You can't fold up a bitcoin and put it in your wallet. Yet you can hold the keys to your crypto by using a crypto wallet of your own.
A crypto wallet is a software program or physical device that allows you to store your crypto and allow for the sending and receiving of crypto transactions. A crypto wallet consists of two key pairs: private keys and public keys. A public key is derived from the private key and serves as the address used to send crypto to the wallet.
The important part of a wallet — and the part where new users often find themselves getting into trouble — is the private key. A private key is like the key to a safe deposit box. Anyone who has access to the private key of a wallet can take control of the balance held there.
But unlike a safe deposit box, crypto users who hold their own private keys and make transactions using non-custodial wallets (i.e., a wallet not hosted by an exchange or other third-party) become their own bank.
"It is similar to a bank account but the main difference is it is controlled by a key that only you control. You use this [private] key to initiate transactions, which is called 'signing,'" says Joel Dietz, founder of Art Wallet and contributing developer to MetaMask.
While the idea of crypto itself is still new to many people, crypto wallets themselves are designed to be user-friendly. Web wallets like MetaMask and desktop wallets like Electrum come with a graphical user interface (GUI) that is made to be as simple as possible.
Blockchain is a public ledger that stores data in what's known as "blocks." These are records of all transactions, the balances held at any given address, and who holds the key to those balances. Crypto isn't stored "in" a wallet, per se. The coins exist on a blockchain and the wallet software allows you to interact with the balances held on that blockchain. The wallet itself stores addresses and allows their owners to move coins elsewhere while also letting others see the balance held at any given address.
"Most Crypto wallets allow users to send, receive, and store crypto. Some have a feature to buy and spend cryptocurrencies," says Utsav Dar, co-founder of Incub8 Finance. "Certain crypto wallets have additional features like swapping between tokens, staking tokens for a fixed return paid out to users, as well as access to dApps (decentralized applications) built on various networks."
While each wallet has its own specific nuances, here are the general steps involved in sending or receiving funds using a crypto wallet:
Sending money via QR codes or long strings of numbers and letters may seem strange at first. But after doing it a few times, the process becomes quite simple.
Crypto wallets fall under two general categories: software wallets and hardware wallets.
Software wallets are simply desktop programs or browser extensions that make it easy for people to send, receive, and store crypto. Hardware wallets serve a similar purpose but are physical devices that can be plugged into a computer.
Software wallets are sometimes called "hot" wallets because the funds are kept online. Hardware wallets keep private keys held offline or in "cold" storage.
A hardware wallet is a small device that can store crypto offline. "A hardware wallet keeps your keys off of your phone or computer," saya Dietz. "Usually, you plug in the hardware wallet from a USB port. This is much more secure because all of the signing happens off of your computer."
The typical hardware wallet costs around $100, give or take. These tend to be slightly more complicated to use than software wallets.
Most hardware wallets interact with a computer in one of three ways:
A software wallet is a computer program or mobile app that holds private keys online. Software wallets are unique to each cryptocurrency while hardware wallets often support multiple currencies (more on these differences later).
"[Software wallets] can either be used on the web, in which case they are custody wallets, which aren't completely secure. Or they [can come] in the form of apps that can be installed on a phone/laptop, in which case the private keys are stored on the local device," says Dar. "These may be connected to the internet, again making them less secure."
The three main types of software wallets are:
Each type of crypto wallet has its own use case depending on the goals of the user, although they all accomplish the same things.
Some pros of using non-custodial crypto wallets include:
Some cons of using crypto wallets include:
The answer to the question "what is a crypto wallet" is that it's like a crypto bank account that only you control. Software wallets are built for convenience while hardware wallets are built for security. To get started, you should research what wallet types work best for you. Research the options available to you, including cost and security.
Those interested in going a step further can invest in a hardware wallet since doing so is one of the best ways to take ownership of your own private keys. Learning to use these might take a little longer for beginners, but doing so could be worth it for the added security. For those holding large sums of money in the form of cryptocurrency, most experts agree that using a hardware wallet is a must.
Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Robinhood Learn, SoFi Learn, and The Balance. He's helped tech and finance startups increase their reach, build their brands, and gain subscribers. He has a passion for bitcoin and for educating others through engaging content, helping them to improve their financial situations as much as possible. Connect with him on LinkedIn or visit his website.
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