What Is a Crypto Wallet – Understanding the Basics & Features

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Crypto wallets are responsible for safeguarding your cryptocurrency’s private keys. These wallets come in various forms, such as physical devices, software programs, or online services.

However, similar to cryptocurrency, the concept of a crypto wallet is abstract. Let’s delve deeper into their workings to better understand these crucial tools and their functionality.

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What Is a Crypto Wallet?

The initial lesson regarding crypto wallets is that they differ significantly from traditional physical wallets that hold cash and cards. Instead, a crypto wallet functions as digital storage to safeguard access to your cryptocurrency.

Unlike physical coins and bills, cryptocurrency is an abstract form of value. It exists solely as a string of code on a blockchain network. When you acquire Bitcoin (BTC), what do you actually possess? A public key and a private key are associated with the BTC blockchain.

Think of the public key as akin to your bank account number. You can freely share it with others, but it doesn’t grant them access to your funds.

On the other hand, the private key acts like a password for your bank account. Keep it confidential! If shared with someone else, they could steal all of your money.

Losing your private key can result in losing your cryptocurrency, while the holder has complete control over the funds. It’s crucial to keep your private keys secure within a cryptocurrency wallet.

According to Martin Leinweber, digital asset product strategist at MarketVector Indexes, coins and tokens are represented as data within a blockchain system, and wallets are tools.

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Why a Crypto Wallet Is Needed?

The safety of a user’s cryptocurrency depends on how they choose to store it. Storing crypto directly on an exchange is not recommended for small amounts or frequent trading purposes.

To ensure greater security, it’s advised that users withdraw most of their funds to a crypto wallet, whether a hot wallet or a cold one. By doing so, they maintain control over their private keys and have full authority over their finances.

How Do Crypto Wallets Work?

A cryptocurrency wallet stores public and private keys for sending, receiving, and storage digital currency.

When you purchase cryptocurrency, the company facilitating your purchase provides a wallet to securely hold your digital coins. This particular type of wallet is called a “hot” wallet because it operates online and remains connected to the internet.

According to Ric Edelman, founder of the Digital Assets Council of Financial Professionals, one way to mitigate the risk of hackers stealing from your online wallet is by utilizing a “cold” wallet that isn’t connected to the internet.

Cold wallets typically take the form of thumb drives or other hardware devices. Edelman advises transferring your coins from your hot wallet into your cold wallet for added security.

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Types of Crypto Wallets

As mentioned earlier, there are two main types of cryptocurrency wallets: hot wallets, which are online-connected, and cold wallets, which are not. Now, let’s delve into these categories further to gain a better understanding.

Paper Wallets

A paper wallet is the most straightforward type of cold wallet regarding understanding and usage. It involves writing down your keys on a piece of paper.

According to Edelman, since it’s just a piece of paper, it qualifies as a cold wallet and provides security against hackers.

However, there are potential risks associated with using a paper wallet. It can be easily lost or stolen and may become unusable if torn or damaged by water. Considering these drawbacks, paper wallets are not ideal compared to other cold wallets.

Hardware Wallets

A hardware wallet is a more secure form of cold storage. These wallets, similar to USB drives, effectively protect your private keys from hackers who would have to physically steal the wallet to gain access, according to Leinweber.

Hardware wallets offer an added layer of security compared to paper wallets by requiring users to input a PIN to access the device’s contents.

While these PINs provide extra protection, if you happen to forget your PIN, you will lose access to your coins. “So it’s important that you have some technical knowledge when using this kind of wallet,” advises Leinweber.

The central concept behind hardware wallets is isolating private keys from online storage platforms like computers or smartphones, which are more susceptible targets for hacking.

This risk is mitigated by storing private keys offline, as hackers would need physical possession of the cryptocurrency hardware wallet to access a user’s private keys.

These hardware wallets typically range from $50 up to $150, with options available at even higher prices. For example, one can purchase the Trezor Model One for $72 or opt for more affordable alternatives, such as the SafePal wallet priced at $49.99.

