Crypto Wallets Explained—How They Keep Your Crypto Safe
Cryptocurrency wallets allow you to access your digital assets through an interface and keys. Discover how crypto in wallets work and whether you need a wallet.
Published August 19, 2022.
A crypto wallet is an interface between you and a blockchain network when you want to access your cryptocurrency holdings. Like the way you need an account number and pin to access your bank account, you also need a public and private key when using a cryptocurrency wallet.
There are different types of crypto wallets:
Hot wallets (online vaults):
- Mobile wallets: Software wallets you download on your smartphone.
- Desktop wallets: Software you install on your desktop.
- Online wallets: Owned and controlled by third parties.
Cold wallets (offline vaults):
- Paper wallets: A unique way of storing keys in written or printed papers with QR codes.
- Hardware wallets: Offline wallets that often resemble USB devices.
What Happens When You Put Your Crypto in a Wallet?
While bank accounts store fiat currencies, cryptocurrency wallets technically don’t hold digital assets. Your assets live on blockchain networks which you access through an interface and keys.
The keys prove ownership of crypto holdings and let you perform transactions. Once you lose or misplace your private keys (particularly for cold wallets), you'll most likely lose access to your funds. Therefore, storing your private keys safely or using wallets is essential.
Since crypto wallets are digital asset management solutions, there are best practices you should implement to keep your account safe:
- If you're using a software wallet, update it frequently since the latest versions are advancements of previous versions.
- Use Two-Factor Authentication (2FA) if your wallet or exchange allows it.
- Don’t share your private keys with anyone. Treat your keys as your Social Security Number or banking pin
- If you're using a crypto exchange or online wallet, create strong passwords using password managers.
Do You Really Need a Crypto Wallet?
From a technical point of view, you don’t need a crypto wallet to own digital currencies. You can purchase coins and leave them in exchange. However, you need a crypto wallet when you want to:
- Manage your crypto holdings in one place
- Control your private keys
- Transfer and receive crypto to and from various addresses
- Interact with domain names instead of the long and complex public keys
- Interact with decentralized finance (DeFi) apps
- Pay for goods and services at various online stores that accept crypto