Crypto Wallet Definition and Security Rules

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Just as you keep your cash in a wallet, you can keep your cryptocurrency in a wallet (kind of). So what is a crypto wallet, exactly? How does it work? What type of crypto wallet is best for you?

All these questions will be answered in detail in this article. More importantly, you’ll learn about the security features of different crypto wallets. At the end of the day, it’s all about security.

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What Is a Crypto Wallet?

A cryptocurrency wallet holds the public and private keys to cryptocurrency. It doesn’t actually hold the cryptocurrency, only the keys that provide access to crypto. Through those keys, you can make crypto transactions. For instance, you can send and receive Bitcoins.

Crypto wallets also interact with the blockchain where your crypto actually resides. In other words, crypto wallets provide proof to the blockchain that you own certain coins or tokens.

You’re probably wondering why do you need a wallet to store keys but not the actual crypto? Those keys basically provide you access to the crypto you own. Without the keys, you’ll lose your crypto coins or tokens.

There are many different forms of crypto wallets today, both physical and digital.

How Does Crypto Wallet Work?

Crypto wallet is essentially software or application and runs similar to those in your mobile. In fact, think of it as a banking app. However, crypto wallets are also available as physical devices, resembling a USB, that hold the software and the keys.

Crypto wallets basically use public and private keys to direct to the cryptocurrency residing on the blockchain. This is useful for both buying, selling, sending, and receiving cryptocurrencies. A crypto wallet can hold many different cryptocurrencies.

Public Keys and Private Keys

Crypto wallets are all about the keys: the public key and the private key. The public key is the one that’s visible to the public and used to send cryptocurrencies.

On the other hand, the private key is supposed to be private, accessible only by the owner. The private key basically authenticates the transaction done on the public key. In other words, it allows you to unlock the received crypto, whether you have bought it or received it from another party.

The private key can be in several forms, from 256 character binary code to a QR code.

The private key is a string of alphanumeric characters that can give access to crypto to anyone who holds it. This is why this private key should never be shared with anyone because that’s essentially the main security feature.

There have been cases where people have forgotten their private keys or someone found their keys. In such cases, there’s no access to crypto then whatsoever because of the way blockchain works.

Because of this, many crypto holders also keep their private keys in hardware wallets that only come in contact with the internet when the device is connected to a computer. Of course, such hardware wallets take security to the next level.

Private Key Storage Types

Your private keys can be stored in either custodial or non-custodial crypto wallets.

Custodial crypto wallets share the private keys with the wallet provider as well. In other words, the crypto is accessible by both you and the wallet provider. Hence, they have custody of your crypto.

In non-custodial crypto wallets, the private keys are only known to the user. This kind of wallet allows complete decentralization as there’s no third party with access to your crypto. The users are solely responsible for the security of the private keys and, by extension, the cryptocurrencies.

While both custodial and non-custodial wallets have their pros and cons, the latter is considered safer. That’s because only the real owner knows the private keys, and therefore, only they can access the crypto.

In the case of custodial wallets, recovery of keys is easier in case you forget it. It works similarly to how passwords can be recovered by providing some additional information. Exchange wallets like Coinbase and Binance are custodial wallets.

Types of Crypto Wallets

There are essentially two types of crypto wallets, but we’ll divide one type even further to present three types. The two main types of wallets are hot and cold wallets. The third type, which is essentially a hot wallet, is an exchange wallet.

Before we talk about each in more detail, here’s a quick comparison:

Hot Wallet Cold Storage Wallet Exchange Wallet

Safety Level

Very High

Average

Average

Where Private Keys stored

Custodial/Non-Custodial

Non Custodial

Custodial

Connected to Internet

Yes

No

Yes

Sub-Types

Web, Mobile, and Desktop

Hardware and Paper

Web, Mobile, and Desktop

Availability

High

Low

High

Vulnerable to Hackers

Yes

No

Yes

Ideal For

Day-to-day transactions

Long-term holdings

Both

Hot Wallet

Online crypto wallets are called hot wallets. These software-based wallets are available as web, mobile, and desktop applications. These wallets are connected to the internet at all times whether they are custodial or non-custodial.

The main benefit of hot wallets is speed and convenience. As they are already online, doing transactions is quick and easy. There’s no need to move from offline to online. This makes hot wallets ideal for day-to-day transactions like buying a coffee, sending crypto to a friend, or buying tokens from an exchange.

The drawback of hot wallets is that they are vulnerable to hacking. Even though hot wallets have security features, the fact that they are online makes them less secure than cold wallets. In 2023, a hacker stole $5.7 million worth of crypto from Roll, a crypto platform, through its hot wallet.

Exodus, Atomic Wallet, and BRD are examples of hot wallets.

👍 Pros

Always online

Quick transactions

User-friendly

👎 Cons

Vulnerable to hacks

Not ideal for large holdings

Cold Storage Wallet

Hardware wallets that physically store the keys are called cold storage. These are typically USB-like devices that hold private keys. However, there are other forms of hardware as well as paper wallets that qualify as cold storage. Offline computers holding keys, as was common in the early days of Bitcoin, are also a kind of cold wallet.