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Online Wallets

Online wallets, also known as software wallets, are called hot wallets. These wallets can be desktop, mobile, or web-based applications and require an internet connection. While they offer convenience in accessibility, they are also more susceptible to hacking than cold wallets.

According to Leinweber, storing your password on online servers increases the potential risk involved. Leinweber suggests using desktop wallets like Electrum and Wasabi Wallet to mitigate this risk and maintain trust in your infrastructure.

By doing so, you eliminate the need for a third party and take full responsibility for the security of your wallet. For those who engage with cryptocurrency daily, mobile wallets are often preferred. These apps function similarly to Apple Wallet and facilitate transactions through QR codes.

On the other hand, web-based wallets can be accessed through browsers, allowing transactions from anywhere with an internet connection.

Custodial Wallets vs Non-Custodial Wallets

Let’s dive into some crypto terminology. Non-custodial wallets are a type of wallet that gives you complete control over your data. These wallets are highly favored by cryptocurrency enthusiasts because they eliminate the need for a third party to secure your private keys.

Exodus and MetaMask offer examples of offline non-custodial wallet options. These wallets prioritize security, making them less susceptible to hacking attempts.

On the other hand, custodial wallets are provided by crypto businesses such as Gemini Wallet, BlockFi Wallet, or eToro. You entrust your private keys to these companies by choosing this type of wallet.

However, there are advantages when it comes to accessibility with these wallets. To access and send coins from a custodial wallet, you simply log into your account and specify the desired destination for your cryptocurrency.

These hot wallets often come bundled with additional features like being free to use and offering the ability to stake your crypto assets.

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NFT Wallets

A secure storage location for non-fungible tokens (NFTs) is an NFT wallet. Regarding NFT wallets, there are two primary options: hardware or software-based wallets.

What to Look for in an NFT Wallet

When selecting an NFT wallet, several factors come into play. These include the user’s experience, security requirements, and the specific types of tokens they intend to store.

Here are a few key points to keep in mind when making your choice:

Compatibility with NFT Marketplaces: Ensure the chosen wallet seamlessly integrates with the desired NFT marketplaces for hassle-free transactions.
Strong Security: Prioritize wallets equipped with robust security features such as two-factor authentication (2FA), email confirmation, or biometric authentication to safeguard your NFT assets.
User-Friendly Interface: Select an NFT wallet with a user-friendly interface, ensuring a smooth and straightforward setup process for an optimal user experience.
Accessibility on Multiple Devices: Look for NFT wallets available as web extensions or mobile/desktop applications. Optimal convenience is achieved with a wallet accessible across various devices, allowing real-time synchronization of transactions.
Cross-Chain Compatibility: While most wallets support Ethereum-based tokens, those interested in engaging with tickets on different networks should seek a wallet with cross-chain compatibility for minting, buying, and selling across various blockchain networks.

Some well-known hardware wallets are manufactured by Ledger and Trezor. Nevertheless, since these wallets do not have native support for NFTs, individuals must link their hardware wallet to a hot wallet that can store and manage NFTs.

For a comprehensive solution, it’s worth considering the Crypto.com DeFi Wallet. This particular wallet is regarded as one of the most reliable and secure options for storing NFTs. It was even voted as the best NFT wallet of 2022 by TradingPlatforms.

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How To Get A Crypto Wallet?

Obtaining a cryptocurrency wallet is quite simple. Several cryptocurrency exchanges, including Coinbase and Gemini, provide online wallets for users. Alternatively, if you prefer a cold wallet, you can purchase one directly from an online manufacturer or even from Amazon.com.

If you browse through Amazon.com, you may come across the Ledger Nano S cold storage stick, available for around $60, or the Trezor Model T hardware wallet, priced at $250.

