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Published: Sep 28, 2022 11 min read

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Illustration of a crypto wallet
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Crypto wallets are digital tools or physical devices meant to safeguard access to your digital currencies, such as Bitcoin (BTC) and Ether (ETH).

Wallets are able to locate your crypto on the blockchain and receive transactions from others by using distinct codes. Like exchanges, these tools are an essential component of the crypto ecosystem that users should familiarize themselves with before or as they begin to invest in this type of asset.

Read on to learn more about crypto wallets, including the different kinds of wallets, how they work and how to set them up.

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How does a crypto wallet work?

Despite their name, crypto wallets don’t actually “store” crypto assets — coins and tokens are located on the blockchain, not within any software program or hardware storage device.

A crypto wallet stores your public and private keys, which are necessary to access and use the cryptocurrency.

Keys are automatically generated code — strings of letters and numbers — that help protect the integrity of transactions on the blockchain. There are two types of keys: public keys and private keys.

Public keys function as a public address for your wallet. They’re like bank account numbers in that you may share them with others in order to receive a transaction. A public key may look something like this: J7orELk10d9H622xaP88qgC743.

Private keys grant direct access to your crypto balance. They are akin to your PIN number or your password for a financial account, which is to say no one but you should know it under any circumstances.

Because private keys are unpractical for signing transactions, wallet owners receive a seed phrase which consists of a mnemonic phrase that’s easier to remember than an alphanumeric string, for example: evidence-sight-confirm-afraid-antenna-joy-steel-weird-room-noble-exhibit-clay.

Are Crypto Wallets Secure?

Crypto wallets are, without a doubt, the best way of securing your cryptocurrency.

Custodial wallets aside, software and hardware storage wallets offer numerous advantages compared to simply leaving the bulk of your coins in a crypto exchange account.

Wallets may not be flawless or impregnable, but they are essential for the security of an already risk-fraught investment product.

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What are the Different Types of Crypto Wallets?

There are two major types of crypto wallets: software wallets and hardware wallets. Software wallets can be further split into custodial and non-custodial wallets.

Software wallets

Also known as hot wallets, software wallets are digital tools that are always connected to the internet. These are available as mobile wallets for your iOS and Android devices, desktop wallets and extensions for your internet browser. Some hot wallets are designed to be accessed directly from a website and are consequently known as web wallets.

Software wallets are more convenient than hardware wallets since you can access your crypto anywhere with an online connection. This makes them ideal for those who trade coins more regularly. However, because hot wallets are always online, they’re also more vulnerable to cyberattacks.

Popular software wallets include Electrum, Exodus and Mycelium.

Pros
  • Available for free, no upfront cost
  • Easier and faster to set up and use
  • Funds can be accessed from anywhere with an internet connection
Cons
  • Requires developer support to provide updates for the wallet
  • May need to switch wallets if the company behind the wallet goes under
  • Inherently more vulnerable to theft than cold wallets due to their online nature

Custodial Wallets

For hot wallets, there is the added layer of custody to be considered. Custody in this context refers to who holds the private keys to your crypto wallet. Wallets that keep their private keys from users and instead grant them other methods of accessing their crypto are known as custodial wallets.

Custodial wallets are often operated by crypto exchanges, such as Coinbase and Binance. This makes them even more convenient for trading than other hot wallets as they tend to be fully integrated with their associated exchange. However, this comes at a cost.

Any coins that you hold in a custodial wallet are owned by the wallet provider: you own the rights to the asset, but not the asset itself. This is of concern to crypto enthusiasts, many of whom consider this inherently problematic. As is often said within crypto circles, “Not your keys, not your coins.”

Pros
  • More beginner-friendly than non-custodial wallets
  • Easier access to large cryptocurrency exchanges
  • Recovery process is easier than that of other wallets
Cons
  • Security is entirely left up to a third-party
  • Must disclose personal information through KYC and AML rules
  • Your coins are held by someone else and could disappear is they go under

Hardware wallet

Also known as cold wallets, hardware wallets store your keys offline and never come into contact with online servers. When you sign a transaction with a hardware wallet, the information is temporarily siloed offline before being sent back into the internet. This type of wallet is most commonly seen in the form of a USB drive, but there are also paper wallets that come with a QR code to access your crypto.

Cold storage wallets are designed to be the safest possible storage for your crypto keys. There is no way for hackers to obtain the keys to a cold wallet remotely unless the owner falls for a phishing attack.

However, the level of security of these wallets can be a double-edged sword: if you lose your device and don’t have the private key backed up, you may lose access to your crypto forever.

Popular hardware wallet brands include Trezor, Ledger and KeepKey.

