What is a Crypto Wallet?

by | Aug 18, 2022 | Blockchain, Blog, Crypto

The idea of a crypto wallet doesn’t seem too complicated at a first glance. Simply put, it’s the place where your cryptocurrencies and other blockchain-based assets such as NFTs are kept.

Obviously, however, this wallet is not physical and has its own particular ways of being accessed and used, so the question of what is a crypto wallet can be more complicated than most people think.

Crypto wallets or blockchain wallets allow their holders to make transactions to purchase, sell and trade cryptocurrencies and other digital tokens without requiring any sort of intermediary or central administrator to validate and process each transaction. 

There are complex systems that need to take place for blockchain wallets to operate, and the wallets themselves can be used for a variety of purposes. These are some of the things that you need to know to understand exactly what a blockchain wallet is.

How Crypto Wallets Work

Generally speaking, crypto wallets work by storing private and public keys for transactions. Each wallet makes contact with multiple blockchains to validate transactions, allowing its holder to store and trade multiple cryptocurrencies and tokens on different blockchain platforms.

Crypto wallets require specific types of keys to be accessed, which are denominated as private and public keys. Keys are codes that allow access to specific wallets, which are given to each user once they create their wallet. 

A public key can be shared with anyone, and those who have it can use it to send funds to its corresponding wallet. A private key should be kept only by the wallet’s owner and cannot be shared with anyone.

In order to access a wallet, its unique public key must be paired with its corresponding unique private key. In other words, a public key is equivalent to the user name in a regular internet platform account, and the private key is equivalent to the password. 

Crypto wallets may or may not be entirely anonymous depending on the platform in which they’re made. Platforms such as BetCoBit allow users to create fully anonymous crypto wallets, though some other platforms may keep some information about their users to streamline the user experience. 

Types of Crypto Wallets

Although the basic principles are the same for all crypto wallets, there are two main types of wallets that differ primarily due to how they’re stored and how their transactions are disclosed. These two types are referred to as hot and cold wallets.

Hot Wallets

These types of wallets are usually accessed through websites, desktop applications, or mobile apps. They are generally easier to use than their cold counterparts and are typically employed by users who wish to have quicker access to their cryptocurrencies and assets from anywhere at any time.

The ease of use that comes with hot wallets usually comes at the cost of security. Although these types of wallets still offer the higher security that comes with blockchain encryption, they tend to be more vulnerable than hot wallets to online attacks and leaks.

For these reasons, large crypto holders tend not to store significant amounts of cryptocurrencies in their hot wallets, and only use them to carry smaller expendable amounts for quick transactions. 

Cold Wallets

Crypto cold wallets usually require some sort of separate hardware such as a pen drive in order to be accessed. This makes them much more secure compared to their hot counterparts, but it also comes at the expense of practicality.

A cold wallet is as secure as the device that holds it. Devices can vary from dedicated computers to simple USB drives, or special pen drives made for the explicit purpose of holding crypto wallets. There are some hardware wallets designed to be immune to hacking, and some can even be connected to the internet without compromising security.

Large crypto holders usually keep the majority of their tokens in a cold wallet as it’s more secure and virtually inaccessible without the physical device that holds it. Even if the physical device gets lost or broken for any reason, most cold wallets have a recovery phrase used to recover the wallet’s funds in those cases.

Crypto Fiat Wallets

In the blockchain and crypto jargon, a fiat wallet can refer to any type of regular bank account or an account within a challenger or neobank, used to store regular fiat currencies.

However, there are some special types of digital crypto wallets that allow their users to store both fiat currencies and cryptocurrencies. This makes it easier to take advantage of market opportunities in crypto investments without having to make new fiat transfers, which can take time and money.

Another advantage these types of wallets offer is being able to receive fiat currencies in exchange for cryptocurrencies, making the process of selling crypto easier and faster.

Crypto fiat wallets, however, usually need to be hosted by specific platforms like Coinbase and are only as safe as the security protocols in said platforms.

How to Set Up a Crypto Wallet

Crypto wallets can be created on platforms such as Coinbase or Blockchain.com. Wallets created in this way are known as hosted wallets as they are based on larger platforms that provide friendly user interfaces for people to access their wallets in an easy manner.

Users may also choose to create self-custody wallets or non-custodial wallets, which are entirely devoid of any third parties, making the responsibility for saving private keys fall entirely on the user.

There are many ways to open a crypto wallet, and one of the easiest ones is to do it through platforms such as the aforementioned ones. These types of custodian wallet platforms usually come with easy guides on how to create a crypto wallet, for a seamless and easy user experience.

To open a hosted wallet, all you need to do is sign up as if you were signing up for any other internet service, by using an email address to create a username and a password.

Once you sign up and open a hosted wallet, the platform will manage the keys for you to streamline the process of making transactions, allowing you to do so with a simple user interface in their website or app.

If you don’t like to have a hosting platform and would instead prefer to make a self-custodial wallet,  the easiest and most popular way is to do so using the Coinbase app, or the Crypto DeFi wallet from crypto.com.

This way, you may also have to create a user and password on the platform, however, the private and public keys for your wallet will be sent to you, and you’ll need to write them down and manage them on your own. 

Why Should You Open a Crypto Wallet?

There are many advantages to having a crypto wallet as a complementary tool to current regular fiat wallets and bank accounts. 

Eventually, crypto wallets could partially or fully replace traditional banking, which is evident upon comparing the perks of crypto wallets to those in traditional financial services.

At a first glance, it might seem that having a crypto wallet is more of a hassle than it’s worth for a regular person who doesn’t own cryptocurrencies or NFTs and isn’t particularly interested in doing, as most people are still using regular centralized financial services. However, that isn’t the case at all.

Crypto wallets are becoming increasingly popular and streamlined. While the process of opening a wallet could’ve been complicated a few years ago when blockchain technologies were only known by a small niche, today, operating a crypto wallet is as simple, if not simpler than managing a regular bank account.

Beyond the simplicity, it’s always a good idea to have a crypto wallet set and ready and, if possible, start interacting with blockchain technologies as soon as possible. Blockchain technologies are revolutionary in many ways, and they will be massively adopted before we know it.

Having a crypto wallet and different crypto assets to invest and buy products with from now will allow you to get incredible value, get acquainted with different instruments and new asset classes that will emerge from blockchain, learn about decentralized finances and bring you a step closer towards the future.

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