The Beginner’s Guide to Crypto Wallets

Learn what a crypto wallet is, how it works, and how to choose the right one for you.

By
&
Tom Blackstone
Gabe TurnerChief Editor
Last Updated on Mar 25, 2022
By Tom Blackstone & Gabe Turner on Mar 25, 2022
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Inside: Ever since the World Wide Web gained prominence in the early ’90s, we’ve gotten used to handing our assets over to third parties and letting them take control. But with crypto wallets, we can now take control of our assets directly, in a way that is similar to holding cash, but with the added advantage of being able to interact with the web.

If you’ve considered buying or investing in cryptocurrency, you’ve probably heard that you need a crypto wallet.

But you may wonder, what exactly is a wallet? Is a crypto exchange the same thing as a wallet? And what’s the best wallet to use?

I’ll briefly answer all of these questions over the course of this guide. I’ll cover many of the details of how a cryptocurrency wallet works and how to choose the best wallet for your needs.

First, let’s start with the most basic question: What exactly is a crypto wallet?

What Is a Crypto Wallet?

In its most basic form, a “wallet” is a piece of software you can use to prove that you are the owner of a particular crypto account or address.

You can use a wallet to store cryptocurrency securely or to authorize crypto payments to employees or merchants.

Because each crypto account is unique, a wallet can also be used to manage and verify your online identities. For example, you can use your wallet address instead of an email address to log in to a social media or instant messaging account.1

The bottom line is that a wallet can be used to prove that you’re you. And it can do so almost instantly, through the push of a few buttons.

Installing a Crypto Wallet

To install a wallet, you can download it from a browser extension store, mobile app store, or the developer’s website. Once you install it and set it up, you can have someone send crypto to your wallet by giving the sender your wallet address (not your home address).

Did You Know: An address is a string of characters that can be used to represent you on the web. If you want to receive crypto, you have to give this address to the sender.

Once you’ve received crypto in your wallet address, you can send it to others or use the wallet to interact with wallet-enabled apps on the web.

I’ll go into more detail about how a wallet works in just a bit. But for now, let’s discuss one common question about wallets: Is a crypto exchange the same thing as a crypto wallet?

Exchanges vs. Wallets

Crypto exchanges, like Coinbase, Binance.US, and Crypto.com, are great places to buy cryptocurrency. They allow users to purchase crypto with debit cards or cash transfers. You can also use a crypto exchange to swap one crypto for another quickly and cheaply.

And you can store crypto in an exchange or use it to send and receive crypto, just like you can with a wallet.

Pro Tip: Want to take a deeper dive and learn more about cryptocurrency exchanges? Check out our guide to finding a legitimate crypto exchange.

But an exchange is fundamentally different from a wallet.

When you store crypto in an exchange, it’s in a wallet directly under the control of the exchange. And when you send crypto to another person using an exchange, you’re actually instructing the exchange to use its wallet to send your crypto to another person.

By contrast, when you store crypto in your own wallet, you have complete control of your crypto. And when you make transfers using a wallet, you do so directly, without relying on a third party. This means that no one can stop you from using your crypto, regardless of how you want to use it.

Storing crypto in an exchange account is similar to having cash in a bank, while having crypto in a wallet is more like having cash in a physical wallet. If your cash is in your physical wallet, no one can stop you from spending it on whatever you want. In the same way, when your crypto is in your own crypto wallet, no one but you has control over it.

So while exchanges can indirectly perform some of the same functions as wallets, they are not actually wallets themselves.

Now that we got that out of the way, let’s talk about the types of wallets that are available.

Types of Wallets

There are different types of wallets that can be used for different activities. Hot wallets are best used for frequent cryptocurrency transactions or for using wallet-enabled web apps. Cold wallets are better for long-term, secure storage.

Here’s a deeper dive on these two types of cryptocurrency wallets.

Hot wallets

A hot wallet is a wallet that is stored on an internet-connected device, like a desktop, laptop or smartphone. Hot wallets are simple and convenient to use. But if your device gets infected with malware, your crypto can be stolen from a hot wallet. So you may want to consider only keeping spending money in your hot wallet, leaving the bulk of your investments in cold wallets.

Now, a hot wallet may be either a desktop or mobile wallet.

Desktop wallets

The first wallet ever invented was Bitcoin-Qt, and it was a desktop wallet. Today, desktop wallets are still the most used crypto wallets for beginners. To install a desktop wallet, all you need to do is to download it from the developer’s website and set it up. And, as you might have guessed, desktop wallets can also be used on laptops.

Some modern desktop wallets include:

  • Electrum
  • Exodus
  • Metamask
  • Brave wallet

Mobile wallets

If you ever need to do transactions while on the go, you’ll need a mobile wallet. These are especially useful if you visit brick-and-mortar stores that accept crypto, since you might not want to haul your PC with you every time you go shopping!

Mobile wallets carry the extra risk that your phone or tablet might get lost or stolen. So you may want to have a PIN code lock on your phone in case this happens. It’s also especially important for a mobile wallet to have a strong password.

You also may want to limit the amount of crypto you keep in your mobile wallet. When it runs out of funds, you can always transfer more crypto to it from your PC.

