Crypto wallets hold the private keys to your cryptocurrency and keep them safe. They come in several varieties, and they can be either physical devices, software programs or online services.
But like cryptocurrency, the concept of a crypto wallet is pretty abstract. Let’s take a closer look at these essential crypto tools and how they work.
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Crypto wallets hold the private keys to your cryptocurrency and keep them safe. They come in several varieties, and they can be either physical devices, software programs or online services.
But like cryptocurrency, the concept of a crypto wallet is pretty abstract. Let’s take a closer look at these essential crypto tools and how they work.
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The first lesson of crypto wallets is that they are nothing like the billfold in your purse or back pocket, holding cash and credit cards. Rather, a crypto wallet is a form of digital storage to secure access to your crypto.
Cryptocurrency is a highly abstract store of value, without a physical token similar to cash’s coins and bills. It exists as nothing more than a string of code on a larger blockchain.
When you purchase Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.
Think of the public key as something like your bank account number—you can share it with anybody, but it doesn’t provide access to your money.
The private key is like a password to your bank account. Please don’t share it with anyone, or they could steal all your money.
If you lose your private key, you could lose access to your crypto. Likewise, the person who holds a private key has full access to the crypto. Keeping your private keys secure in a crypto wallet is essential.
“Coins and tokens are part of a blockchain system in the form of data, and the wallets serve as a means to access them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
A crypto wallet stores the public and private keys necessary to send, receive and store cryptocurrency.
When you buy cryptocurrency, the company you purchased it through probably gave you a wallet to hold the digital coins. This is called a hot wallet because it’s online and connected to the internet.
“To avoid the risk that hackers might steal your online wallet, you can get a cold wallet which is not connected to the internet,” says Ric Edelman, founder of Digital Assets Council of Financial Professionals.
Cold wallets are essentially thumb drives or another type of hardware device. “Once you have one, you simply transfer your coins from your hot wallet to your cold wallet,” Edelman says.
As noted above, there are two broad categories of crypto wallets: hot wallets that are connected to the internet and cold wallets that are not. Let’s take a look at these in more depth.
A paper wallet is the simplest cold wallet to understand and operate. It is what it sounds like: A piece of paper with your keys written on it.
“As this is just a piece of paper, it’s a cold wallet and thus safe from hackers, but paper can be lost, stolen, torn or made illegible by getting wet,” Edelman says. Given this, “as cold wallets go, paper is not ideal.”
A more secure type of cold wallet is a hardware wallet. Like a USB drive, hardware wallets help keep your private keys safe from hackers who would need to steal the physical wallet to gain access, Leinweber says.
Hardware wallets also have an additional layer of security over paper wallets by requiring users to enter a PIN to access the device’s content. While these PINs provide an extra layer of protection, if you forget your PIN, you lose access to your coins. “So you need to be tech-savvy to use such a wallet,” Leinweber says.
“The idea behind hardware wallets is to isolate the private keys from online storage like on a computer or smartphone, which are more vulnerable to hacking,” Leinweber says. “Storing the private keys offline prevents this, as hackers would have to physically steal the cryptocurrency hardware wallet to gain access to a user’s private keys.”
You can typically get a hardware wallet for between $50 and $150, although there are some much higher price options. For instance, you can buy the Trezor Model One for $72. You can also find more economical ones, such as a SafePal wallet for $49.99.
Online wallets, also called software wallets, are your hot wallets. Desktop, mobile or web-based applications, these wallets require an internet connection and are both more accessible but also more prone to hacking than cold wallets.