What is a Crypto Wallet? How Does it Work?
- By Localcoin
- July 10, 2023
While traditional wallets and crypto wallets both offer a way to store assets, that’s where the similarities between them start and end. Cryptocurrency wallets are a thing of their own entirely, making them subject to many questions from newcomers. So, to help you wrap your head around this new kind of wallet, we’re here to break down the basics! Read on to learn more about what a crypto wallet is, how it works and to find out if you need different wallets for different cryptocurrencies.
Browse This Content:
- What is a Crypto Wallet?
- How Does a Crypto Wallet Work?
- What are the Different Types of Crypto Wallets?
- What is the Difference Between Custodial and Non-Custodial Wallet?
- Do I Need Different Wallets for Different Cryptocurrencies?
- Use Your Crypto Wallet to Buy and Sell Crypto With Localcoin ATM
What is a Crypto Wallet?
A crypto wallet is a necessary part of holding and transacting crypto coins. In order to send or receive any kind of coin, you’ll need a secure wallet that’s just for cryptocurrency. These specialized wallets exist to keep track of coin ownership, and to generate the public addresses you’ll need to make transactions.
They don’t literally hold your coins as a fiat wallet (traditional wallet) does; instead, your Bitcoin, Ether, Litecoin, etc. all exist on the blockchain — your crypto wallet simply gives you access to them. For beginners, it is essential to have a clear understanding of fiat wallet vs crypto wallet.
Your crypto wallet’s public address, balance and transactions can be viewed by anyone on the blockchain in a transparent, decentralized network, but this information is not tied to your identity. And not to worry, your actual coins themselves are securely protected in your wallet by private keys.
Private keys are long sequences of letters and numbers that are unique to you that both act as your personal password for accessing your coins, and as digital signatures that verify your transactions on the blockchain.
Keeping your private keys private is your responsibility. Anyone can access your coins with it, and no one can access them without it — even you. If you lose access to your private keys, there’s no way to retrieve them or your crypto holdings. Thankfully, there are many different types of cryptocurrency wallets to choose from that can help you keep your assets safe and sound. Let’s start by breaking down how they work.
How Does a Crypto Wallet Work?
Put simply, a crypto wallet works to allow the owner to safely and securely make transactions on the blockchain. Crypto wallets are responsible for:
- Broadcasting Information: During a transaction, your crypto wallet works to broadcast a file containing all the transaction information (how many Bitcoins are being traded, sender/recipient information, public address etc. ) to the blockchain.
- Private Key Management: Crypto wallets work to make your coins accessible in a user-friendly interface while keeping them securely protected at the same time through the private key function.
- Transaction Security: Crypto wallets help make transactions verifiable by adding your signature to transactions.
Cryptocurrency wallets work to perform these critical functions but differ in the ways that they perform these functions based on what kind of wallet they are.
What are the Different Types of Crypto Wallets?
There are a number of different types of crypto wallets out there to choose from, all with their own advantages and disadvantages. New crypto users deciding between wallets will have to assess the unique attributes of different wallets and decide which will work best for their needs.
Most cryptocurrency wallets fall into one of three categories: “hot, “cold” and “warm”. These terms are used to describe whether or not a wallet is connected to the internet — a factor that affects both its functionality and security.
Here is an overview of the key differences between hot, cold and warm wallets.
A “hot” wallet is a crypto wallet that is always connected to the internet and accessed by internet-connected devices. The biggest advantage of hot wallets? Functionality: the fact that these wallets are connected to the internet makes it quick and easy to buy, sell and transfer crypto.
Mobile hot wallets, for example, allow for fast crypto transactions on-the-go. Conversely, transactions from cold, hardware wallets require extra steps, such as plugging into a desktop computer and transferring coins to a hot wallet.
The biggest downside to hot wallets? Their security. Because of internet-related security threats, many crypto users feel more comfortable keeping small amounts of currency in hot wallets, while keeping the majority of their holdings in cold wallets. Some platforms that host hot wallets also require their users to share personal identification documents.
Some of the most common types of hot wallets include:
- Web wallets
- Desktop wallets
- Mobile wallets
- Software wallets
What is a cold wallet? It is a type of crypto wallet that is not connected to the internet. Typically, cold wallets are hardware devices that look like USB drives. Hardware wallets come with their own downloadable software to help users set up their wallets and view their portfolios without having to connect to the internet.