Mobile wallets can usually be downloaded from Google Play or the Apple App Store. But you may want to follow the link from the developer’s website instead of searching for it in the store, just to be sure that you’re getting an authentic copy of the software.

Some popular mobile wallets include:

  • Mycelium
  • Metamask mobile
  • Atomic wallet
  • Trustwallet

Cold wallets

A cold wallet is a wallet that is not connected to the Internet. You can’t do transactions on a cold wallet unless you connect it to a device that has Internet access. So cold wallets can be inconvenient for users that perform frequent transactions.

However, cold wallets are also more secure than hot wallets. They usually can’t be hacked without being physically stolen.

With this in mind, cold wallets are best used for long-term storage of large amounts of crypto.

A cold wallet may be either a hardware wallet or a paper backup.

Hardware wallets

A hardware wallet is a USB device that stores your private key (I’ll explain private keys in the next section). It has a PIN code lock to keep thieves from getting into it. To use a hardware wallet to do a transaction, you connect it to your PC.

The device sends a signature through the USB port, but it never sends the private key itself. Theoretically, this should prevent any malware on your PC from being able to steal your crypto.

Pro Tip: A hardware wallet can still be hacked if the attacker gets physical possession of it (although even then, it’s pretty difficult to get into). So if your hardware wallet is lost or stolen, you may want to consider moving funds out of it immediately.

The safest way to get a hardware wallet is to purchase it from the manufacturer’s website. They range in price from $50 to $180.

Some popular hardware wallets include:

  • Trezor Model T
  • Ledger Nano X
  • Safepal S1

Paper backup wallets

When you first set up a desktop wallet, you’ll be offered a set of seed words that can be used to access your accounts if your device crashes (again, we’ll discuss this more in the next section). Under normal circumstances, these words are just used as a backup.

But you can also use these words as a form of long-term storage. Just take the following steps:

  1. Write your seed words on a piece of paper and store it somewhere safe and secure.
  2. Transfer crypto to your desktop wallet.
  3. Delete the wallet from your PC. (Make sure you’ve done step 1 first!)

Once you’ve done this, the crypto is essentially stored on the piece of paper. This means that an attacker shouldn’t be able to steal your crypto even if they install malware on your PC (as long as it wasn’t already infected). They would need to steal the piece of paper to get your crypto.

When you get ready to spend your crypto, you can reinstall the wallet software and import the seed words to recover your account. However, you’ll need to make sure the device you are importing the account to is malware-free.

Pro Tip: For more details on how to buy and use crypto safely, check out our full cryptocurrency investor’s guide.

At this point, you may be wondering exactly how a cryptocurrency wallet works. How can you verify that you are the owner of an account without using a username and password? I’ll go over that in the next section.

How a Crypto Wallet Works

If you’re curious about all the nuts and bolts of how a crypto wallet works, this section is for you.

A private key instead of a password

A crypto wallet does not use a password to authorize transactions. Instead, it uses a string of characters called a private key. When you authorize an action to be taken (such as sending cryptocurrency or posting a message), your wallet encrypts a message using this key. This encrypted message is called a “signature.”

Did You Know: A crypto “signature” is a message that has been encrypted with a user’s private key. For a more detailed explanation of how cryptography works in a crypto transaction, read our Crypto User’s Guide to Cryptography.

If you are logging in to a website, the website never needs to know your private key. So it doesn’t need to have a copy of your private key on its servers. This means that an attacker can’t get your private key by hacking the websites you visit. This is one of the security advantages that a wallet provides over a traditional password-based login system.

Although wallets don’t use passwords for authorizations, they do require a password for unlocking. This is an additional measure that exists in case an attacker gets physical access to your device. But wallet passwords are never sent to a remote server and are not used to make authorizations.

If anyone ever gets the private key to your account, they can pose as you on wallet-enabled websites or even steal all of your crypto. So if anyone asks you for your private key, they’re probably up to no good.

Pro Tip: There’s a lot to think about when you really start to build a crypto portfolio of investments. To help ensure you stay secure with your wallet and crypto transactions, read our How to Protect Your Crypto guide.

Your public key

When you first set up your wallet, your private key is run through an algorithm that produces a second string of characters called a “public key.” This second key can be used to decrypt any message that is encrypted with the first one.

There is no known way to derive the private key from the public one. So you can safely give your public key to anyone you want. Even if you were to give your public key to a known hacker, the hacker would still not be able to guess your private key unless he had billions of years and hundreds of supercomputers.2

When you authorize a transaction using your wallet, you send a copy of your public key to the website or network validator. The validator then tries to decrypt your signature using your public key. If it succeeds, this proves that you are the person who created this particular crypto account.

An address instead of a username

I touched on this earlier, but let’s dig a little deeper on addresses.

When you first create your account, your public key is run through a hash function to create a third string of characters called an “address.”

Did You Know: A hash function is a function that produces a hash, and a hash is a unique string of characters that identifies a message. Hash functions were originally invented to help detect whether messages had been tampered with. But today, hash functions are mostly used to shorten messages so that they take up less space. A cryptocurrency address is a public key run through a hash function.

