What Is a Crypto Wallet? A Comprehensive Guide for Beginners

A crypto wallet is a physical device or online solution that provides cryptocurrency holders with the means of managing their digital assets. It enables them to safely store, save, and spend crypto funds.

Each wallet can be identified using a crypto address, or public key, a long string of numbers and letters, and the user will need this, as well as their private key to make transactions.

How Do Cryptocurrency Wallets Work? 

A blockchain is a ledger where every party has a unique address. Each address has a public key serving as an account number where funds can be transferred. Private keys function as the password to that wallet and give the holders access to the assets held in that address.

Crypto wallets use private keys to access an address, providing the front-end software needed to access the “back office” of the address.

Ideally, wallets are designed with an easy-to-understand user interface that makes sending and receiving tokens as easy as sending an email or text.

Why Do You Need a Crypto Wallet? 

Crypto wallets are just specialized code wrapped in a user-friendly package. They take the hard work out of finding and accessing a blockchain, giving users a simple and quick way to access the assets protected by their private keys.

Crypto wallets come in various forms. Digital asset holders can store funds in software, hardware, or paper wallets. They can also decide between custodial and non-custodial wallets. In addition, a choice can be made between hot and cold wallets. Let’s explore the nature of each wallet type and which is most suitable for the average person to use.

In the world of crypto wallets, the terms “hot” and “cold” generally refer to whether the wallet is always connected to the internet.

Hot wallets are those that are always connected to the internet in some way and able to execute transactions at any time. These types of wallets are easy to set up and allow funds to be quickly accessed, but as they are online, they can potentially be hacked and are deemed less secure.

A cold wallet has no connection to the internet and instead uses a physical medium to store public/private keys offline in a more secure manner, often in the form of a USB-type device. To access the wallet, it must be connected to the internet via WiFi or a hard-line USB connection, and typically, all actions performed inside the wallet must be approved directly on the physical hardware wallet interface.

One of the most important distinctions to understand is the difference between custodial and non-custodial wallet providers and what that means for your crypto portfolio overall.

What Is a Custodial Wallet? 

A custodial wallet is one where your digital assets are held in custody and managed by a third party, such as a brokerage firm or cryptocurrency exchange. It’s important to understand that with custodial wallets, you do not have control over your funds and cannot sign transactions.

Keeping assets in a custodial wallet can help reduce the risk of exposing a private key to a bad actor and provide several other important benefits.

One key consideration that most people don’t account for is what happens to your crypto assets if something unfortunate happens to you.

While you might have a $2 million nest egg saved up to pass on to your loved ones, it might as well be non-existent if it’s stored in a crypto wallet that no one else can access. Utilizing a trusted custodian can help ensure your assets find their way to your beneficiaries, providing a little peace of mind when it comes to the fate of your crypto wealth.

Also, custodians such as cryptocurrency exchanges tend to have fail-safes in place in case of forgotten passwords and similar matters, meaning that completely losing access to your funds is unlikely.

What Is a Non-custodial Crypto Wallet? 

A non-custodial wallet is one where only you hold and control the private keys and embody the ethos of “Be your own bank” that arose after the Great Financial Crisis of 2008.

Non-custodial wallets are recommended for more experienced crypto users who know how to manage and protect their private keys and seed phrases. Importantly, they allow you to access the broader ecosystem of cryptocurrency applications, including decentralized finance (DeFi) apps like Uniswap.

For those who prefer to remain in full control over their funds, non-custodial wallets are the way to go. Just remember, with non-custodial wallets, you are fully responsible for keeping your private keys and seed phrases safe. You would be wise to stay up to date with the latest reported scams and hacks designed to steal the wealth of crypto owners who don’t remain vigilant.

The are several important security and user experience issues that crypto owners must take into account.  Here are some questions that our coinhint.com team advises you to consider before choosing a crypto wallet.

• Does it provide two-factor authentication?
  This is usually available in hardware wallets and can help prevent errant transactions.
• Does it offer regular updates and user education?
  Blockchain technology is always evolving, so wallets with regular updates are crucial to maintaining secure assets, while those with tutorials tend to offer a better user experience and provide support.
• Does it provide detailed documentation?
  Anonymous teams and projects mean that anything can be hidden in the code, so having “doxxed” teams and open-source code evaluated by trusted security experts is vital to securing your funds.
• Does it cost money?

Most software wallets can be accessed for free but include other ways to generate income, such as an additional fee when conducting swaps through the wallet. It’s important to research associated fees when choosing a software wallet. Since hardware wallets are physical devices with built-in software, they can cost anywhere from $20 to $500 to purchase. 

Here are some general security measures to consider when keeping your assets safe:

• Use strong passwords and encryption to protect private keys.
• Implement backup and recovery mechanisms to ensure funds can be recovered in case of device loss or damage.
• Store paper wallets and physical copies of your private key in a safe or a deposit box.
• Avoid copying mnemonics into the clipboard, which can be monitored by other processes.
• Stay up-to-date with the latest version of your crypto wallet.
• Be wary of online storage services, such as exchanges and web wallets, which may not provide sufficient insurance and security for storing large amounts of cryptocurrency.
• Research and carefully evaluate the security features and reputation of any wallet before using it.

Incorporating these security features and best practices can significantly reduce the risk of unauthorized access and ensure the safety of your digital assets.

Myth: Losing access to a crypto wallet means you lose access to the funds it holds. 

Fact: Crypto wallets are just software interfaces that allow you to access the assets protected by a private key. Losing a private key means you will lose access to those funds.

Myth: Hardware wallets make you immune to hacking.

Fact: Hardware wallets can be hacked if a thief obtains physical access to the device. These wallets are also vulnerable to things like address poisoning and scam transactions when they are connected to the internet.

Cryptocurrency wallets are necessary to interact in the world of blockchain and help keep your digital assets safe. Just as you have a wallet or purse for physical money, crypto wallets serve as a virtual wallet for your digital money. 

It’s important that every user research the different options available to find a crypto wallet that meets their needs while also having robust security features. There’s an expansive and continually growing ecosystem of decentralized applications (dApps) out there for all to access, and all that is needed is a cryptocurrency wallet and starting funds.

Just remember, private keys are like the combination to a safe, so be sure to keep them secure and never share them with anyone.