What Is a Cryptocurrency Wallet?

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DEFINITION
A cryptocurrency wallet stores digital currency and other digital assets.

A cryptocurrency wallet stores digital currency and other digital assets. Most cryptocurrency wallets are software applications or hardware devices, but a crypto wallet can also be a piece of paper. Your cryptocurrency wallet holds a combination of a public wallet address and private security key.

If you want to invest in cryptocurrency or non-fungible tokens (NFTs), or use any other blockchain-based service, then you need a cryptocurrency wallet. Keep reading to learn how crypto wallets work, and how you can use one to get started as a cryptocurrency investor.

Definition and Example of a Cryptocurrency Wallet

A cryptocurrency wallet is the digital equivalent of a physical wallet that you carry in your pocket. But instead of holding dollars and credit cards, a cryptocurrency wallet stores the information required to access digital assets like Bitcoin, Ethereum, Dogecoin, or another type of cryptocurrency.

A digital wallet, rather than storing actual cryptocurrency, contains two strings of random letters and numbers. The first is a public wallet address, often around 30 to 50 characters long and used by others to send you cryptocurrency or another digital asset. The second is a much longer private key, which is a very large number with certain mathematical properties that is required to access your wallet’s assets.

Non-custodial cryptocurrency wallets (those not hosted by an exchange) are backed up using a seed phrase that you personally set. Write it down or don’t forget it, because knowing the seed phrase—often a series of 12-24 simple words—is the only way to access your wallet if you lose the private key.

Using cryptocurrency without a compatible cryptocurrency wallet is not possible. Cryptocurrency wallets enable users to send and receive assets to anyone in the world who has a compatible wallet.

Cryptocurrency wallets are only semi-anonymous. Anyone can use a public blockchain explorer tool to view the contents and transactions of any crypto wallet, but likely won’t know who owns that specific wallet. If you buy and sell cryptocurrency through an exchange or brokerage, your wallet may be hosted by that entity.

Some examples of cryptocurrency wallet makers include Exodus, Ledger, and Coinbase.

How Cryptocurrency Wallets Work

Imagine that you want to buy some Ethereum. You can use a major cryptocurrency exchange like Binance or Coinbase, and your wallet can be standalone or hosted by the exchange. Here’s a step-by-step look at how a cryptocurrency wallet is used for a transaction: 

  1. The cryptocurrency transaction, including information about the sending and receiving wallets, is sent to the network.
  2. The transaction is processed, resulting in the blockchain network recording that one wallet has sent a specific amount of cryptocurrency to another wallet.
  3. The transaction is confirmed by multiple blockchain network participants and added to the blockchain. The wallet balances of sender and receiver should automatically update.

The sending and receiving crypto wallets need to be compatible for a transaction to succeed. If you are sending cryptocurrency to a wallet, make sure that the receiving wallet is compatible before sending, otherwise you may send funds that are never received and not recoverable.

Types of Cryptocurrency Wallets

There are three types of cryptocurrency wallets you can choose:

  • Software: Cryptocurrency software wallets are usually free and accessible via your computer, phone, or a browser plugin. The online accessibility of software wallets makes them the most convenient but also the most likely to be hacked. Examples of software wallets include those by MetaMask and Coinbase Wallet.
  • Hardware: Your cryptocurrency wallet can be a hardware device, which physically stores your wallet’s public and private keys offline. You can access a hardware wallet via your computer, usually by connecting to the hardware device via Bluetooth or the computer’s USB port. Examples of hardware wallets include those by Ledger, Trezor, and Keystone.
  • Paper: Literally pieces of paper, a paper wallet is a typed or handwritten copy of your wallet address and private key. Using a stack of paper to store your wallet information is likely not convenient, but could be the safest, depending on the measures that you take to store the paper. 

While each type of crypto wallet accomplishes the same basic objective of securely storing your digital assets, the various wallet types have different levels of convenience and security. Let’s compare:

  Software Wallet Hardware Wallet Paper Wallet
Cost Free Around $50 to $200 Very inexpensive
Ease of Use Easiest Varies Most difficult
Security Less secure More secure Most secure

How To Get a Cryptocurrency Wallet

How to get a crypto wallet depends on the type of cryptocurrency wallet that you wish to use:

  • Software wallet: Most software wallets, including those by major software wallet providers like Exodus, MetaMask, and Coinbase Wallet, can be downloaded for free. Using the Brave browser, you can access a free software cryptocurrency wallet that is pre-installed—no download required. 
  • Hardware wallet: You can buy a hardware crypto wallet directly from the manufacturer or through a trusted retailer. Used hardware wallets are not recommended as they may not have maximum security for your assets.
  • Paper wallet: To create a paper wallet, you need to digitally generate your wallet address and private key. This generally requires coding skills. Then, you would print that information using your local printer or write it on paper by hand.

Regardless of which type of wallet you choose, be sure to keep your digital wallet secure after you set it up.

Do I Need a Cryptocurrency Wallet?

You need a cryptocurrency wallet if you want to buy and hold cryptocurrency or another digital asset. You need a non-custodial digital wallet if you wish to store your cryptocurrency independently of a major exchange or brokerage—a smart move for security reasons, since wallets hosted by major exchanges may be more frequently targets of hackers. If you are just starting out, you can rely on any of the large, centralized cryptocurrency exchanges to store your cryptocurrency for you in a wallet hosted by the exchange. 

As a cryptocurrency investor, it’s important to choose a wallet solution that matches with your technical skills and investing goals. And remember that if you lose your wallet information or your wallet is hacked, then you are unlikely to recover any lost assets. 

Key Takeaways

  • Cryptocurrency wallets allow you to store, send, and receive digital assets, including cryptocurrencies and NFTs.
  • Digital wallets are usually in software or hardware formats, but can be as simple as sheets of paper.
  • Your crypto wallet contains public and private keys—long sets of letters and numbers that need to be securely stored.
  • You’ll need a cryptocurrency wallet to invest in any type of digital asset.

Article Sources

  1. United States Sentencing Commission. “Bitcoin Glossary: 2018 Annual National Seminar.” Accessed Jan. 14, 2022.

  2. U.S. Department of the Treasury. “Frequently Asked Questions.” Accessed Jan. 14, 2022.

  3. BitPrime. “Cryptocurrency Wallet Addresses.” Accessed Jan. 14, 2022.

  4. National Institute of Standards and Technology. “Public Key Cryptography (PKC).” Accessed Jan. 14, 2022.

  5. Electronic Frontier Foundation. “A Deep Dive on End-to-End Encryption: How Do Public Key Encryption Systems Work?” Accessed Jan. 14, 2022.

  6. Coinbase. “What Is a Seed Phrase?” Accessed Jan. 14, 2022.

  7. Coinbase. “What Happens if I Use the Wrong Wallet Address To Send or Receive Crypto?” Accessed Jan. 14, 2022.

  8. Consumer Finance Protection Board. “Risks to Consumers Posed by Virtual Currencies.” Accessed Jan. 14, 2022.

  9. Coinbase. “Unsupported Crypto Recovery.” Accessed Jan. 14, 2022.

  10. Ledger. “Frequently Asked Questions.” Accessed Jan. 14, 2022.

  11. Brave. “Brave Wallet.” Accessed Jan. 14, 2022.

  12. Federal Trade Commission. “What To Know About Cryptocurrency and Scams.” Accessed Jan. 14, 2022.