What Is a Crypto Wallet? A Detailed Introduction

What is a crypto wallet?

A crypto wallet is a software or an app that acts as a wallet for cryptocurrency. Like a physical wallet stores cash and cards, crypto wallets hold the keys to all cryptocurrency transactions. These wallets provide an interface where users can send and receive digital currencies. 

To understand how crypto wallets function, we need to address two important questions: Why would someone need a crypto wallet, and what would they use it for?

Why do I need a crypto wallet?

Most of us would ponder if we actually need an interface for digital assets as banks already provide us with accounts.

However, cryptocurrencies differ from traditional fiat currencies like the US dollar or the euro. A bank account stores money in the currency of one’s country of residence. For example, a bank account of a US resident would hold funds in US dollars. Similarly, someone who lives in England would have a bank account carrying British pounds.

Users require a wallet to interact directly with the blockchain. If somebody wants to instead let other parties custody their tokens and interact with the blockchain on their behalf, they don’t require a wallet. However, if a person wants to interact with the blockchain, they require one. 

What is a crypto wallet used for?

Most people use wallets to keep their cash and credit cards, while crypto wallets don’t store any funds. Instead, cryptocurrency exists on a blockchain. Users use wallets to authorize transactions that occur on the blockchain. If anyone’s interested in finding out their balance, they must look at all transactions ever associated with the wallet, instead of looking in the wallet itself. Therefore, to access this blockchain, users require a crypto wallet, but the transaction itself is occurring on the blockchain, public to everybody. Having keys to a wallet proves ownership of their cryptocurrency and allows them to make virtual transactions.

How to get a crypto wallet

Beginners can follow these five easy steps to purchase their first crypto wallet:

1. Choose the type of wallet
2. Buy or download the wallet
3. Install the required app or software for the wallet
4. Set up an account and enable its security features
5. Deposit cryptocurrency for use

But before you buy a crypto wallet, it’s essential to understand different crypto wallets and how they work.

What are the different types of crypto wallets?

Every crypto wallet falls into one of the two categories:

1. Hot wallets
2. Cold wallets

Simply put, hot wallets are connected to the internet and are digital, while cold wallets aren’t always connected to the internet and are physical. Hot wallets function through software and other digital media, while cold wallets keep cryptocurrency in cold storage without any virtual connection. Cold wallets are hardware, physical devices that one can touch, whereas its hot counterpart is intangible.

Users may prefer a hot or cold crypto wallet, depending on their needs. We’ve compiled a list of different crypto wallets to help you choose the best crypto wallet to store cryptocurrency:

Software wallets

Software crypto wallets exist in the form of web, mobile, and desktop wallets. Let’s look at each:

1. Web wallets – These require you to log in to an online account with a username and password with the keys granted by a third party

1. ‍Mobile wallets – These require you to download or buy a mobile app through iOS or Android with the wallet and keys living on the phone

1. ‍Desktop wallets – Similar to mobile wallets, desktop wallets require you to download or buy an app for a laptop or desktop, so the keys live on the device

Hardware wallets

Hardware wallets are USB drive-like physical devices that store private keys offline, separate from any browser, phone, laptop, and desktop.

Analog wallets

Analog wallets use QR codes on pieces of paper to contain keys that facilitate cryptocurrency transactions.

Custodial vs. non-custodial wallets

Custodial wallets require an external party to control private keys, while non-custodial wallets give users complete control of their private keys.

Pros of custodial wallets

1. Usually easier to set up for non-technical users, and comes with customer service
2. More akin to traditional financial products, making it easy to use

Cons of custodial wallets

1. May require KYC verification
2. Users lose control of their funds and are at the mercy of the custodian if anything were to go wrong

Pros of non-custodial wallets

1. Complete control of private keys
2. Transactions tend to be faster

Cons of non-custodial wallets

1. Less user-friendly
2. User is completely responsible for any losses with no protection

How to choose the best crypto wallet

Now that we’ve understood the different types of crypto wallets, it’s time to consider a few factors that separate the best crypto wallets from others on the market.

