What are cryptocurrency wallets

Cryptocurrency wallets are software used to communicate with blockchain networks to safely access, send and receive crypto funds or assets. Simply put, the software stores your crypto just like traditional wallets store your cash and credit cards. Where things get interesting is in the storage mechanism. Unlike fiat money — aka USD, AUD, etc. — which you store in a bank, crypto assets are stored on the blockchain. Just like you use a debit card to access your paper money at an ATM, you use your crypto wallet to access your crypto on the public ledger. The crypto wallet does not actually hold physical items — instead, it holds unique digital passwords or “private keys” which allow you to transact on the blockchain.

Crypto wallets come in the form of devices, mediums or smartphone applications and help you access records of transaction history that are held on the ledger. Simply put, if you want to actually use your crypto, you’ll need a wallet to do so.

Custodial v Non-Custodial

Custodial Wallets

Many people make their first crypto purchases on centralized exchanges. These are online marketplaces where you can buy, sell and store a variety of cryptocurrencies. Many of you may have heard of Coinbase, one of the most popular centralised exchanges in the United States and a great option for beginners! Exchanges like Coinbase are known as “custodians” because they have custody over your cryptocurrency. In other words, when you make purchases with the Coinbase app, Coinbase holds your crypto for you in its own “custodial” or “hosted” wallet. This way, Coinbase acts as a third-party with ownership of your private keys, and you are trusting the platform with the responsibility of keeping your crypto safe and secure.

Custodial wallets are a convenient gateway into the crypto world. It’s as simple assigning up for a Coinbase account with your email address, verifying your identity with a photo ID, choosing a strong password and linking your credit card or bank account to start buying. While Coinbase is great for holding small amounts of crypto and buying major cryptocurrencies such as bitcoin and Ether, the company does not yet offer NFTs.

For now, if you want to be able to purchase NFTs, you’ll need to have what is called a non-custodial wallet.

Non-custodial Wallets

For full control over your crypto assets, a non-custodial wallet is your best and safest bet. With these wallets, there is no third-party involved and you are the owner of your own private keys. While this is ideal for security, it also comes with great responsibility. More on the importance of private keys in just a bit. For now, let’s talk about where non-custodial wallets come into play.

If you have a Coinbase account but you now want full control over your crypto. You can transfer your crypto holdings from Coinbase into your own non-custodial wallet! This is especially helpful for those of you looking to store large amounts of crypto, or for people looking to purchase NFTs. Since NFTs exist mostly on the Ethereum blockchain, you would need to purchase Ether on Coinbase and then transfer it to your non-custodial wallet, which you would then use to buy an NFT from online marketplaces such as NiftyGateway, OpenSea, Rarible, etc. You can also buy Ether directly using a non-custodial wallet like MetaMask!

For the purposes of this article, we will be focusing specifically on non-custodial wallets, which come in several options: software (web, mobile or desktop), hardware and paper. Before we dig deeper into each category, let’s explore how wallets actually work.

How do they work?

Every cryptocurrency wallet functions using public keys and private keys. These keys work in tandem to make secure and verifiable cryptocurrency transactions on a blockchain.

Public Keys and Addresses

Wallet addresses are derived from a public and private key pair, and identify your account on the blockchain, thus allowing you to receive crypto. Think of an address like an email address — you can share it anywhere! Whoever knows your address can send you crypto. An Ethereum address will always start with 0x and then a string of 40alphanumeric characters. It may also appear as a scannable QR code.

Private Keys & Seed Phrases

Every public key is mathematically linked to a private key in a unique key pairing. A private key — which appears as a string of alphanumeric characters — is used to digitally sign a transaction to authenticate your transactions on the blockchain. One private key can generate several wallet addresses.

Seed Phrase > Private Key > Public Key > Address

A seed phrase is a group of 12 or 24 words usually generated within the wallet software that can be used to derive your private key. Further, your private key can be used to derive your public key — however, it is important to note that your public key cannot be used to recover your private key or seed phrase. Therefore, guard your private keys and seed phrases with your life!

Why you should always protect your private keys

Private keys and seed phrases must never be shared with anyone or left susceptible to discovery or theft. Think of a private key like a password or better yet, a PIN number — whoever has it has access to your crypto assets. Why is this so important? Unlike traditional money, stolen crypto is lost forever. There is no bank to call and report the theft; not even the government can help you recover lost or stolen assets. For this reason, when you create a crypto wallet and receive your private key and/or seed phrase, be sure to store it offline in a secret, safe location only accessible to you. Never store your keys in online notebooks unencrypted, or type into any website.

Types of cryptocurrency wallets

There are a few categories of crypto wallets.

Software Wallets – HOT storage

Software wallets are considered to be “hot storage,” a term referring to any wallet that has been directly connected to the internet. software wallets can be further broken down into several wallet types — web, mobile and desktop.

WEB WALLETS

e.g. Phantom for Solana

Web wallets include both browser extensions and websites, and can be used on most computers with access to the internet. MetaMask browser extension is a great web option generally accepted on all web3 applications. This makes them extremely convenient, however, they are vulnerable to cyber attacks.

MOBILE WALLETS

e.g. MetaMask Mobile, Rainbow, Argent

Mobile wallets are accessed via smartphone apps. As they are easily downloadable right to your phone or mobile-device, these wallets are great for everyday, on-the-go access and purchases. Just like your computer, you should always keep your phone updated and protected.

DESKTOP WALLETS

e.g. Mycrypto client-side

Desktop wallets are software programs downloaded and installed directly onto your PC or laptop. Private keys are input into this software and never leave the original machine onto which they were downloaded.

While convenient, software or hot wallets are best used only for storing smaller amounts of crypto due to the risk of hackers or viruses.

COLD storage

"Cold storage” wallets store your keys independently of an internet connection, providing higher security and protection.

HARDWARE WALLETS

e.g. Ledger, Trezor

One of the most secure options, hardware wallets are physical devices you can buy that allow you to make transactions without exposing your seed phrase or private keys to the internet. Hardware wallets typically look like a USB or thumb drive which you connect to your computer or laptop when making a transaction, and then remove once finished. Since your private keys are stored on the device itself and not on a computer or online platform, hardware wallets are very hard to exploit.

PAPER WALLETS

Paper wallets are really just a way to store the private key and public key pair for your account on a piece of paper. They can be a way to store crypto keys you don’t plan to access for a long time, but are generally deemed obsolete in lieu of seed phrases.

Where to get a cryptocurrency wallet

Depending on your specific needs, you can download your crypto wallet to your computer (desktop) or phone (mobile), create it on a web browser (web), buy it from a store (hardware) or print it out (paper). Where you go to get your crypto wallet depends on need and personal preference. Great options include the Rainbow mobile wallet, Ledger or Trezor for hardware or one of our favorites as a browser extension —MetaMask

MetaMask is an Ethereum wallet available for both web and mobile, and in our opinion, it’s one of the best crypto wallet options on the market and perfect for anyone interested in buying an NFT. Since its launch in 2016, MetaMask has gathered over one million monthly active users and is proving to be a popular, trusted option.

Phantom is a Solana wallet.

Photo by Behnam Norouzi