A cryptocurrency wallet is a type of tool used to store and transact with top cryptocurrencies like bitcoin (BTC) and ether (ETH).
Cryptocurrency wallets are also used to collect non-fungible tokens (NFTs), like art, digital collectibles, and virtual land.
Accordingly, a crypto wallet is home for your crypto and NFTs. These applications or devices can be set up such that only you or ones close to you can access your digital assets.
How does a crypto wallet work
In a certain sense, a crypto wallet doesn’t literally “store” cryptocurrency or NFTs.
Instead, a wallet provides a holder with a public key and private key pair that offers access to an account on a blockchain like Ethereum. So while crypto is stored and tracked “on chain,” wallets are necessary for interfacing with and securing the underlying funds.
- A public key is commonly shortened into an “address,” an alphanumeric phrase or username where crypto users can receive and manage digital assets.
- A private key is like the password to your public key because it is needed to “unlock” your public key and approve transactions. For this reason, it’s important never to share your private key with others. If you do, they can unlock and spend your crypto.
Additionally, if you lose access to your private key, you will lose access to your funds unless you’ve relied on a special kind of wallet known as a social recovery wallet. More on these types of wallets a little later.
Online (hot) wallets vs. hardware (cold) wallets
There are two genres of cryptocurrency wallets: ones that are software-based, like browser, mobile, and smart contract wallets, and ones that are device-based, like hardware wallets.
Online Wallets
Since software wallets are used within internet-connected devices, they’re considered “hot” wallets. These wallets are accessible and easy to use, but they’re also prone to hackers via the internet.
It’s entirely possible to set up software wallets securely, but whether doing so is easy for novices is a different question. As such, the simplest way to reasonably secure your cryptocurrency is through a hardware wallet.
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Hardware Wallets
A hardware wallet is a physical device that remains disconnected from the internet at all times, hence the “cold” nickname. They often look like a USB drive or a small point-of-sale system that users can plug into their computer.
Crypto holders thus use these specialized, fire walled devices to sign transactions offline, thereby eliminating the internet-based attack vectors that can plague software wallets.
Fortunately, crypto users can link their hot and cold wallets together to get the best of both worlds, i.e. accessibility and security.
What is a social recovery wallet?
Losing access to all your cryptocurrency because you’ve lost access to your private key is harsh.
In response, the Ethereum community has pioneered social recovery wallets that allow Ethereum accounts to be recovered in perpetuity.
Powered by smart contracts, these wallets make use of a “signing key” and “guardians.” A signing key is what people use to approve transactions, while guardians are family or friends you handpick.
A majority of guardians can then coordinate to update your signing key if you ever lose access to your original one, thus ensuring recoverability.
Risks of crypto wallets
Moving your assets from a centralized cryptocurrency exchange like Coinbase or Gemini to your own wallet entails certain risks.
That’s because while your crypto is on these exchanges, it is ultimately in these services’ custody and can be easily secured by passwords, two-factor authentication, and even user-friendly vault systems.
Related: Why Invest in an Index?
If you transfer your crypto to a wallet you own, this is self-custodying your assets. Many users do this to directly interact with established and upstart DeFi and NFT platforms. However, this also means these users are their own last line of defense when it comes to securing their assets.
For example, if you have funds on a browser wallet like MetaMask and a hacker exploits your computer and scrapes your password, that crypto will be stolen. Accordingly, it’s important to take security seriously and layer in mitigations like hardware wallets to all your crypto routines.
The best crypto wallets to consider
There are a range of reputable cryptocurrency wallets you can choose from. Below are some of the most popular ones by category.
Bitcoin-centric wallets
Ethereum wallets