You can think of a cold wallet as a safe or a vault; it may not be the most seamless or accessible option, but it’s definitely a secure one. While cold wallets don’t offer the fastest, most convenient way to transact coins, they do offer more cybersecurity protection. Because they are not stored over an internet network, your private keys are safe from the online threats that hot wallets could be vulnerable to.
For even more cybersecurity protection, crypto users can even turn a sheet of paper into a cold wallet. A paper wallet is first generated online and then taken offline by printing or writing out the private and public keys on a sheet of paper. But while paper wallets are far more protected from internet threats, they can be lost, stolen or misplaced just like any traditional wallet.
Some of the most common types of cold wallets include:
- Hardware wallets
- Paper wallets
“Warm” wallets operate somewhere in-between hot and cold wallets. They can come in the form of downloadable software or even hardware, and are often protected by PINs and passcodes — no personal identification required. Warm wallets have the unique ability to both connect to the internet to work like a hot wallet and disconnect from the internet and safeguard your assets. While they sound promising, warm wallets are still quite new and only time will tell whether they are truly a happy medium between hot and cold wallets.
What is the Difference Between Custodial and Non-Custodial Wallet?
In addition to terms like “hot” and “cold,” crypto wallets are also defined as “custodial” or “non-custodial” based on who has access to and ownership of your private keys. Let’s dive deeper into what these two terms mean:
With custodial wallets, a third party holds and (ideally) keeps your private keys safe. Not all, but some web-based crypto wallets are custodial, including wallets provided by some of the most popular crypto exchange platforms. In these cases, your chosen crypto exchange has a custodial duty to protect your keys.
Having a custodial wallet that you can directly access through your crypto exchange platform is a convenient option. It’s one that offers you some relief from the responsibility of remembering your keys and keeping your assets secure. For example, these exchanges often offer two-factor authentication in case you forget your password.
That said, these online exchange platforms are vulnerable to the same risks that face any other online network, including hacks and site crashes; any threat to the security of the crypto exchange could put your assets at risk as well. Before selecting a custodial wallet as your wallet of choice, ensure that the third-party host is one you can trust to avoid scams and potential security breaches.
A non-custodial wallet describes a wallet where you, the owner, have private keys and keep them safe. This kind of wallet completely eliminates the intermediary between you and your coins, meaning that you are the only one responsible for the security of your private keys.
This may seem daunting as you can’t simply reset your password like you can with a custodial wallet in case you forget, lose or misplace your information. But non-custodial wallet owners do get access to another layer of protection in the form of a “seed phrase”: a 12-24 word phrase that will generate your private keys.
Keeping this phrase private and protected is, again, the responsibility of the wallet owner. From a cybersecurity standpoint, non-custodial wallets are objectively more secure than custodial wallets.
We have also picked the best non-custodial crypto wallets in 2023 that are backed by well-known crypto exchanges.
Do I Need Different Wallets for Different Cryptocurrencies?
While you don’t need to create different wallets for your different crypto coins, you do need to ensure that your wallet is compatible with the coins you wish to purchase. For example, a Bitcoin wallet can’t hold Ether, and you can’t send Bitcoin to an Ether wallet.
Those comfortable with using custodial wallets won’t have to worry much about this as the coins you send and receive will automatically go into their respective wallets once you select the correct currency. Non-custodial wallet users also don’t have to think much about setting up different wallets as most modern crypto wallets are multi-asset wallets. Multi-asset wallets generate different addresses for different coin types so that you can hold, send and receive various crypto coins from the same hardware or digital wallet, though technically these addresses lead to their own, smaller wallets.
Use Your Crypto Wallet to Buy and Sell Crypto With Localcoin ATM!
In this quick guide, we addressed the question "What is a crypto wallet?" and how it works. Crypto enthusiasts have lots of options to choose from when it comes to storing their coins in a crypto wallet. From the smallest sheet of paper to the most heavy-duty hard drive, there’s something out there for every kind of crypto trader.
Crypto users also have options when it comes to buying and selling crypto, and one of the easiest ways to do this is through a crypto ATM! Localcoin ATMs offer an accessible, user-friendly and secure way for anyone to buy and sell cryptocurrencies in their communities. This is especially meaningful for beginners who are seeking a hassle-free way to dive into the world of digital currency with confidence! As Canada’s largest Bitcoin ATM network with more than 700+ terminals across Canada and the U.S, it’s never been more convenient to buy and sell cryptocurrency.
Visit a Localcoin ATM in your community to start buying and selling cryptocurrency today.