What is Crypto Wallet? The Latest Premier Guide 2024
What is a Crypto Wallet?
Crypto wallet is an application that acts as a digital wallet for cryptocurrencies. It’s termed a wallet because it serves a purpose similar to the wallet you carry cash and cards in. Instead of holding these physical items, it stores the keys you use to sign cryptocurrency transactions and provides an interface that lets you access your cryptocurrencies.
Modern crypto wallet makes blockchain accessible to everyone. When cryptocurrencies were first introduced, sending cryptocurrency was a manual task that required entering lengthy keys. Today, the software can do most of the work for you.
The first wallet belonged to the creator of Bitcoin, Satoshi Nakamoto. The second wallet belonged to Hal Finney, who communicated with Satoshi and is reported to be the first person to run the Bitcoin client software wallet. Satoshi sent him 10 Bitcoins as a test, and the cryptocurrency craze began.
Key Points:
- A cryptocurrency wallet is a device or program that stores your cryptocurrency keys and allows you to access your coins.
- Wallets contain public keys (wallet addresses) and private keys necessary for signing cryptocurrency transactions. Anyone who knows the private key can control the tokens associated with that address.
- There are several types of wallets, each with its functionalities and level of security.
- Many cryptocurrency wallets can store keys for different cryptocurrencies.
Understanding Crypto Wallet
Crypto wallets are software applications on computers or mobile devices (such as phones or tablets). They use an internet connection to access the blockchain network of the cryptocurrency you are using.
Cryptocurrencies are not “stored” anywhere—they are bits of data stored in databases. These data bits are scattered across the database; the wallet locates all the bits related to your public address and aggregates the amounts for you in the application interface.
Sending and receiving cryptocurrencies using these applications is very easy. Various methods can be used to send or receive cryptocurrencies from a wallet. Typically, you enter the recipient’s wallet address, choose the amount to send, sign the transaction with your private key, add an amount for transaction fees, and then send.
Receiving is even easier—the sender enters your address and follows the same routine. You accept the payment, and the transaction is complete.
Types of Crypto Wallet
Wallets are primarily of two types: custodial wallets and non-custodial wallets. Custodial wallets are managed by a third party that stores the keys for you. This could be a company that provides enterprise-level data security systems for businesses to store and protect data. Some cryptocurrency exchanges offer custodial wallets to their clients. Non-custodial wallets are wallets where you are responsible for safeguarding the keys. This is the type of most cryptocurrency wallets on devices.
Wallets have two subcategories: hot wallets and cold wallets. Hot wallets are connected to the internet or a connected device, whereas cold wallets are not. Finally, wallets are divided into three subcategories: software, hardware, and paper wallets. Each of these types is considered a hot wallet or a cold wallet.
Therefore, you could have a non-custodial software hot wallet, a non-custodial hardware cold or hot wallet, or a custodial hardware cold wallet. These are the most common types, but you might also encounter other combinations.
Software Wallet
Software wallets include applications for desktop and mobile devices. These wallets are installed on desktops or laptops and can access your cryptocurrencies, conduct transactions, display your balance, etc. Some software wallets also include additional features, such as exchange integration if you are using a wallet designed by a cryptocurrency exchange.
Many mobile wallets facilitate quick payments in physical stores through Near Field Communication (NFC) or by scanning QR codes. Mobile wallets tend to be compatible with iOS or Android devices. Examples of wallets you can use are Trezor, Electrum, and Mycelium. Software wallets are generally hot wallets.
Hardware Wallet
Hardware wallets are the most popular wallet type because you can store private keys and remove them from the device. These devices resemble USB drives, and modern hardware wallets have various functionalities.
You can conduct cryptocurrency transactions on a computer or device by inserting a hardware wallet. Most of them can automatically sign cryptocurrency transactions without you entering the key, circumventing hackers’ ability to record your keystrokes or screen.
These devices typically cost between $100 and $200. Ledger and Trezor are well-known hardware wallets. Hardware wallets are generally considered cold wallets because they do not have an active connection until inserted.
Paper Wallet
Early cryptocurrency users would write or type keys on paper, calling them paper wallets. These evolved to include keys and QR codes so that wallets on mobile devices could scan them. However, paper wallets are easily damaged or lost, so many cryptocurrency owners no longer use them.
However, if you take steps to properly store the paper wallet in a safe deposit box or vault and check it occasionally to ensure it has not deteriorated, there is nothing wrong with using a paper wallet.
Crypto Wallet Security
Wallet security is crucial because cryptocurrencies are a high-value target for hackers. Some protective measures include encrypting wallets with strong passwords, using two-factor
authentication for transactions, and storing any significant funds offline.
Seed Phrases
Most modern wallets generate a twelve-word mnemonic seed phrase. An example phrase might be “airport bedroom impression sample reception protect highway shirt…” It looks random, but it is created by your wallet and linked to your keys. If the device is lost or damaged, you can use the phrase to recover the wallet. These words should be stored carefully in a secure location, as anyone who finds them can access your cryptocurrency.
Cryptocurrency Exchanges
Cryptocurrency exchanges have started offering custodial key storage to their users. However, you should be cautious about using this service. Cryptocurrency exchanges are prime targets for cybercriminals.
Moreover, if a cryptocurrency exchange goes out of business, it is not guaranteed that you would get your cryptocurrency back. For instance, the popular exchange Coinbase announced in its quarterly report filed with the Securities and Exchange Commission in May 2022:
The crypto assets we custody in omnibus wallets for our customers could be considered the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.
Coinbase
General unsecured creditors are lower in the priority list of creditors in bankruptcy proceedings. Thus, you could lose your cryptocurrency assets when your custodial wallet company declares bankruptcy if there are not enough assets to liquidate and meet the financial demands of higher-priority creditors.
The best security measures for cryptocurrency keys include removing the keys from the wallet, placing them in cold storage, and keeping them in a vault, safe, or safe deposit box. The more steps required for you to access your cryptocurrency, the harder it is for criminals to access them. This ensures that you won’t lose the keys. It also ensures that the person you entrust with custody of the keys won’t lose them or deny you access to them.
Which Cryptocurrency Wallet is Best?
There are many wallets to choose from, with a variety of options. It’s best to read as many reviews as possible, find the ones that suit your needs while ensuring the security of your keys.
What is the Safest Cryptocurrency Wallet?
The safest crypto wallet is not connected and has no connection to a device that can access the internet. It also should not deny you access to your cryptocurrency because the custodian is having financial issues. Many so-called “safe” wallets have wireless connection technologies that cybercriminals can access.
Do I Need a Cryptocurrency Wallet?
Yes. Without private keys and an interface to access the blockchain, you cannot access your cryptocurrency. All wallets can store keys, but only hot wallets can access the blockchain, so it’s very important to have the keys in a hot wallet before you need them.
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