On wallet-enabled websites, your address is your public identity. Everything you do is tied to your address. So a crypto address is an identifier, just like an email address or username.

When you authorize a transaction on a crypto network or wallet-enabled website, the validators hash your public key to determine your address. This tells them which account is supposed to be performing the transaction.

For example, if you’re sending crypto to someone else, your address tells the validators which account the crypto is being sent from. Or if you’re posting a message to a social media network, it tells them which account is making the post.

You can also send someone else your address if you want them to send you crypto. For example, you can give your address to an exchange like Coinbase or Binance.US to make a withdrawal from the exchange.

Seed words

Seed words are a set of words that can be used to recover your crypto accounts if your device crashes. They’re shown to you when you first set up your wallet.

You can generate an unlimited number of crypto accounts or identities using the same seed words. As long as you have your seed words, they can all be recovered.

If you lose your seed words and your device crashes, you will lose all of your accounts. So you may want to write these words down on a piece of paper and store it in a place where it can’t be damaged or destroyed.

If anyone gets your seed words, they can steal all of the crypto accounts associated with these words. So you might not want to let anyone other than your legal heirs know where they are.

Pro Tip: Want even more tips on crypto safety? We recommend checking out our roundup of Crypto Pitfalls to Avoid. In it you’ll learn all about the most common crypto scams and how to stay safe while investing.

So that’s how a crypto wallet works “under the hood.” But how do you know which wallet is right for you? In the next section, I’ll go over some key factors to keep in mind when shopping for a wallet.

How to Choose the Right Wallet

There are hundreds of crypto wallets to choose from. So trying to figure out which one is best can seem overwhelming. But asking a few key questions may allow you to quickly narrow down your search.

Here are a few questions to consider.

  • Does the wallet work with your coins? Each crypto exists on a particular network and generally can’t be stored in a wallet from another network. For example, you can’t store a Cardano token like Sundae in an Ethereum wallet. So the most important factor to consider when choosing a wallet is whether it works with the coins you own.
  • Is this wallet for long-term storage? If you’re planning to store large amounts of crypto in this wallet for a long time, you may want to go with an ultra-secure hardware wallet like the Trezor Model T or Ledger Nano S.
  • What is your budget for the wallet? Desktop and mobile wallets are almost always free, but hardware wallets can cost $50 to $150 or more.
  • Will you be using this wallet frequently? This is the opposite of long-term storage. If you plan on doing lots of transactions in this wallet, you may want to choose a desktop or mobile wallet.
  • Do you hold crypto from multiple networks? If you hold crypto from many different networks, a multi-chain wallet like Exodus may be your best bet. On the other hand, multi-chain wallets often don’t carry tokens for every network. So if you use only a small number of networks, you may want to use several different wallets instead of relying on a single, multi-chain one.
  • Will you be using decentralized applications (logging into apps) with this wallet? If you’re planning to use decentralized applications like Uniswap or Curve, having a wallet that allows you to interact with a website is key. Metamask, Brave wallet, and Coinbase wallet are examples of wallets that can do this.
  • Will you be using this wallet to stake your coins? If you’re planning to stake your coins with a validator to help secure the network and earn rewards, you’ll need a wallet that allows you to do this.

Still confused by all of the factors and options? Here is a simple chart showing a few popular crypto wallets that are great for different purposes.

Crypto Wallets and their Uses:

Trezor Model T Ledger Nano X Metamask Exodus Electrum Phantom wallet Nami Daedalus
Good for long-term storage Yes No No No No No No No
Good for frequent use No No Yes Yes Yes Yes Yes Yes
Works with decentralized apps Yes Yes Yes No No Yes Yes No
Affordable No No Yes Yes Yes Yes Yes Yes
Works with Ethereum Yes Yes Yes Yes No No No No
Works with Cardano Yes Yes No Yes No No Yes Yes
Works with Solana Yes Yes No Yes No Yes No No
Works with Avalanche Yes Yes Yes Yes No No No No
Works with Harmony Yes Yes Yes Yes No No No No
Works with Binance Smart Chain Yes Yes Yes Yes No No No No
Works with Bitcoin Yes Yes No Yes Yes No No No
Allows staking No No Depends on network* No No Yes Yes Yes
* Metamask can be used to stake on Harmony and Fantom, but not on most other networks.

Wrapping Up

So that’s the basics of what a crypto wallet is, how it works, and how to choose the right wallet.

Ever since the World Wide Web gained prominence in the early ’90s, we’ve gotten used to handing our assets over to third-parties and letting them take control. But with crypto wallets, we can now take control of our assets directly, in a way that is similar to holding cash, but with the added advantage of being able to interact with the web.

Still, if you’re new to crypto, choosing a wallet can be a novel experience. So I hope this information and the chart at the end have helped you to narrow down your options.

Citations
  1. Ethereum. (2022). login.xyz/

  2. Medium. (2018). Can I derive the private key from the public key?. medium.com/asecuritysite-when-bob-met-alice/can-i-derive-the-private-key-from-the-public-key-ba3609256ec