However, there are several factors to take into account when selecting a cryptocurrency wallet:

Customer Service: Opt for wallet support that’s consistently available and helpful, mainly if you’re new to cryptocurrency ownership.
Fees: Beware of transaction fees imposed by third-party hot wallets, as they can impact your profits.
Security: Ensure your wallet provider is reputable and implements sensible security measures to safeguard your cryptocurrency keys.
Types of Cryptos Supported: Check the range of crypto projects the wallet supports. Some wallets may only accommodate a few crypto projects, while others support hundreds. Verify that the wallet supports the specific cryptocurrency, such as Cardano (ADA), that you intend to purchase.

According to Leinweber, there’s no definitive “best” cryptocurrency wallet due to various considerations. Each wallet has its advantages and disadvantages.

Some users choose to use multiple wallets simultaneously, which can enhance the security of their assets. Ultimately, choosing the best and most suitable wallet depends on individual preferences.

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How To Use Crypto Wallet?

Utilizing a cryptocurrency wallet for transactions with digital currency will vary depending on your specific wallet type. However, it’s generally an uncomplicated procedure that resembles sending any other money electronically.

According to Leinweber, you must input the recipient’s public address and the desired amount of cryptocurrency to be transferred, then confirm the transaction.

It’s important to note that when dealing with cryptocurrency as opposed to traditional fiat currency, there are fewer options for recourse if something goes wrong.

Leinweber advises caution when entering the recipient’s address since cryptocurrency transactions are irreversible. If an incorrect address is entered, retrieving your coins will not be possible once they have been sent.

Best Crypto Wallets to Use – What Is Crypto Wallet?

Zengo – Best Crypto Wallet Overall

Zengo stands out as one of the most inventive and user-friendly digital asset wallets in the constantly changing realm of cryptocurrencies.

Zengo is a self-custodial wallet that focuses on safeguarding your crypto and solving the biggest challenges in the crypto industry. You don’t need to worry about losing your private key or having it stolen with this crypto wallet.

This makes Zengo the most secure way to buy, store, sell and trade crypto. With Zengo Pro you can access Legacy Transfer which allows you to pass your crypto to your loved ones for as low as $5.8.

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Ledger – Best Hardware Wallet for Hot Wallet Integration

Ledger, a well-known name in the world of crypto wallets, offers a range of products with prices starting at $79 and going up to $149. It seamlessly integrates with popular software wallets like Crypto.com and Guarda, making it convenient for users.

In addition to its impressive mobile app, Ledger also provides a dedicated desktop app and is currently working on releasing a browser extension.

For enhanced security, Ledger offers two-factor authentication to protect user accounts. It goes beyond being a wallet provider by providing educational content for users to learn more about cryptocurrencies.

Moreover, Ledger plans to release an advanced display model called “Stax” in 2023 at an expected cost of around $280. Overall, Ledger stands out as one of the top choices for crypto enthusiasts looking for secure yet user-friendly storage solutions.

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Electrum – Best Desktop Wallet

Established in 2011, Electrum stands as a pioneer and is a widely recognized crypto wallet in the present day. Notably, it remains one of the rare wallets solely dedicated to Bitcoin transactions, showcasing its specialized capabilities.

This wallet boasts an array of robust security measures, including two-factor authentication (2FA), transaction verification checks, and support for multi-signature wallets.

Additionally, users can customize their transaction fees based on their desired waiting time: transactions can be executed quickly by paying higher prices.

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Coinbase Wallet – Best for Beginners

Coinbase Wallet proves to be an ideal choice for newcomers in the world of cryptocurrencies, especially those lacking prior experience.

This user-friendly app seamlessly connects with various leading bank accounts and boasts an intuitive interface that is easy to navigate and comprehend. Its simplistic three-tab layout and clearly labeled functions enhance the overall user experience.

The versatility of Coinbase Wallet is evident as it facilitates storage for a wide range of popular coins, including Bitcoin, Litecoin, Dogecoin, and BNB, as well as numerous ERC-20 tokens and tokens on EVM-compatible blockchains.

In fact, this wallet supports over 100,000 digital assets – a staggering figure that places it among the most extensive offerings in the market. It’s crucial to differentiate between Coinbase exchange and Coinbase Wallet.

