What Is a Crypto Wallet?

Crypto wallets store access to your digital cash. Here's what to know.
Sep 22, 2022

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To buy, sell or trade Bitcoin and other cryptocurrencies, you need a crypto wallet to store your digital cash. Your choices include “cold” wallets on devices that are not connected to the internet and “hot” wallets kept on your computer or phone.

Crypto wallets safeguard the information you need to show proof of your funds. They store your public and private keys, the crypto world’s version of a username and password that can authorize transactions.

Do you need your own crypto wallet?

Not necessarily. Though some investors prefer to manage their own wallets, many crypto platforms offer “custodial wallets,” in which they’ll store your digital assets in wallets they maintain. Some of these crypto storage options pay crypto interest or rewards on assets kept on their platforms.

Custodial wallets can be helpful for beginners because they provide recovery methods in case you lose your login credentials. With non-custodial wallets, you’re in control, but you can lose your funds if you forget your login credentials or get hacked.

On the other hand, crypto exchanges have their own security risks. They can be enticing targets for hackers because of the amount of value they hold.

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How do crypto wallets work?

A crypto “wallet” isn’t a wallet in the traditional sense; instead of holding cash and cards, it stores the data that allows users to view and access funds that move through a blockchain. Every wallet has a private and public key, cryptographically generated strings of letters and numbers.

Here are some of the key components of a wallet.

  • A public key determines the address used to send crypto funds to the wallet and is generally open to view by anyone on the blockchain.

  • A private key is a code used to verify transactions and should not be accessible to anyone else. Wallets manage this key through their software, so you won’t have to enter it manually.

  • A recovery phrase, also called a seed phrase, is a series of 12 to 24 words that can unlock your wallet in case of lost access.

  • A password may also be required for you to open your wallet. This is similar to a password you might use to access any other type of computer service, such as an email client.

Both hot and cold wallets store your crypto information using different methods.

Hot wallets

Cold wallets

Convenient to access and use for trading.

Better suited for long-term storage.

Because they are connected to the internet, they could potentially be vulnerable to hacking.

More secure, though they must be kept safe from physical damage, loss or theft.

Usually free, and some platforms pay interest.

Requires purchase of an external device.

To send funds from one wallet to another, you’ll need to enter the recipient’s public key into your wallet’s send feature. Once you press “send,” the wallet itself will “sign” the transaction with your private key.

Ensure you enter the recipient’s public key correctly; those funds can’t be recovered once sent.

Hot wallets

Hot wallets are desktop, browser-based or mobile software programs on internet-connected devices. Hot wallets can often serve other functions on top of storage, such as connecting to blockchain applications.

Hot wallets are more easily accessible than cold wallets, but they can raise security issues because hackers can potentially reach them.

Custodial hot wallets

Custodial wallets managed by software providers are a good option for beginners or users looking for a more hands-off approach. These wallets allow users to store their funds directly on an exchange where they can be bought or traded. Gemini, Crypto.com and Coinbase have the highest ratings from NerdWallet for platform-based crypto storage.

Non-custodial hot wallets

Online wallets controlled by the wallet owner are typically free to use and make it easier to carry out transactions, though users need to be responsible for their own keys. Many offer add-on services such as trading or staking in exchange for fees. MetaMask, TrustWallet and Exodus are among the popular hot wallets on the market, and all have accompanying mobile apps for ease of use.

Cold wallets

Cold wallets are hardware-based storage options that keep your private keys offline. While a piece of paper with your key written on it is technically a cold wallet, the term typically refers to a special device that plugs into your computer’s USB port.

It may be tempting to record your keys the old-fashioned way, but hardware wallets use technology that makes storing, moving, and backing up your crypto assets easier. Cold wallets can’t be accessed online, but they require security measures such as a safe to keep them from getting damaged, lost or stolen.

Hardware wallets can be purchased directly from companies that create them; some are available at stores like Best Buy and Walmart. Popular options include Safepal, Trezor and Ledger devices, ranging from $49.99 to $255.

For a balance of security and convenience, you can use both wallet types, storing easy-access funds online to trade and earn interest while keeping the keys to more significant investments offline for longer-term storage.

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