Everything you need to know about the Crypto Wallet: what they are, you we need them, and most importantly, what is the right wallet for you?
Every journey starts with a first step. For most, the journey into cryptocurrencies begins with setting up a crypto wallet. But what exactly is a wallet, and how does it work?
In short: A crypto wallet is a piece of software (or hardware) that grants access to virtual assets, such as cryptocurrencies and smart contracts.
Key Takeaways
- Crypto Wallets hold Private and Public Keys, not the actual assets.
- The three major forms of wallets are Online, Software, and Hardware.
- Online wallets offer the highest ease of use.
- Dedicated Software Wallets unlock the full potential of a token’s eco-system.
- Hardware Wallets are highly secure but less convenient to use.
- Start with an Online Wallet from a trusted service provider.
A crypto wallet holds your private key and your public key and which in turn generates your public address. Your wallet is the gateway to access your crypto assets.
To understand what a crypto wallet exactly is, what it does, and how we use it, we must first clarify some terms.
What are Keys?
The private key is a string of code, usually, in the form of a series of randomly generated words, that is unique to you and will allow you to identify with the assets stored on the blockchain. You must keep the private keys classified since anyone who can access your private key will be able to access your wallet and, thus, all the holdings linked to it.
The public key is a string of numbers and characters used to generate your wallet’s public address. As the name suggests, it is public and is used to sign transactions, such as sending or receiving assets. Think of it as your digital postal address.
What is a Crypto Wallet?
There is an abundance of wallets available, every single one with its pros and cons. In this article, I will touch on some of the most popular of them, show their use cases and compare them.
Unlike a regular wallet, which can hold cash, crypto wallets technically don’t store your crypto. Your holdings live on the blockchain but can only be accessed using a private key. Your keys prove your ownership of your digital money and allow you to make transactions. If you lose your private keys, you lose access to your money. (Coinbase)
A crypto wallet contains the private key(s) that allow you to access your cryptocurrency holdings on the blockchain.
Now that we know what specifies a wallet let’s closely examine the different versions.
What kinds of Crypto Wallets are there?
In principle, there are three types of wallets. Other styles may exist, but let’s focus on the most common ones.
Online Wallet (Hot)
The keys are stored online. These crypto wallets are easy and convenient to use and offer a simple way to get started in the crypto space, but at the same time pose the risk of a malicious attack. Large wallet providers such as Coinbase, Binance, and Kraken have implemented their own security protocols to secure these “hot” wallets; general security is good. However, remember that some of these protocols have been breached in the past. Some of the larger online exchanges offer, therefore, wallet apps that are separated from their trading apps in an attempt to ringfence the assets from the exchange.
Software Wallet (Hot)
Some ecosystems offer their native software (app), allowing token holders to access the full potential of the underlying blockchain, such as staking, voting, and smart contracting.
Other software wallets are multi-asset wallets that come as an app or standalone software. e.g., MetaMask
Hardware Wallet (Cold)
Keys are stored on a hardware component such as a thumb drive. Hardware Wallets, similar to paper wallets, are stored offline on a thumb drive or dedicated “cold” storage drive. These wallets combine the security of offline storage with the ease of use of a software wallet. Important reminder: you can only sign transactions on the blockchain if you have the hardware wallet readily available, i.e., no wallet, no access.
What Wallet Type Should I Use?
For your first steps into the crypto and NFT world, I recommend using a software/online wallet. They are convenient to set up, usually offer a user-friendly interface, and have a reduced risk of error and loss.
Online Crypto Wallets
It is essential to look at a crypto wallet provider’s reputation, data security, and usability. As a small investor, I would recommend going with one of the household names such as Kraken, Coinbase, Binance, or Crypto.com for the first steps Kraken, Coinbase, Binance, or Crypto.com. Most of these providers offer not only wallets but also the ability to trade, send and receive a variety of cryptocurrencies. Some even provide cards that allow you to spend certain crypto in the real world (at least the Fiat currency counter value).
Mainstream software wallets are best for but are not limited to, transacting with the major cryptocurrencies such as Bitcoin, Ethereum, Tether, Binance Coin, etc. Make sure you look at the list of cryptocurrencies from each wallet provider since not every platform offers access to the same tokens, especially if you intend to invest in small or niche coins & tokens.
Most online crypto wallet providers have KYC requirements, restrictions, or specific regulations depending on your country of residence. This should not put you off but be a sign of transparency and security, and it will likely prevent you from having your assets questioned or frozen by a regulator or even a hack.
Software Crypto Wallets
These wallets are specific pieces of software that can hold single or multiple cryptocurrencies. They offer an excellent alternative to store and maintain your holdings away from a centralized provider.
These wallets are still considered “hot” because they live online or on software, yet they are somewhat more detached.
Some of the most popular Software Wallets are;
Often software wallets are dedicated to a specific token and offer unique benefits tied to the ecosystem of that token. This can range from staking to smart contracts and voting rights on the blockchain.
A good example here would be Cardano’s Yoroi Wallet or NEM’s Symbol. Here the software wallet app is acting as the gateway to the ecosystem of these tokens.
By now, many exchanges and crypto wallet providers offer crypto holders pass-through benefits such as staking rewards and voting rights. Thus for new entrants using token-specific software is likely to lead to confusion rather than simplicity.
I will write a separate deep-dive article about software wallets in the near future.
Do I need a Hardware Crypto Wallet?
In the beginning, no. I started using a hardware wallet much later, and even now, only for more significant holdings I don’t frequently trade or move.
Hardware wallets offer a high degree of security but can be cumbersome. Let’s bring a use case for a hardware wallet for a better understanding;
John has opened a Coinbase account and intends to buy a large amount of Bitcoin. He, therefore, sends USD from his bank account to his online wallet provider and exchanges it for BTC. He does not intend to sell those coins soon and wants to store them safely. However, he has heard of exchange breaches and wants to keep his BTC more secure. To do so, he buys a Hardware Wallet and transfers the BTC into it. (Note: Certain online wallets allow you to secure them with a hardware wallet, i.e., you can only interact with the online wallet once the hardware wallet grants permission).
Hardware wallets provide a high degree of security since the tokens cannot be transacted without the actual piece of hardware. This simultaneously shows the inconvenience; the hardware wallet must be readily available if you want to interact with your holdings.
Thus, I recommend using a hardware wallet only for large amounts and assets that are infrequently moved.
Popular hardware wallet providers are Ledger on Trezor.
Conclusion
For beginners entering the world of cryptocurrencies, setting up a wallet is a crucial first step. A wallet is software or hardware that grants access to virtual assets such as cryptocurrencies and smart contracts by holding your private and public keys, which generate your public address. There are different types of wallets, including online, software, and hardware. When selecting a wallet, consider security, ease of use, and the type of assets you plan to hold. It is recommended to go with Kraken, Coinbase, Binance, or Crypto.com for the first steps. Dedicated software wallets such as Cardano’s Yoroi Wallet or NEM’s Symbol offer unique benefits tied to the ecosystem of that token. Hardware wallets like Ledger and Trezor provide higher security but can be cumbersome and should be used for large amounts and infrequently moved assets. Remember that crypto wallets hold private and public keys, not tangible assets. If you lose your private keys, you lose access to your money. Start with a trusted online wallet from a reputable provider to begin your journey in cryptocurrencies.