What is a crypto wallet (cryptocurrency wallet)?
A crypto wallet (cryptocurrency wallet) is software or hardware that enables users to store and use cryptocurrency.
With cryptocurrency, there is no tangible currency, no paper money to place within a physical wallet or purse. Cryptocurrency exists on the blockchain, and there is no physical manifestation that a user touches. However, there still is a need for individuals and organizations to understand ownership of cryptocurrency assets and to be able to know how much is held, much like a bank account provides a bank balance.
A crypto wallet provides a way for users to validate an account balance to provide visibility into how much cryptocurrency the user owns. A crypto wallet enables users to both send and receive cryptocurrency transactions, in an approach that is similar in concept to how a traditional bank account enables users to conduct transactions. For many users, a crypto wallet is a primary mechanism for managing cryptocurrency balances.
Why are crypto wallets needed?
As with any type of currency, cryptocurrency can be accumulated and used for any number of different purposes and transactions. Crypto wallets serve a foundational role in enabling cryptocurrency to be functionally useful for individuals and organizations, much like a bank account is foundational for fiat currency.
Crypto wallets are needed for several critical things that help to enable the practical utility of cryptocurrency. Among the reasons why crypto wallets are needed are the following:
- Management of cryptocurrency. Crypto wallets provide users with the ability to monitor a balance for cryptocurrency assets.
- Transactions. Sending and receiving cryptocurrency payments is an important feature of crypto wallets and a primary reason why they are needed.
- Connection to decentralized apps (dApps). In order to connect and interact with Web 3.0 dApps, a crypto wallet is required.
- Username identities. All cryptocurrencies are stored on a blockchain. A crypto wallet enables transactions to occur with a username that can be associated with a public key address on a blockchain.
- Key management. Functionally, cryptocurrency exists on the blockchain as a public key address. A crypto wallet helps users to manage the private encryption keys that are used to access a given address and enable a transaction.
How do crypto wallets work?
With a physical wallet, individuals can hold fiat currency or bank and credit cards, which enable access to funds. A crypto wallet doesn't actually hold cryptocurrency, but rather holds the privileged credentials needed in the form of private keys to access the blockchain for a given cryptocurrency.
With a traditional bank, users receive bank accounts with account numbers. With a cryptocurrency blockchain, the public key serves the same basic concept as the bank account number. Simply having a bank account number or a public key isn't enough to conduct a full set of transactions with an account.
Blockchain works with a public key infrastructure model for cryptography, where there is a public key and a private key that are only supposed to be known by users that hold a given asset or cryptocurrency. Both a public key and a private key are needed to access and transfer cryptocurrency. Just as a private personal identification number is used to access a bank account with a bank card, a private key is needed to access the asset on a blockchain.
Crypto wallets hold users' private keys and information where the public keys are located on the blockchain. With the combination of both public and private keys, a crypto wallet can enable a secured operation to validate a balance and send or receive cryptocurrency transactions.
Types of crypto wallets
With crypto wallets, users get to choose not just the service or vendor that supplies a crypto wallet, but the deployment approach as well.
There are functionally two core types of crypto wallets: hot wallets and cold wallets. Hot wallets are generally always on and connected to the internet, while cold wallets are typically disconnected and only connect online as needed.
Within the category of cold wallets are two primary types:
- Hardware wallets. With a hardware-based crypto wallet, the private keys for a user's cryptocurrency balance are stored on a physical medium, which is typically a USB drive. Because the hardware wallet is a secured device that isn't always connected, it ensures a form of isolation when the user pulls the key out.
- Paper wallets. A paper wallet is truly a low-tech solution whereby the user writes down the public and private key information on a piece of paper.
Within the hot wallet category are three types:
- Online (web) wallets. Perhaps the most common and widely used form of crypto wallet is found in online services. With an online wallet, an online service, such as a crypto exchange, holds the user's public and private keys. Users access the wallet by logging in to the online service.
- Desktop wallets. With a desktop wallet, the cryptographic keys are stored in an application on a user's desktop system.
- Mobile wallets. A mobile app can be used to store a user's public and private keys for accessing and using cryptocurrency.
Examples of crypto wallets
There is no shortage of crypto wallets for users to choose from across every type of approach. For paper wallet users, the options include any type of paper, notebook, whiteboard or surface on which the user can write a series of numbers.
Examples of hardware wallets are the following:
- Ledger. Ledger offers a series of different hardware wallet options, including the Nano S and Nano X devices.
- Trezor. Trezor offers the entry-level Trezor Model One and the premium Trezor Model T hardware crypto wallets.
- SecuX. SecuX has a growing portfolio of hardware wallets, including the V20, W20 and W10 devices.
- SafePal. SafePal's primary product is the company's S1 hardware wallet, which is a low-cost option.
Examples of hot wallets are the following:
- Coinbase. Coinbase provides all three types of crypto wallet, including online, desktop and mobile options.
- Exodus. Exodus provides desktop and mobile crypto wallet options that can also be integrated with the Trezor hardware wallet.
- Crypto.com. Crypto.com provides a series of services to users as part of its exchange, including options for a crypto wallet with a web-based approach and a mobile app.
- MetaMask. MetaMask offers a mobile app, as well as a desktop crypto wallet that works as an extension on the Firefox web browser.
- Trust Wallet. Trust Wallet provides a popular mobile crypto wallet option and support for nonfungible tokens (NFTs).
How to choose the best crypto wallet
Often, the first choice of cryptocurrency wallet for new users is to have an online wallet with the crypto exchange with which they are buying and selling cryptocurrency. While that choice might be the easiest, it's not necessarily the best choice for all users.
The following are considerations for choosing the best crypto wallet:
- Cold vs. hot. A hardware wallet offers a disconnected model for cryptocurrency access. For those that are particularly risk-averse and concerned about the potential that an online service, desktop or mobile app could be hacked or the victim of ransomware or other attack, a hardware wallet is a reasonable choice. The challenge with a hardware wallet is that it's not always on or as easily accessible with online services, making it a bit more difficult to use.
- Security. For hot crypto wallets, security is a top priority. A user should choose a crypto wallet that has strong authentication capabilities, including multifactor authentication.
- Blockchain support. If users are looking to use a specific cryptocurrency, they should make sure that the chosen crypto wallet technology supports the desired services.
- Integration and access. Beyond just specific cryptocurrency support, users should also check to see if the desired crypto exchange provides easy integration and support for the chosen crypto wallet technology.