1. Security – Cryptocurrencies are expensive assets, which is why a crypto wallet’s security features should be top-notch. If you want the most secure wallet, you can turn to hardware and paper crypto wallets.
2. ‍Cost – Most non-hardware crypto wallets are free, although hardware wallets may require a small investment. If you’re looking to hold cryptocurrency for an extended period or with large amounts, it may be best to go for a hardware wallet for security.
3. Mobility – If all you want are mobility and portability, look no further than software options like web, mobile, and desktop wallets. As long as there’s access to an internet connection, you can carry these around and access them from anywhere.
4. Currency Support – Not all wallets support all cryptocurrencies. If you’re looking to invest in a single cryptocurrency, you should visit that currency’s website and see if they offer support for a wallet. You can also see how many cryptocurrency exchanges support various types of digital wallets.

Depending on your requirements, some crypto wallets may be more suitable than others. There’s no single best wallet for every user. 

How do you use a wallet safely?

Wallets are exceptionally powerful tools, but because they can’t protect traditional financial products, it’s imperative to use them safely. Below are some best practices:

1. Safely store your seed phrase – If you would like to be able to recover your account, you need to store your seed phrase. The best practice is to write it down and store it in an analog format, so it can’t be gathered anywhere online. 
2. Never share your seed phrase – Always remember to never share your seed phrase, because if somebody gets it, they can gain control of your wallet and steal your funds. 
3. Be careful which transactions you verify – When verifying a transaction, always ensure it’s coming from the correct location. Many scammers may send malicious or deceiving messages that you can inadvertently verify, authorizing transactions that can drain your wallet.

What are the most popular crypto wallets?

With over 140 crypto wallets on the market, it’s difficult to choose the right one. Fortunately, we’ve narrowed it down to four of the most popular hot and cold crypto wallets available for all types of users. 

Hot wallets

1. MetaMask – MetaMask is the largest crypto wallet for Ethereum, decentralized finance (DeFi), Web3, and non-fungible tokens (NFTs).
2. Trust Wallet – Trust Wallet enables fast transactions and is suitable for users involved with decentralized apps (dApps) on the Ethereum network.

Cold wallets

1. Ledger Nano X – As crypto wallets can be expensive, we found Ledger Nano X to be the best budget-friendly crypto wallet on the market. It’s an excellent choice for those looking to start investing in crypto.
2. Trezor – The Trezor crypto wallet is known for its robust security features. For those who prioritize safety, look no further than Trezor.

What is the difference between a crypto wallet and a crypto-centralized exchange?

Before we dive into the difference between a crypto wallet and a crypto-centralized exchange, let’s recap: A crypto wallet holds keys to your cryptocurrency transactions and doesn’t actually store cryptocurrency. This is possible because crypto wallets have a private key or a 12- or 24-word seed phrase.

What’s a seed phrase, you ask. Well, it’s a mnemonic you can use to gain access to or recover your cryptocurrency. A key—or seed phrase—gives you access to the cryptocurrency's blockchain. 

Whereas a crypto-centralized exchange is simply a platform where you can view your cryptocurrency. It enables you to manage coins and tokens and even send and receive cryptocurrency via an app or exchange. However, for most exchanges and transactions, it doesn’t interact with any blockchains, so what changes is just an entry in the database. Most users must also maintain custody of their keys. 

Pros and cons of crypto wallets and crypto-centralized exchanges

Both crypto wallets and apps come with their fair share of pros and cons. Let’s go through a few to understand the difference, starting with crypto wallets.

Now let’s look at the pros and cons of crypto-centralized exchanges.

Whether you choose a crypto wallet or crypto-centralized exchange, we, at Worldcoin, will always be here to assist and guide you through these not-so-complex transactions. Follow our blog to know more.