to Consider
Most people will use a combination of software, custodial, and hardware wallets. All can be secure, but only if you make them so. Want some general tips? Here goes:
- Use strong, unique passwords and PINs. Use a locally stored password manager like KeePassXC to generate them if you can. Never use easily-guessable things like your wedding anniversary, your pet’s name, your children’s birthdays, or anything like that.
- Two-factor authentication really isn’t optional. Hardware tokens, like Yubikeys, are the most secure — they require physical access to work.
- Back your crypto wallet up. Regularly. It’s better to be safe than sorry.
- Large amounts of crypto not in active use should be moved to cold storage.
- If you use a software or custodial wallet, the security it provides partly depends on the provider. Make sure it’s reputable.
- Phishing is a real threat. Nobody is immune — and if you think you are, you’re precisely the most vulnerable target. Do not click on weird links that arrive in your inbox (or, really, any links). Do not reveal your private keys to anyone, unless you want to give them your crypto. If you do, do that in person — just to make sure the correct recipient gets the funds.
A Final Word
You now have a good launchpad from which you can do your own research — but picking a wallet is a big choice. Slow and steady wins the race, especially if you’re hoping to invest in larger amounts of crypto.
A good starter combo? A custodial wallet through the coin exchange you choose to buy your first crypto from, a software wallet for ongoing transactions (like paying for things with crypto), and a cold wallet for secure storage of crypto savings.
