Cryptocurrency Explained: What Is a Crypto Wallet and How Does It Work?

Crypto Wallet 101

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. Learn about lost key recovery options here.

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 Crypto Wallet.  

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.

Learn about advanced wallet options here.

Using a Crypto Wallet with a Bitcoin ATM

One of the most common real-world uses of a crypto wallet is at a Bitcoin ATM. If you’re purchasing crypto through a CoinFlip location, the process is simple and fast.

• You open your wallet, select the “receive” option, and display your QR code.

• At the ATM, you scan this code, insert cash, and complete the transaction.

• Within minutes, the cryptocurrency is sent directly to your wallet.

This process allows you to buy crypto without needing a traditional bank account, making it one of the most accessible ways to enter the crypto ecosystem.

How to Keep Your Crypto Wallet Secure

Because your wallet controls access to your funds, security is critical. The most important thing you can do is protect your private key or seed phrase. It should be stored offline in a safe place and never shared with anyone.

It’s also important to use trusted wallet providers and avoid downloading apps from unknown sources. As crypto adoption grows, scams and phishing attempts have become more common, so staying cautious is key. Learn more about how to stay safe in the crypto space here. https://coinflip.tech/safety

For users holding larger amounts of cryptocurrency, many choose to move funds into cold storage to reduce exposure to online threats. Taking these precautions helps ensure that your assets remain safe and under your control.

Why Crypto Wallets Matter

Crypto wallets are more than just a tool—they represent a fundamental shift in how money works. Instead of relying on banks or financial institutions, wallets allow individuals to control their own assets directly.

This opens the door to new possibilities, from global payments to decentralized finance and beyond. Whether you’re buying Bitcoin, exploring Ethereum, or using crypto for everyday transactions, your wallet is what makes it all possible.

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.  

Frequently Asked Questions (FAQ)

What is a crypto wallet?

A crypto wallet is a software app, hardware device, or online service that allows you to access and use cryptocurrency. Instead of storing money directly, it stores the public and private keys needed to interact with your funds on the blockchain.

How does a crypto wallet work?

Crypto wallets work using two keys: a public key and a private key. The public key acts as your wallet address for receiving funds, while the private key allows you to authorize transactions and access your cryptocurrency.

What is the difference between a public key and a private key?

A public key is like an account number that you can share with others to receive crypto. A private key is like a password or PIN that gives you control over your funds and must be kept secure at all times.

Do crypto wallets actually store cryptocurrency?

No, crypto wallets do not store cryptocurrency itself. Your assets exist on the blockchain, and your wallet stores the keys that prove ownership and allow you to access them.

What are the different types of crypto wallets?

There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are connected to the internet and are convenient for everyday use, while cold wallets are offline and provide higher security for long-term storage.

What is a seed phrase or recovery phrase?

A seed phrase is a set of 12 to 24 words that acts as a backup for your wallet. It allows you to recover access to your crypto if you lose your device. Keeping this phrase safe is critical, as anyone with access to it can control your funds.

Are crypto wallets safe to use?

Crypto wallets are generally safe if used correctly. Security depends on how well you protect your private key or seed phrase. Using trusted wallet providers and storing sensitive information offline can significantly reduce risk.

How do you use a crypto wallet at a Bitcoin ATM?

To use a crypto wallet at a Bitcoin ATM, you open your wallet app, select “receive,” and display your QR code. You then scan the code at the ATM, insert cash, and complete the transaction. The cryptocurrency is sent directly to your wallet.

Can I lose my cryptocurrency if I lose my wallet?

If you lose access to your wallet but still have your seed phrase, you can recover your funds. However, if you lose both your wallet and your recovery phrase, your cryptocurrency may be permanently inaccessible.

Why do I need a crypto wallet?

A crypto wallet is essential for owning and using cryptocurrency. It allows you to send, receive, and store digital assets securely without relying on a bank or third party.