A crypto wallet is a program or device that gives users access to their cryptocurrency. A cryptocurrency wallet uses public and private keys to store, encrypt, assign and authorize cryptocurrency transactions on the blockchain network.
How does a crypto wallet work?
Crypto wallets store, send and receive cryptocurrency. Every cryptocurrency uses public and private keys to conduct transactions. A public key is like your bank account number that you can share with anyone or institutions to allow them to send or take money from you. At the same time, your private keys act as your password or PIN and are unique to you.
The public and private keys of a crypto wallet are encrypted on a blockchain network. This makes the crypto wallet the bank you control with your keys and not in the hands of a third party. Your crypto wallet contains public keys that you use to receive cryptocurrency.
Users can use public keys to send or receive a request for an amount of cryptocurrency from another party. The blockchain system will then create an address or QR code to send the crypto to. The QR code stores financial information unique to each user.
Users can also exchange cryptocurrency for other cryptocurrency tokens or assets. This happens on a cryptocurrency exchange. Cryptocurrencies have different values on the blockchain network.
How are crypto wallets protected?
Passwords protect your crypto wallet. The blockchain network does not store user passwords and cannot reset them. This is due to the design of the crypto wallet, which is to deter company insiders from stealing it. If you lose or forget your password, you can recover it by using a mnemonic seed.
The mnemonic seed is a sequence of words that, like a password, only gives access to your wallet. If you forget or lose your mnemonic seeds, you will never be able to recover your wallet.
Does a crypto wallet store cryptocurrency?
No, a crypto wallet does not store any currency. Instead, it tracks transactions on the blockchain network. You can integrate your crypto wallet with various blockchain networks. This allows you to check your balance, send money and perform other operations. When you buy or sell crypto, you or the sender sign ownership with crypto wallets.
Are cryptocurrency wallets safe?
Crypto wallets are safe as long as you keep your private keys private and don’t lose them. You should also protect your device from cybercrime. The security of your crypto wallet depends on the type of wallet you use and the security measures you take.
Types of crypto wallets
There are two types of crypto wallets: hardware and software wallets. Crypto wallets are further divided into cold and hot wallets.
Hardware wallets or cold wallets
A hardware wallet is a small USB device with an OLED screen and buttons on the side that stores crypto offline. Another type of cold hardware wallet uses a smart card to generate private keys offline.
Hardware wallets do not expose you to online security risks as they are not connected to the internet. You sign all your transactions without your computer. They also allow you to generate a seed phrase to help you recover your cryptocurrency if you lose the device. We recommend using a hardware wallet to store your crypto. The disadvantage of cold hardware wallets is that they cost around $100. Still, they are worth it in terms of security and malware vulnerability.
How does a cryptocurrency hardware wallet work?
To use a hardware wallet, you need to connect it to a computer, laptop, or another device via a USB stick or Bluetooth. Most hardware wallets interact with computers in one of three ways:
– a separate browser-based software app
– a company-created app
– a web-based interface to store offline private keys
A paper wallet contains printed public and private keys on a piece of paper with a QR code. Users can scan the code, add it to a software wallet, and sign as transactions take place. It is safe to print a paper wallet with a printer that isn’t connected to the internet.
A paper wallet contains one-time keys. This means its security is crucial. If you lose the paper you will lose access to your crypto. It would be helpful to encrypt or duplicate the information on paper as a backup.
Another disadvantage of using a paper wallet is that you cannot create or send payments. That is why we don’t recommend using a paper wallet.
Software wallets or hot wallets
A software wallet is a program or app that stores private keys online and is not linked to a specific exchange. To access your hot wallet keys, you must first connect to the internet.
There are three types of software wallets:
- Mobile wallets allow users to access their crypto on their smartphones. They are easy to use as they include a QR code for allocating transactions.
- Desktop wallets are programs that users can install on their computers and laptops.
- Web-based wallets can communicate with decentralized applications and decentralized finance (DeFi) protocols. Most of them work as browser extensions. The best example is MetaMask.
Every crypto wallet type has its own use case but they all do the same thing.
Pros and cons of crypto wallets
Using a crypto wallet instead of traditional banking systems has several advantages. These are as follows:
- Self-ownership of money. Users hold their own private keys. The cryptocurrency only belongs to the user. Money in a bank account is the bank’s property.
- The ability to send crypto whenever you like to whoever you like. Cryptocurrencies are decentralized and censorship-resistant. Nobody can stop transactions on the blockchain.
The usage of crypto wallets also has some cons. These include:
- Responsibility. Being your own bank comes with responsibility. You are 100% liable for everything you do with your cryptocurrency.
- Computer knowledge. To use a crypto wallet you need computer knowledge to know what you are doing.
A crypto wallet is like your own cryptocurrency bank account. There are software wallets and hardware wallets. Software wallets are connected to the internet whilst hardware wallets aren’t. What the best crypto wallet depends on your own goals. We recommend using a hardware wallet.
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision.
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.