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What is a cryptocurrency wallet?

Cryptocurrency wallets are software used to communicate with blockchain networks to safely access, send and receive crypto funds or assets.

Simply put, the software stores your crypto just like traditional wallets store your cash and credit cards.

If you want to use Bitcoin or any other cryptocurrency, you will need to have a digital wallet. There is a considerable misunderstanding about how they work. Unlike traditional “pocket” wallets, digital wallets don’t store currency.

Just like you use a debit card to access your paper money at an ATM, you use your crypto wallet to access your crypto on the public ledger. The crypto wallet does not actually hold physical tokens, instead, it holds unique digital passwords or “private keys” which allow you to transact on the blockchain.

The wallet also includes an address, which is an alphanumeric identifier that is generated based on the public and private keys. Such an address is, in essence, a specific “location” on the blockchain to which coins can be sent to. This means you can share your address with others to receive funds, but you should never disclose your private key to anyone.

Your journey into cryptocurrency starts with downloading a wallet.

The Different Types of Cryptocurrency Wallets

There is a saying in crypto “Not your keys, Not your coins” and that’s the difference between custodial and non-custodial wallets and how much control you have over your coins.

There are various crypto wallet types which can be divided into three groups: software, hardware, and paper wallets. Depending on their working mechanisms, they may also be referred to as hot or cold wallets.

The majority of crypto wallet providers are based on software, which makes their use more convenient than hardware wallets. However, hardware wallets tend to be the most secure alternative. Paper wallets, on the other hand, consist of a “wallet” printed out on a piece of paper, but their use is now deemed as obsolete and unreliable.. 

Custodial Wallet

Many people make their first crypto purchases on centralized exchanges. These are online marketplaces where you can buy, sell and store a variety of cryptocurrencies. Many of you may have heard of Coinbase, one of the most popular centralized exchanges in the United States and a great option for beginners! Exchanges like Coinbase are known as “custodians” because they have custody over your cryptocurrency. In other words, when you make purchases with the Coinbase app, Coinbase holds your crypto for you in its own “custodial” or “hosted” wallet. This way, Coinbase acts as a third-party with ownership of your private keys, and you are trusting the platform with the responsibility of keeping your crypto safe and secure.

Custodial wallets are a convenient gateway into the crypto world. It’s as simple as signing up for a Coinbase account with your email address, verifying your identity with a photo ID, choosing a strong password and linking your credit card or bank account to start buying. While Coinbase is great for holding small amounts of crypto and buying major cryptocurrencies such as bitcoin and Ether, the company does not yet offer NFTs — although they may soon be considering it.

For now, if you want to be able to purchase NFTs, you’ll need to have what is called a non-custodial wallet.

Non-Custodial Wallet

For full control over your crypto assets, a non-custodial wallet is your best and safest bet. With these wallets, there is no third-party involved and you are the owner of your own private keys. While this is ideal for security, it also comes with great responsibility. More on the importance of private keys in just a bit. For now, let’s talk about where non-custodial wallets come into play.

Say you have a Coinbase account but you now want full control over your crypto. Good news, you can transfer your crypto holdings from Coinbase into your own non-custodial wallet! This is especially helpful for those of you looking to store large amounts of crypto, or for people looking to purchase NFTs. Since NFTs exist mostly on the Ethereum blockchain, you would need to purchase Ether on Coinbase and then transfer it to your non-custodial wallet, which you would then use to buy an NFT from online marketplaces such as NiftyGateway, OpenSea, Rarible, etc. You can also buy Ether directly using a non-custodial wallet like MetaMask! If you want to be ready for Gary’s upcoming project, MetaMask is what he recommends. Don’t worry, we’ll get you set up by the end of this article For the purposes of this article, we will be focusing specifically on non-custodial wallets, which come in several options: software (web, mobile or desktop), hardware and paper. Before we dig deeper into each category, let’s explore how wallets actually work.


Web Wallet

You can use web wallets to access blockchains through a browser interface without having to download or install anything. This includes both exchange wallets and other browser-based wallet providers.

In most cases, you can create a new wallet and set a personal password to access it. However, some service providers hold and manage the private keys on your behalf. Although this may be more convenient for inexperienced users, it’s a dangerous practice. If you don’t hold your private keys, you’re trusting your money to someone else.

