A crypto wallet is a type of software or device that stores the public and private keys needed to interact with blockchains. With these, a user can send or receive digital currencies. To clarify, although many refer to wallets as digital safes for your cryptos, this is not the case. The records of your cryptocurrency balances and transactions are what is stored on the blockchain. This means that your assets are not contained within any single physical location, but rather the data that represents them is duplicated across multiple ledgers all over the world.
How Does a Crypto Wallet Work?
The best way to understand this concept is by using Bitcoin wallets as an example. Every Bitcoin wallet is associated with a set of public and private keys. The public key is comparable to an email address. Just as someone needs your specific email address to send you a message, they also need your public key or “receive address” to send you bitcoins. Luckily, both email and wallet addresses only function as digital locations to receive data but do not allow people to access or transfer the data received.
Not unlike your email’s login credentials, it is the private keys that grant you full access, control, and ownership of your bitcoin. This is where we must start to deviate from the email analogy. A Bitcoin wallet private key is a string of alphanumeric characters that is only known to you. Each address only has one unique private key associated with it. Anytime you transfer bitcoin out of your address you must give it a digital signature that is created through a complex mathematical process that employs your private key. Using any other private key that does not correspond to that individual address will result in an invalid signature. In other words, giving someone your private key is essentially the same as giving them your bitcoin.
Make sure you get a deeper understanding of Bitcoin, read the article:
Different Types of Wallets
Although we mentioned that crypto wallets do not actually hold your digital currencies, it is understandable why many treat them as if they do. These wallets contain your keys, which as explained, are the tools needed to send and receive bitcoin. As such, the safety and security of your wallet is equivalent to the safety and security of your bitcoin. There are multiple types of wallets or ways to store these keys, each with its own distinct set of pros and cons.
Paper wallets are the most basic and simple ways of storing your keys. These are literally pieces of paper with your public and private keys printed or written on them.
- No cost
- Easy to hide or keep anywhere
- Not connected to the internet and cannot be hacked (cold storage)
- You will need a different paper wallet for each type of crypto you own
- Could be easily destroyed (water/fire) and physically stolen
- Inconvenient and impractical for quick and daily transactions
Hardware wallets, which often resemble USB flash drives, are devices specifically designed to hold your keys digitally. They generally come with screens that allow you to interface with some basic options and software that can be used to connect these with computers to initiate transactions.
- Are compatible or able to hold keys for thousands of different cryptos and addresses
- Easy to use software
- Full ownership and control of keys
- Can be quite expensive
- Susceptible to physical damage
- Loss of wallet and seed phrase (a set of words that can be used to recover access to your keys), means loss of funds forever
Software wallets are programs that can be installed on many of the devices you own. These would include mobile and desktop wallets. Once installed, these programs store all of your keys and offer you clear interfaces to easily and immediately send or receive cryptos.
- Incredibly convenient and compatible with all your devices
- Simple interfaces and automated tools for transactions
- Keys are still under your control stored in the device of your choice
- Your devices are generally connected to the internet and could be hacked
- Additional wear and tear or exposure to elements from constant use for other purposes
- The security of this wallet is tied to the security of your device
Online Wallets are hosted on servers accessible through the internet. These are built-in features in all cryptocurrency exchange platforms. This means that you will have to access them through a third-party intermediary.
- Accessible anytime with an internet connection
- Already connected to exchange platforms for immediate trading activities
- Accessed with username and password that company can help you recover if lost
- You do not own the keys
- Highly susceptible to hackers
- You must trust the exchange
What Is The Best Crypto Wallet?
The best crypto wallet will depend on your preferences. If you value security, a hardware wallet will likely be the best option. It is as safe as a paper wallet, but with added functionality and support for multiple cryptocurrencies. On the other hand, if you value convenience, an online wallet will be accessible from anywhere in the world and it will instantly enable you to perform advanced trading activities. In addition, you can also benefit from the guidance and support of a trusted exchange.
By using Phemex, you do not need to compromise on security either. Any deposits you make into the platform’s built-in wallet will periodically be moved to cold wallets that require multiple offline signatures. This means that you do not need to worry about hacking attacks as the keys to your funds are not permanently stored online. All transfers are also rigorously checked by multiple founders and managers. As a Phemex user, you will have the full support of our customer service team should you need it. If you intend to trade your cryptos or make a profit with your cryptos, you will also have access to both our spot and derivatives markets. To learn how to trade, check out our article “how to trade”.
Find out why a Cold Wallet is important: Cold Wallet vs. Hot Wallet