What is a crypto wallet?

golden bitcoin phone keyboard scaled

A crypto wallet, also known as a cryptocurrency wallet, can be either software or hardware designed to facilitate the storage and utilization of cryptocurrencies, which are considered digital asset securities. In the realm of cryptocurrencies, there is no physical cash or paper money to be placed in a conventional wallet or purse. Instead, cryptocurrencies reside on the blockchain, devoid of any tangible form that users can physically handle. Nevertheless, there remains a crucial necessity for individuals and organizations to ascertain ownership of their cryptocurrency assets and monitor the quantity held, akin to the manner in which a traditional bank account reflects a bank balance. The primary function of a crypto wallet lies in providing users with a means to validate their account balance, offering transparency into their cryptocurrency holdings. It serves as a tool for users to send and receive cryptocurrency transactions, resembling the functionality of a conventional bank account that facilitates various financial transactions. For many users, a crypto wallet serves as a central mechanism for effectively managing their cryptocurrency balances.

What makes crypto wallets essential?

Similar to any form of currency, cryptocurrency can be accumulated and utilized for various purposes and transactions. Crypto wallets play a fundamental role in making crypto assets and cryptocurrencies functionally practical for both individuals and organizations, much like how a bank account is foundational for fiat currency. Crypto wallets fulfill several critical functions that contribute to the practical utility of cryptocurrency, including:

Types of Cryptocurrency Wallets

There are two primary types of crypto wallets: hot wallets and cold wallets. Hot wallets are typically operational at all times and remain connected to the internet, while cold wallets, also known as cold storage, are usually offline and only connect to the internet as needed. Within the cold wallet category, two main types exist:

Within the hot wallet category, three types are prevalent:

How do cryptocurrency wallets operate?

In contrast to a physical wallet that can contain fiat currency or bank and credit cards, a cryptocurrency wallet doesn’t store cryptocurrency. Instead, it safeguards the essential credentials, specifically private keys, necessary for accessing the blockchain of a particular cryptocurrency. In the conventional system, users are provided with bank accounts featuring unique account numbers. Similarly, in the cryptocurrency realm, the public key serves a comparable role to a bank account number. However, possessing solely a bank account number or a public key is insufficient to execute a comprehensive set of transactions within an account. The blockchain operates on a public key infrastructure model for cryptography, where both a public key and a private key are intended to be known only to users holding a specific asset or cryptocurrency. The combined use of both keys is imperative for accessing and transferring cryptocurrency. Just as a personal identification number is required to access a bank account using a bank card, a private key is essential for accessing assets on a blockchain. Crypto wallets securely store the user’s private key and associated information, while public keys reside on the blockchain. By employing the combination of public and private keys, a crypto wallet facilitates secure operations.