What Is a Cryptocurrency Wallet?

How Cryptocurrency Wallets Work

There's a lot of jargon in the cryptocurrency world. So, before diving deeper into how cryptocurrency wallets work, let's decipher some of the key terms:

• A blockchain is the foundational technology that many cryptocurrencies use. Cryptocurrency blockchains are decentralized and public, meaning a record of all the transactions that have occurred are stored on computers around the world. Each cryptocurrency has its own blockchain.
• A private key is often a randomly generated number. It gives someone control of cryptocurrency that's on a blockchain. You need the private key if you want to send or spend cryptocurrency.
• A public key is derived from a private key. It's a bit like a cryptocurrency account number.
• A cryptocurrency address is created based on a public key as an added layer of security. It's what you share with others to receive cryptocurrencies. Anyone can look up a cryptocurrency address on the blockchain to see its transaction history.

While the cryptocurrency itself is stored on the blockchain, cryptocurrency wallets store the public and private keys you need to access them and the addresses you need to receive them. You can have multiple addresses in your wallet—similar to how you can have multiple credit cards in a wallet or keys on a keychain.

Types of Cryptocurrency Wallets

You'll need a cryptocurrency wallet if you want to own Bitcoin, Ether or other cryptocurrencies. However, there are different types of wallets available.

Wallets are broadly classified as "hot" if the information in the wallet is connected to the internet or "cold" if it's stored offline. Hot wallets are more convenient if you frequently buy, sell or trade cryptocurrency, but it may be safer to store your cryptocurrency in a cold wallet.

Custodial Wallets

Many people start with cloud-based wallets that are hosted or custodial wallets. For example, if you create an account on a cryptocurrency exchange, the exchange may set up and manage a wallet on your behalf.

With custodial wallets, you'll log in to your account with a username and password, similar to logging in to a bank account online. You don't have to worry about keeping track of your keys; however, you also don't control the private key—the exchange does.

There's a risk of losing your funds if the custodian turns out to be a scammer or is compromised, although some exchanges have insurance and keep most of their cryptocurrency in cold storage, which may provide you with some peace of mind.

Software Wallets

You can download mobile apps and desktop software wallets, which may also be hot wallets. Storing the wallet locally could add a layer of security, as you don't risk losing your wallet if a custodian is compromised.

But someone could steal the information if your computer or mobile device gets infected with malware. You also risk losing the keys if your device is lost, stolen or damaged, although some cryptocurrency wallets have 12- to 24-word recovery phrases that you can use to get your wallet back if that happens.

Hardware Wallets

A hardware wallet stores a cryptocurrency wallet on a physical device, such as a USB drive. These cold wallets can be connected to a computer if you want to use your cryptocurrencies, but the information doesn't live on an internet-connected device or platform.

Some hardware wallet providers also offer apps that make it easier to buy, sell or exchange cryptocurrencies but keep the private key safely hidden.

Paper Wallets

When someone is using a paper wallet to store their cryptocurrency, that means their cryptocurrency information is written out on a literal piece of paper. Often, the information is created by a program and then printed, or a QR code is printed that can be scanned later. These aren't very popular options, as it's easy for the paper to be damaged or lost.

Where You Can Get a Crypto Wallet

You can get different types of cryptocurrency wallets from various sources.

Cryptocurrency exchanges, such as Coinbase and Gemini, offer free custodial wallets, though you may pay a fee to trade cryptocurrencies on the exchange. Some exchanges also have separate software wallets you can download and use to store your keys.

There are also other popular software options, such as the MetaMask app or browser extension that supports Ethereum-based tokens, or the Exodus desktop or mobile app. The non-custodial software options might not require you to create an account, which could help keep your identity and information private.

Ledger and Trezor are two popular hardware wallet options that work alongside the companies' apps and websites. Exodus also makes a hardware wallet. Unlike custodial and software wallets, you often have to pay for a hardware wallet.

Keep Your Keys Safe

There's a popular phrase in the cryptocurrency world: "Not your keys, not your coins." In short, whoever controls a private key controls the cryptocurrency associated with it. Never share your private key—even if someone promises you free coins or contacts you to say there's something wrong with your account (it's a scam).

If you share or someone steals your private key, they can transfer your funds, and there might not be a way to get them back. Or, if you lose your private key, you might not be able to access the cryptocurrency again.