Desktop Wallet

As the name implies, a desktop wallet is a software you download and execute locally on your computer. Unlike some web-based versions, desktop wallets give you full control over your keys and funds. When you generate a new desktop wallet, a file called “wallet.dat” will be stored locally on your computer. This file contains the private key information used to access your cryptocurrency addresses so you should encrypt it with a personal password.

If you encrypt your desktop wallet, you will be required to provide your password every time you run the software so that it can read the wallet.dat file. If you lose this file or forget your password, you will most likely lose access to your funds.

Therefore, it’s crucial to backup your wallet.dat file and keep it somewhere safe. Alternatively, you can export the corresponding private key or seed phrase. By doing so, you will be able to access your funds on other devices, in case your computer stops working or becomes inaccessible somehow.

In general, desktop wallets may be considered safer than most web versions, but it’s crucial to make sure your computer is clean of viruses and malware before setting up and using a cryptocurrency wallet.

Mobile Wallet

Mobile wallets are pretty similar to software wallets in the sense that they’re both ways to store your cryptocurrency outside of just keeping it on an exchange. However, these mobile wallets don’t actually store your cryptocurrency. Instead, they store your private and public keys and interact with various blockchains to enable users to send and receive digital currency and monitor their balance.

Mobile wallets function much like their desktop counterparts but designed specifically as smartphone applications. These are quite convenient as they allow you to send and receive cryptocurrencies through the use of QR codes.

As such, mobile wallets are particularly suitable for performing daily transactions and payments, making them a viable option for spending Bitcoin and other cryptocurrencies in the real world.

Hot Wallet

A hot wallet is any wallet that is connected somehow to the Internet. For example, when you create an account on Binance and send funds to your wallets, you are depositing into Binance’s hot wallet. These wallets are quite easy to set up, and the funds are quickly accessible, making them convenient for traders and other frequent users.

Cold Wallet or Hardware Wallet

Cold wallets, on the other hand, have no connection to the Internet. Instead, they use a physical medium to store the keys offline, making them resistant to online hacking attempts. As such, cold wallets tend to be a much safer alternative of “storing” your coins. This method is also known as cold storage and is particularly suitable for long-term investors or “HODLers.”

As such, hardware storage constitutes a type of cold wallet and is deemed as one of the most secure alternatives.

How do I decide which wallet to use?

Deciding which type of wallet to use depends on a variety of factors, including:

  • How often you trade. In general, hot wallets are better for more active cryptocurrency traders. Quick login ability means you are only a few clicks and taps away from buying and selling crypto. Cold wallets are better suited for those looking to make less frequent trades.
  • What you want to trade. As mentioned earlier, not all wallets support all types of cryptocurrencies. However, some of the best crypto wallets have the power to trade hundreds of different currencies, providing more of a one-size-fits-all experience.
  • Your peace of mind. For those worried about hacking, having a physical cold wallet stored in a safe deposit box at the bank or somewhere at home, provides the safest, most secure option. Others might be confident in their ability to keep their hot wallets secure.
  • How much it costs. It is important to investigate the costs associated with each wallet. Many hot wallets will be free to set up, but charge a fee each time you trade. Meanwhile, cold wallets, like any piece of hardware, will cost money to purchase.
  • What it can do. While the basics of each cryptocurrency wallet are the same, additional features can help set them apart.
  • This is especially true of hot wallets, many of which come with advanced reporting features, insights into the crypto market, the ability to convert cryptocurrencies and more.
  • Security features can also be a good differentiator.

Understand Blockchain

The easiest way to understand blockchain is to think of it as a fully transparent and continuously updated record of the exchange of information through a system which nobody fully owns.

This makes it decentralized and extremely difficult for anyone to single-handedly hack or corrupt the system, pretty much guaranteeing full validity and trust in each exchange of information.

Understand Blockchain

The easiest way to understand blockchain is to think of it as a fully transparent and continuously updated record of the exchange of information through a system which nobody fully owns.

This makes it decentralized and extremely difficult for anyone to single-handedly hack or corrupt the system, pretty much guaranteeing full validity and trust in each exchange of information.

What is a Crypto Wallet?

Cryptocurrency is a digital or virtual currency designed to work as a medium of exchange.

Cryptocurrencies, are the tokens used within blockchains to send value and pay for transactions. Additionally, you can think of them as tools on the blockchain, in some cases serving as a resource or utility function. Other times, they are used to digitize the value of an asset.

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