While Coinbase Exchange holds its reputation as one of the oldest and most renowned cryptocurrency trading platforms nationwide, storing your digital assets in its web wallet exposes them to increased cybersecurity risks despite facilitating more accessible trading opportunities.

MetaMask – Best for Ethereum

We have chosen MetaMask as the top crypto wallet for Ethereum because of its user-friendly interface, which grants convenient and speedy entry to numerous tokens and decentralized apps (dApps) on the Ethereum network.

MetaMask is an extensively utilized Ethereum wallet, boasting a monthly active user base of over 30 million.

Its popularity can be attributed to its ease of use and accessibility: The wallet features an appealing and simplistic design that appeals to novice investors seeking a storage solution for Ethereum-compatible cryptocurrencies and a means to interact with dApps.

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Crypto Wallet Security

Ensuring the security of your wallet is crucial because hackers often target cryptocurrencies, which have high value.

To protect your wallet, you can employ various measures such as encrypting it with a robust password, implementing two-factor authentication for exchanges, and keeping large sums offline.

Seed Words

Contemporary wallets typically produce a twelve-word seed phrase that serves as a mnemonic. For instance, “Airport bedroom impression sample reception protection road shirt…” may appear arbitrary but is actually associated with your wallet’s keys.

You can utilize this phrase to recover your wallet if your device is lost or damaged. It’s crucial to securely store these words since anyone who discovers them will gain access to your cryptocurrency.

Cryptocurrency Exchanges

Cryptocurrency exchanges have recently introduced a service for their users, providing custodial key storage. However, exercising caution when utilizing this service is essential because cryptocurrency exchanges are prime targets for cybercriminals.

Moreover, if a cryptocurrency exchange goes bankrupt, there’s no guarantee of recovering your cryptocurrency. In bankruptcy proceedings, general unsecured creditors are given lower priority on the list of creditors.

If insufficient assets are available to satisfy the financial obligations of higher-priority creditors through liquidation, you may likely lose your crypto assets if your custodial wallet company declares bankruptcy.

To ensure optimal security for your cryptocurrency keys, removing them from your wallet and storing them in cold storage such as a vault or safe deposit box is recommended.

Increasing the number of steps required to access your cryptocurrencies makes it more challenging for criminals to gain unauthorized entry. This safeguards against critical loss and prevents individuals entrusted with access from misplacing or denying you entry.

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What Is a Crypto Wallet? – Frequently Asked Questions

Which Cryptocurrency Wallet Is Best?

There are multiple options for choosing a wallet, offering a wide range of choices. Zengo is considered one of the top cryptocurrency wallets available.

It’s advisable to go through numerous reviews to find the perfect fit for your requirements while prioritizing the security of your keys.

What Is the Safest Crypto Wallet?

The most secure cryptocurrency wallet has no inherent connection or link to a device with internet access.

Additionally, it should not restrict your access to your cryptocurrency due to financial problems encountered by the custodian. Numerous wallets that claim to be “safe” utilize wireless connectivity technology, which can be exploited by determined cybercriminals.

Do I Need a Wallet for Cryptocurrency?

Indeed, securing access to your cryptocurrency necessitates possessing your private keys and an interface that interacts with a blockchain.

While all wallets can store keys, only hot wallets possess the ability to connect with the blockchain. It’s, therefore, crucial to keep your keys separate from your hot wallet until they are required.

Conclusion – What Is a Crypto Wallet?

In the world of cryptocurrency wallets, there is no flawless answer. Every kind of wallet possesses unique advantages, uses, and compromises. The responsibility falls on the user to evaluate what suits them most effectively:

Individuals with a high-risk tolerance seeking to make frequent online payments may find the convenience of a hot wallet most suitable.
Those with a more risk-averse approach, planning to hold their coins for the long term, may find that a secure offline device, such as a hardware wallet, is the most sensible choice.

To find the perfect balance between safety and ease, it’s best to use a mix of cold and hot wallets instead of storing all your coins in one place. This approach reduces the risk associated with large quantities of cash in a single wallet.