If you want to invest in cryptocurrency or non-fungible tokens (NFTs), or use any other blockchain-based service, then you need a cryptocurrency wallet. Keep reading to learn how crypto wallets work, and how you can use one to get started as a cryptocurrency investor.
Definition and Example of a Cryptocurrency Wallet
A cryptocurrency wallet is the digital equivalent of a physical wallet that you carry in your pocket. But instead of holding dollars and credit cards, a cryptocurrency wallet stores the information required to access digital assets like Bitcoin, Ethereum, Dogecoin, or another type of cryptocurrency. A digital wallet, rather than storing actual cryptocurrency, contains two strings of random letters and numbers. The first is a public wallet address, often around 30 to 50 characters long and used by others to send you cryptocurrency or another digital asset. The second is a much longer private key, which is a very large number with certain mathematical properties that is required to access your wallet’s assets. Using cryptocurrency without a compatible cryptocurrency wallet is not possible. Cryptocurrency wallets enable users to send and receive assets to anyone in the world who has a compatible wallet. Cryptocurrency wallets are only semi-anonymous. Anyone can use a public blockchain explorer tool to view the contents and transactions of any crypto wallet, but likely won’t know who owns that specific wallet. If you buy and sell cryptocurrency through an exchange or brokerage, your wallet may be hosted by that entity. Some examples of cryptocurrency wallet makers include Exodus, Ledger, and Coinbase.
How Cryptocurrency Wallets Work
Imagine that you want to buy some Ethereum. You can use a major cryptocurrency exchange like Binance or Coinbase, and your wallet can be standalone or hosted by the exchange. Here’s a step-by-step look at how a cryptocurrency wallet is used for a transaction:
Types of Cryptocurrency Wallets
There are three types of cryptocurrency wallets you can choose:
Software: Cryptocurrency software wallets are usually free and accessible via your computer, phone, or a browser plugin. The online accessibility of software wallets makes them the most convenient but also the most likely to be hacked. Examples of software wallets include those by MetaMask and Coinbase Wallet.Hardware: Your cryptocurrency wallet can be a hardware device, which physically stores your wallet’s public and private keys offline. You can access a hardware wallet via your computer, usually by connecting to the hardware device via Bluetooth or the computer’s USB port. Examples of hardware wallets include those by Ledger, Trezor, and Keystone.Paper: Literally pieces of paper, a paper wallet is a typed or handwritten copy of your wallet address and private key. Using a stack of paper to store your wallet information is likely not convenient, but could be the safest, depending on the measures that you take to store the paper.
While each type of crypto wallet accomplishes the same basic objective of securely storing your digital assets, the various wallet types have different levels of convenience and security. Let’s compare:
Software wallet: Most software wallets, including those by major software wallet providers like Exodus, MetaMask, and Coinbase Wallet, can be downloaded for free. Using the Brave browser, you can access a free software cryptocurrency wallet that is pre-installed—no download required. Hardware wallet: You can buy a hardware crypto wallet directly from the manufacturer or through a trusted retailer. Used hardware wallets are not recommended as they may not have maximum security for your assets.Paper wallet: To create a paper wallet, you need to digitally generate your wallet address and private key. This generally requires coding skills. Then, you would print that information using your local printer or write it on paper by hand.
Regardless of which type of wallet you choose, be sure to keep your digital wallet secure after you set it up.
Do I Need a Cryptocurrency Wallet?
You need a cryptocurrency wallet if you want to buy and hold cryptocurrency or another digital asset. You need a non-custodial digital wallet if you wish to store your cryptocurrency independently of a major exchange or brokerage—a smart move for security reasons, since wallets hosted by major exchanges may be more frequently targets of hackers. If you are just starting out, you can rely on any of the large, centralized cryptocurrency exchanges to store your cryptocurrency for you in a wallet hosted by the exchange. As a cryptocurrency investor, it’s important to choose a wallet solution that matches with your technical skills and investing goals. And remember that if you lose your wallet information or your wallet is hacked, then you are unlikely to recover any lost assets.
