What You Need to Know

This article covers the basics of crypto wallets. 

• Your public key or public address is a string of numbers and letters that other wallets can scan as a QR code and send money to. It is OK to give out your public key. 

• Your private key is a long string of numbers and letters that is represented by a seed phrase, which is a 12-24-word list that you can enter into any blockchain's wallet provider software to gain access to assets on the ledger. Never share your private key. 

• We recommend using wallets that are user-controlled (non-custodial) instead of controlled by an exchange (custodial). The CoinFlip Wallet is a great option.

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. Unlike traditional wallets, however, there isn't any fiat 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. 

Public Key

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 usually between 26 and 35 characters long. To make this address more usable, it is often displayed as a QR code that can be scanned by a smartphone camera. 

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. 

Private Key

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.  

Your private key is a really long string of numbers - 256 characters in the case of Bitcoin. To make it easier for people to use, most crypto wallets will share your private key with you as a seed phrase, which is also called a recovery phrase. A seed phrase is 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 vault 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. 

Fun Fact: The reason it isn't called a keychain is that when Satoshi Nakamoto launched Bitcoin, there was already a popular password-saver product called "keychain". 

It sounds complicated, but most crypto wallets come with apps that show easy-to-use interfaces - we recommend the CoinFlip Wallet 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, it is important to know the different types of wallets: 

Non-Custodial Wallets

A non-custodial (or self-custodial) wallet gives you full control and ownership over the assets inside. Funds can be freely accessed and used at any time, without approval from a third party. This wallet type was developed by Satoshi Nakamoto as part of the Bitcoin protocol.  

With a non-custodial wallet, you’re in charge of your private keys (or seed phrase). As we mentioned before, your private key is your secret-keep it to yourself. It’s a good idea to keep this info somewhere super safe, like a vault. And remember, NEVER share it with anyone.

Hot or Cold Non-Custodial Wallet

When talking about non-custodial 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 does a lot of transactions from their crypto wallet. In contrast, a cold wallet might be a better option for keeping long-term crypto holdings. 

Hot wallets are also called software wallets, which are apps that can be downloaded on your smartphone, Internet browser, or computer. Because they can be easily accessed from your phone or laptop, hot wallets are great for taking advantage of market opportunities to do swaps or trades, or for online shopping. Some hot wallets even let you buy or sell crypto directly from the app.   

The CoinFlip Wallet is a non-custodial hot wallet that supports the most popular cryptocurrencies. It’s free to download and comes with 24/7 support from our Chicago-based team. 

Cold Wallet (Hardware Wallet)

A more accurate name for a cold wallet is a hardware wallet. Cold wallets store your private keys on a physical device like a USB thumb drive. When making a transaction using a cold hardware wallet, you must plug the device into your computer and enter a pin. While plugged in to the computer cold wallets can perform online transactions, but once you’re done using it you can unplug it to take it offline, where it cannot be accessed or hacked. 

Custodial Wallets

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 or seed phrase 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 lose your crypto.  

Another risk factor of using a custodial 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 do not 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.  

Where To Next?

Now that you have a basic understanding of crypto wallets, you may be ready to get started buying and selling cryptocurrencies. If you need additional help, our Customer Support team is available 24/7 and can guide you through the process of setting up your crypto wallet. Additionally, CoinFlip Preferred’s knowledgeable client managers, can address any crypto wallet inquiries, especially if you’re interested in purchasing crypto via wire transfer.