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What is a crypto wallet?

December 30th, 2020Joey PrebysJoey Prebys

As you learn more about cryptocurrencies, you may be considering hopping on the bandwagon and investing in some popular coins like BitcoinEther, and Litecoin. But, not so fast - first, you are going to need a cryptocurrency wallet. 

What is a cryptocurrency wallet, and how do they work? How can you make sure your crypto is safe? This article covers everything you need to know about crypto wallets as a beginner.

What is a crypto wallet?

When you hear the word wallet, you probably think of a traditional wallet that holds some cash, your debit cards and credit cards, and your ID. A crypto wallet, also referred to as a digital wallet, has some similarities to a conventional wallet.

It stores the information necessary to access your accounts (like your ID) and a way to directly access your funds (like a debit card). Unlike traditional wallets, however, there isn't actually any currency stored in a crypto wallet… but more on that later.

In the simplest terms, a cryptocurrency wallet is a software app or physical device that stores a pair of keys that allow you to hold, access, and use digital currencies like bitcoin.

How does a crypto wallet work?

A crypto wallet works by using two keys; one public and one private. 

Your public key is your wallet address and is used by those who want to send you cryptocurrency. This address is a mix of numbers and letters that is between 26 and 35 characters long. To make this address more usable, it is often displayed as a QR code that can be easily scanned by a camera device.

It is safe to share your public key with others as it can only be used to add funds to your crypto wallet and cannot be used to detract funds or see what is inside your wallet.

Your private key acts more like a PIN or verification code that is used to verify you are the cryptocurrency owner and allows you to spend it. As the name suggests, your private key should remain private and only known to you. 

In reality, your private key is a really long string of numbers. To make it easier for people to use, most crypto wallets will share your private key with you as a seed phrase. A seed phrase is a representation of a random number that is in an ordered sequence of 12 to 24 words.

It is best to keep your seed phrase written on a piece of paper precisely as displayed when setting up your crypto wallet. We recommend locking this piece of paper up in a safe or another equally secure place. NEVER share this information with anyone.

It might be easier to think of your crypto wallet as a keychain because the only information that it stores are your public and private keys. Your cryptocurrency lives on the digital ledger known as the blockchain and is encrypted with the information from your wallet that states you are the owner.

It sounds pretty complicated, but most crypto wallets come with apps that have incredibly easy-to-use interfaces that allow you to keep track of your holdings with live price charts and some even allow you to buy or sell crypto right from the app. 

How to pick the right crypto wallet

Now that you understand how cryptocurrency wallets work let's get into the different characteristics of a wallet. Crypto wallets come in many different formats, but before deciding which one will work best for you, there are two questions you should consider:

When talking about crypto wallets, the terms hot and cold refer to internet connectivity. A hot wallet is always connected to the internet. This constant connection makes it more vulnerable to a cyber attack than a cold wallet that does not require an internet connection and is stored offline. 

A hot wallet could be an excellent option for someone who makes daily transactions from their crypto wallet. In contrast, a cold wallet might be a better option for keeping more long-term crypto holdings.

A custodial wallet, also known as a hosted wallet, is maintained by a third party. In most cases, that third party is a cryptocurrency exchange. The main benefit of a custodial wallet is that you have the option to recover your password if you happen to lose or misplace it. However, the drawback is that you do not own your private keys -  the third-party hosting your wallet does.

There is a saying in the crypto industry, "if you don't control your keys, you don't control your coins." When using a custodial wallet, there is always a risk that the third party involved could be hacked or compromised, and you could potentially lose your crypto. 

Another risk factor of using a hosted wallet is that crypto exchange websites sometimes crash due to high activity volumes. When this happens, you can't access your coins, so you could potentially miss out on a profitable transaction. 

For these reasons, we never recommend using a custodial wallet - stick with a non-custodial wallet that is not hosted by a cryptocurrency exchange or investment platform and stay in complete control of your crypto. 

The most popular types of crypto wallets

Now that we have the two main wallet characteristics covered let's discuss the two most popular types. 

A great example of a non-custodial cold wallet is a hardware wallet. Hardware wallets store your private keys on a hardware device like a USB thumb drive. When making a transaction using a hardware wallet, you must plug the device into your computer and enter a pin. They make transactions online but are typically kept offline, increasing the security of your coins. 

One hardware wallet brand that is popular among crypto enthusiasts is Trezor, the first and most secure hardware wallet out there. With an easy-to-navigate interface and very transparent security protocols, it is clear why Trezor is so highly rated by its users.

For more information on Trezor hardware wallets, see our review of the Trezor One.

A software wallet is a wallet app that can be downloaded on your smartphone or on your computer's desktop. They are non-custodial hot wallets that become cold when the device is not connected to the internet.  Because they can be easily accessed from your phone, software wallets are great for using crypto on the go. Some software wallets also allow you to buy or sell crypto directly from the app - all without the oversight of a centralized third-party like an exchange. 

CoinFlip recommends using a non-custodial wallet because it gives you the power to be your own bank.

Final Thoughts

Now that you know everything you need to know about crypto wallets, you should be ready to get started buying and selling cryptocurrencies. Visit a CoinFlip ATM near you or contact CoinFlip Preferred to add some crypto to your wallet today!

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