What Is a Crypto Wallet? [Beginner’s Guide]

If you’re interested in becoming a crypto investor, then you must first understand the fundamental tools of cryptocurrency trading. One particularly indispensable is a crypto wallet. Crypto wallets play a vital role in the world of blockchain technology, enabling traders to monitor, manage, and transfer their cryptocurrency assets. 

Despite this, many myths and misconceptions surround the utility and characteristics of crypto wallets. In this article, we aim to demystify the concept of crypto wallets so you know exactly what they are and how to use them. We’ll also discuss the key functions of these wallets and address the two main types of crypto wallets you can own as a trader. Let’s begin!

What Are Crypto Wallets?

Crypto wallets are devices or applications that function as a wallet for cryptocurrency assets. Many believe that crypto wallets store cryptocurrency, similar to how a typical wallet stores a person’s cash. However, this is a common misconception. 

Cryptocurrency is not a physical asset and cannot be stored anywhere. So rather than storing actual crypto assets, cryptocurrency wallets store passkeys that enable access to these assets. These passkeys are known as private keys. 

Simply put, cryptocurrencies are pieces of data that are scattered in a public database known as the blockchain. The role of a crypto wallet is to ‘find’ all the pieces of data that are associated with a trader’s public address. This is what allows traders to view how much crypto they own and manage their holdings. 

If you want to sell crypto, you will just have to enter the recipient’s wallet address, select how much you want to send, and finalise the transaction using your private key. 

Why Are Crypto Wallets Important?

Whilst cryptocurrency wallets don’t actually store your crypto, they still play a vital role in the transaction and management of these assets. Crypto wallets enable the utility of cryptocurrency between both individual traders and organisations. 

Here are a few key functions of crypto wallets: 

• Asset Management – Crypto wallets allow users to manage and monitor the balance of their assets.

• dApp Usage – Users will need a crypto wallet to access and connect to dApps (decentralised applications).

• Transactions – Similar to a traditional bank account, traders can send and receive cryptocurrency using a crypto wallet. 

• Transaction History – Crypto wallets not only facilitate transactions but also record them, allowing users to keep track of and review their past financial activities. 

• Privacy Features – Some wallets provide additional privacy features that enhance traders’ anonymity. For instance, stealth addresses act as a proxy for wallet addresses, enabling untraceable crypto transactions. 

How Do I Use a Crypto Wallet?

If you’re new to trading, a crypto wallet may seem like an overly complicated piece of tech. However, this couldn’t be further from the truth! Cryptocurrency wallets are fairly straightforward to use, and wallet providers usually do whatever they can to assist their users. 

After you’ve signed up for a crypto exchange (such as Kraken) or a crypto brokerage-matching platform (such as altrix-edge.club), you’ll find that you need a wallet to start trading cryptocurrencies. Some brokerages and exchanges provide a crypto wallet on their users’ behalf. However, many traders prefer to retain control of their private keys, so they will opt to find a wallet on their own. 

Once you’ve decided which type of crypto wallet you want to use, you just need to set it up. For hot wallets, you’ll need to download the provider’s app on your preferred device. Alternatively, for cold wallets, you must order a physical device and await its arrival. Further in this article, we’ll discuss the pros and cons of hot and cold wallets so you can decide which option is best for you! 

As soon as you’ve downloaded the necessary software or received your physical wallet, you just need to follow the provider’s instructions to finish the set-up process. Don’t worry, this usually doesn’t take long! Finally, you can link your wallet to your broker or exchange, and you’ll be all set to start trading crypto assets!

The Different Types of Crypto Wallets 

Now that you understand what a crypto wallet is, it’s time to learn about the two main types of wallets – Hot Wallets and Cold Wallets. Each of these wallet variations has its own advantages and drawbacks, which we will soon address. 

It’s important to carefully consider the unique functions and attributes of these wallets, as the best one for you will heavily depend on your individual trading needs. With that in mind, let’s find out more about the two main types of crypto wallets: 

Hot Wallets

Pros

• Easily accessible
• Typically free to use 
• Plenty of recovery and backup options
• User-friendly 

Cons

• Can be vulnerable to hacking 
• Requires an internet connection 
• Some features may be restricted in certain jurisdictions 

Top recommendation – Trust Wallet

A hot wallet (also known as a software wallet) is a crypto wallet that consists of an online application. This type of wallet only requires an internet connection to work through any compatible device (e.g. desktop, tablet, mobile), making it a highly convenient option. Additionally, hot wallets are generally very user-friendly and free to use, making them ideal for inexperienced and first-time traders. 

On the flip side, hot wallets are susceptible to hacking due to potential hidden vulnerabilities within the application. Cybercriminals can target hot wallet apps through malicious programs to steal crypto assets and wreak havoc. Therefore, if you’re planning on storing a large amount of crypto, then a hot wallet may not be your best option. 

Overall, hot wallets are a great option for beginner traders who intend to store smaller amounts of crypto and participate in day-to-day trading. With easily accessible apps that have little-to-no learning curves, a hot wallet is the ideal place to set off on your crypto trading journey! 

Cold Wallets

Pros 

• Enhanced security against attacks
• Easily portable 
• Increased privacy 

Cons

• Susceptible to theft, loss, and damage 

• Requires up-front cost
• Have a steeper learning curve 

Top recommendation – Ledger Hardware Wallets

A cold wallet (otherwise known as a hardware wallet) is a physical device that resembles a USB. Rather than being connected to the internet to access crypto assets, cold wallets function by being plugged into a compatible device such as a computer. Since these wallets primarily consist of hardware as opposed to software, they are significantly less vulnerable to cyber attacks. This type of wallet is considered the safest way to store cryptocurrency. 

However, since a cold wallet is a physical device, traders have to be careful not to lose or damage it. If the device is stolen, lost, or damaged beyond repair, then usually nothing can be done to cover a trader’s private keys. Furthermore, these devices require an upfront cost of anywhere between £50 and £200. These wallets also have a steeper learning curve compared to their software counterpart. 

All in all, if you take your security very seriously and/or are planning to own large amounts of cryptocurrency, then cold wallets are the best option for you. Just remember to keep your device safe and locked away when you’re not using it. But, if you’re still new to trading or have a low budget, cold wallets may not be your first choice. 

Conclusion

To conclude, a cryptocurrency wallet is a device or application that enables traders to access their crypto assets. Rather than a form of crypto storage, crypto wallets are a form of private key storage. Private keys allow users to view and manage their crypto wallets from a public ledger known as the blockchain. To make a transaction with another trader, you just need to input their wallet address and the amount of crypto you wish to send.

The two main types of crypto wallets, (hot) software wallets and (cold) hardware wallets, have distinctive attributes, advantages, and disadvantages. 

Hot wallets are extremely convenient, affordable, and beginner-friendly. However, they can be vulnerable to security threats and need constant internet access to operate. These wallets are best for inexperienced traders who want easy access to their holdings and intend to store smaller amounts of crypto.

On the other hand, cold wallets are highly secure, private, and easily portable. However, they are more costly than their counterparts and have a much steeper learning curve, which may be off-putting for beginner traders. These wallets are the ideal option for traders who value security over convenience and intend to store substantial amounts of crypto.

The first step is deciding which type of crypto wallet is the most suitable for you. Next, you’ll need to download the wallet’s software (for hot wallets) or order the physical device (for cold wallets). After this, you just need to follow the provider’s instructions and then link your wallet to your chosen brokerage or exchange. All that’s left is to invest in your favourite cryptocurrencies and manage your assets through your trusted crypto wallet! 

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