Pros
  • Eliminates third-parties from your storage experience
  • More secure than hot wallets due to offline storage
  • Many hot storage wallets feature native compatibility with hardware wallets
Cons
  • Requires an upfront purchase
  • Transactions take longer to process on average
  • Nearly impossible to regain access of your crypto if you don't have a backup of your private key

How to Set up a Crypto Wallet

Setting up a crypto wallet is a straightforward process that can be summed up in three simple steps regardless of the type of digital wallet you want to use. Overall, it shouldn't take more than a couple of minutes to have everything ready for trading once the wallet is in your hands.

1. Download or purchase the wallet.

The first step is to acquire the wallet. In the case of software wallets, this means downloading an app, software or browser extension, or simply creating an account for a web wallet.

In the case of hardware wallets, this means going online to the developer’s website and buying the physical product.

Crypto scams are becoming increasingly common, so make sure that any software you download or the website you use to access your wallet is legitimate. Also, avoid third-party resellers for hardware wallets, as the device may have been tampered with beforehand.

2. Set up your wallet and its security features.

To set up your wallet after purchase, you will receive a private key and then choose what security features to enable, such as two-factor authentication and biometrics.

For hardware wallets, each brand has its own software that must be installed onto the hardware device before it can be used.

The process for setting up a custodial wallet is a tad more involved. You’ll probably have to undergo a verification process called Know-Your-Customer (KYC) to validate your identity before you can use this type of wallet.

3. Add funds to your wallet.

Lastly, you’ll have to fund your wallet before you can make any transactions with it. Custodial wallets have it easy here: you can generally fund them by using a credit card, debit card or some other type of payment method.

For non-custodial wallets, users may have to transfer crypto from elsewhere, as not all wallets let people directly buy crypto with fiat currency.

Some hardware wallets may have an incorporated exchange that allows users to trade crypto while the device is connected to your desktop computer or mobile device (to learn more about crypto exchanges, visit our best crypto exchanges page).

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Which Cryptocurrency Wallet is the Best?

It’s hard to pinpoint a single best crypto wallet because they come in several forms — hot and cold, custodial and non-custodial. Moreover, many wallets offer unique features that are best tailored for specific groups of traders. Some are designed for those who are interested in specific blockchain technology (like Ethereum, Cardano or Bitcoin wallets) or who want to stake their crypto, for instance.

To find the best crypto wallet for you, consider the following factors:

Security Tools - Security is paramount when it comes to finances, and crypto is no exception. We recommend looking for wallets that are built on open-source code and have experienced few to no security breaches. Additionally, consider looking for wallets with two-factor or multi-factor authentication, biometrics, multi-signature wallets and strong security protocols for transactions.

Unique Features - Crypto wallets offer an increasing variety of services that help set one wallet apart from another. Consider what it is exactly that you hope to do with a crypto wallet. Will you just be trading digital currencies? Are you interested in collecting NFTs or in decentralized solutions for dapps and defi? Pick a wallet that addresses your unique needs.

Fee and Purchase Price - Crypto wallet fees are tricky to evaluate, namely because most of them don’t have many! In some cases, the only transaction fees you’ll have to pay are exchange fees and miner fees, which wallets have no direct control over. Where you may see a difference is in conversion and funding fees, which we suggest you look over before deciding on a wallet.

Hardware wallets are much easier to evaluate for cost because their prices are clear from the get go. Nonetheless, the price range for cold wallets is wide: some wallets sell for a little as $40, whereas others for as high as $500.

The best crypto wallets are those that feature plenty of options for trading and managing your crypto, employ advanced security measures and have affordable fees or a competitive purchase price.

What is a Crypto Wallet FAQ

What does a crypto wallet do?

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Crypto wallets store the two alphanumeric strings that traders need to access their cryptocurrency on the blockchain. These are the public key (your "wallet address" on the blockchain) and the private key (your password to access your crypto). Many wallets also provide an easy-to-use interface to trade and manage a user's crypto balances.

Are crypto wallets safe?

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Crypto wallets are by far the safest way of holding your cryptocurrencies. Leaving your crypto in an exchange account might be convenient for trading but it's also much more dangerous than keeping it in a wallet, particularly a non-custodial one. You could lose all your assets if cybercriminals hack the exchange's servers and steal your coins or if the exchange goes bankrupt and ceases operating.

Do I really need a crypto wallet?

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You should seriously consider getting a crypto wallet if you expect to trade or hold any significant number of cryptocurrencies. Doing so will go a long way in securing your digital assets and is much safer than letting them sit in a crypto exchange account, where they are liable to being stolen or disappearing. We specifically recommend using a hardware wallet if you own a large amount of crypto that you don't expect to be trading in the near future.

What happens if I forget my password?

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If you are using a custodial wallet and forget your password, you can usually contact the wallet's customer service department and undergo a verification process to regain access to your account and wallet.

For non-custodial wallets, losing your private key and seed phrase almost always means you've lost access to your wallet — and crypto — for good. We recommend keeping a backup of your private key at all times and enabling automatic backups for wallets that have this feature.