Because these wallets are offline, they keep the keys protected from hackers on the internet. Even when connected with an internet-enabled device, they are not vulnerable to hacks because the digital signing is done within the device.

The only way to access the cold storage wallet is to actually have it in possession. Even then, you would need a password or pin to access the device.

Ledger and Trezor make USB-like cold wallets for crypto.

👍 Pros

Extremely secure

Good for long-term holdings

👎 Cons

Difficult to use

Backup required

Exchange Wallet

Exchange wallets are mainly hot wallets provided by crypto exchanges. These have basically the same features as other hot wallets, but these are mostly custodial storage. That means that the exchange has access to your keys.

👍 Pros

Convenience

Quick transactions on exchanges

Keys recoverable

👎 Cons

Not highly secure

Main Types of Software Wallets

Web Wallets

Web wallets, as suggested by the name, exist on the web. This is basically a website where you can access your wallet (hot wallet). Many crypto wallet providers also offer web wallets in addition to mobile or desktop wallets.

It goes without saying that a web wallet, as a hot wallet, is vulnerable to hacks. However, it does provide the benefit of accessing it from anywhere with any browser as long as you have an internet connection.

Mobile Wallets

Mobile crypto wallets are the most commonly used hot wallets. As hot wallets, these are also connected to the internet all the time, or at least as long as your phone is connected to the internet.

Mobile wallets do have some reliable security features and can also leverage your mobile’s verification system like fingerprints or face ID.

These wallets are the most convenient as you can complete transactions on the go, anywhere, and any time.

Mobile wallets can be both custodial and non-custodial.

Many crypto owners are using mobile wallets on separate phones that are dedicated for this purpose only.

Desktop Wallets

Desktop wallets are not much different from mobile wallets in that they are also downloadable software. These are available for Windows, macOS, and Linux mainly. Some hot wallet providers offer for all three operating systems.

In comparison to web and mobile wallets, desktop wallets are slightly more secure and provide greater control over your private keys. While the software is provided by another party, you don’t necessarily have to rely on them to safeguard your keys.

Desktop wallets are password-protected and also have recovery features enabled.

There are desktop versions of exchange wallets as well that integrate with the exchange easily, allowing quick transactions.

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How to Choose A Crypto Wallet?

Now that you understand the different types of crypto wallets, you can move on to other considerations when choosing a crypto wallet. Here’s what you should keep in mind:

Security

The number one factor is security, period. While that is intrinsically connected with the types of crypto wallets, you may want to do further research on the security protocols and features of the wallet you’re considering.

Most users go for hot wallets as they are easy to use. However, as they may be vulnerable to attacks, you should choose one that offers foolproof security. Features such as two-factor authentication or biometric verification can further enhance security.

Also, look for historical data on the wallet whether there have been attacks in the past.

Supported Cryptocurrencies

Generally, crypto wallets can support a wide range of cryptocurrencies. Still, some wallets may not support some cryptocurrencies, particularly, newer players in the market. If you’re after specific crypto, make sure to check whether the wallet even has support for it or not.

NFT Support

Non-fungible tokens (NFTs) are quickly becoming the next big thing in the blockchain. And the type of wallet you have may have a say in that.

If you’re interested in buying or selling NFTs, you should look for a wallet that supports the blockchains the NFTs are on. Currently, most NFTs are on the Ethereum blockchain. However, there are other blockchains as well, like Solana, for which you may want to go for a wallet from Solflfare or Phantom.

The wallet should be able to connect to NFT marketplaces like OpenSea and Solanart.

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Transaction Fees

Crypto wallets may charge a fee for transactions you make with the wallet. This fee is usually charged for withdrawals. Ideally, you want a wallet that charges no or very small fees.

Some wallets charge a flat fee, while others charge a percentage of the transaction amount. So pay attention to the costs of the crypto wallet when choosing one.

Also, there may be account minimum thresholds as well. For instance, SoFi has an account minimum of $10, whereas Gemini has no minimum requirement.

Availability

For hot wallets, you should also consider availability. The web, desktop, or mobile application of the wallet should ideally be available 24/7. The last thing you want is a website or app down when you need to send or receive crypto assets.

This can be ensured by going for a trusted wallet provider who has been in the industry for some time and is well-known in the crypto community. You can read reviews from other crypto users to judge for yourself.

How to Set Up A Crypto Wallet

Security

The exact steps may vary by the wallet, but to give you an idea of how to set up a crypto wallet, here’s a step-by-step instruction on how to set up an Exodus wallet.

Step 1: Download the Exodus Wallet app for iOS or Android.

Step 2: Add a Password to your wallet. This ensures that even if someone is using your device, they cannot access your crypto wallet. Note: this password, unlike other passwords online, is non-recoverable.

Exodus wallet set up

Exodus wallet set up

Step 3: Write a 12-Word Seed Phrase. This seed phrase helps recover your wallet even when you lose access to it, for example, forget the password. Make protected physical copies of it.

Exodus wallet set up

Exodus wallet set up

Step 4: Open the wallet and start using it.

The process is pretty much the same with the desktop version of the Exodus wallet.

How to Use Crypto Wallet

Hot wallets like Exodus have an easy-to-use interface that’s easy even for beginners. You can use the wallet to send and receive crypto assets supported by the wallet.

Here’s how you can receive Bitcoin in Exodus.

Step 1: Click on the Wallet icon on the top of the desktop version.

Step 2: Go to the Bitcoin wallet and click on the ‘Receive’ button.

Bitcoin wallet

Bitcoin wallet

Step 3: You’ll see your address (derived from public key), which you can copy by clicking on the copy button on the right.

Your address

Your address

Provide this address to a sender by copying or even via email with the built-in button.

How to Protect Your Crypto Assets - Top 5 Tips

No matter how secure a crypto wallet you choose, the responsibility of safeguarding your crypto assets also falls on you.

Here are the top five tips to help you do just that:

  • Never Share Your Private Keys with Anyone - believe it or not, most of the security of your crypto is dependent on those private keys. Anyone who gets access to the private keys can do transactions from your crypto and steal it.

  • Use a combination of hot and cold storage wallets - as both hot and cold crypto storage offers unique benefits, users may benefit from using both of them. As a beginner, you can start with a hot wallet, but as you acquire more crypto assets, move the majority of them into a cold wallet, especially if it’s high-value assets like Bitcoin, Ethers, or NFTs. You can use the hot wallet for smaller transactions.

  • Never use the public Internet with crypto wallets - public Wifi networks are never secure because so many people are accessing them. People get hacked through their home WiFi, so who’s stopping those hackers on a public network? Always use a private network, preferably with VPN, when using your crypto wallet.

  • Get multiple wallets - most crypto wallets are either free or charge a low fee, which means maintaining multiple wallets isn’t necessarily heavy on the pocket. This can also help secure your assets as the keys exist in different wallets. Even if one wallet is compromised, at least you won’t lose all your crypto.

  • Change passwords regularly - your hot wallets are password-protected, so make sure to change them frequently and use strong password combinations. Never use the same password for two accounts.

Best Crypto Exchanges

Coinbase

Coinbase is the world’s biggest and most popular crypto exchange for a reason. The exchange lists authentic cryptocurrencies and charges very minimal transaction fees. With strong security features, the exchange ensures that interaction with the exchange is fully encrypted.

While there are many emerging cryptocurrencies you won’t find on Coinbase, it does offer a decent variety with over 100 crypto coins and tokens. The platform is mostly free to use and provides an intuitive user interface, ideal even for beginners.

Coinbase also offers Coinbase Wallet, which is separate from the exchange and supports many cryptocurrencies that even the exchange doesn’t.

How Does Coinbase Work? Fees, Withdrawal, Safety

Binance

Binance is an international crypto exchange that offers many cryptocurrencies, including new entrants. So it’s a good choice for beginners looking to enter crypto trading. While it’s good for beginners, professional traders can leverage its more advanced trading tools and features.

The Binance dashboard provides a lot of useful information that can be helpful in entering or exiting crypto trades. With the web, desktop, and mobile access, it makes it super convenient for traders to use the exchange from anywhere.

Binance wallet works seamlessly with Binance and is a great choice for holding ERC-20 tokens.

FAQs

Which is the safest crypto wallet?

Cold storage crypto wallets are the safest option. These offline wallets like Ledger or Trazer are not susceptible to hackers as they are not connected to the internet.

Is Coinbase wallet custodial?

Coinbase wallet is a self-custodial crypto wallet, which makes it safer. However, Coinbase Pro wallets are custodial.

Are crypto wallets free?

Downloading and setting up most crypto wallets is free. You’re only charged a fee when you make a transaction from the wallet. The fee rate varies by wallet provider, type of transaction, and amount of transaction.

Which crypto wallet has the lowest fees?

Coinbase wallet has some of the lowest transaction fees. It supports over 5,500 crypto assets, including NFTs.

Team that worked on the article

Chinmay Soni
Contributor

Chinmay is a certified Investment Analyst and Portfolio Manager by the National Stock Exchange (NSE) Academy. He is currently associated with a $75 million VC fund and assists them in identifying and researching investable sectors and start-ups. He has completed his Bachelors of Business Administration from the Institute of Management, Nirma University and is currently pursuing MBA majoring in Finance from the same. He has 4 years of hands-on investment experience in a variety of asset classes and his professional qualifications include being a CFA Level 2 candidate and NSE Certified Market Professional Level 2.

He finds writing as a way to express his thoughts and share his knowledge with people eager to learn. He himself happens to be an avid reader of personal finance books and on top of his recommendation list are the international bestsellers ‘The Psychology of Money’ and ‘Think and Grow Rich’

He has this one strong belief as his motto: Life is what you make of it.

Olga Shendetskaya
Author and editor at Traders Union

Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.

Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.

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Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.