Crypto wallets are digital tools that allow you to securely store and manage your cryptoassets. There are various types of crypto wallets, including hot wallets and cold wallets.
Researching the crypto market and identifying trading opportunities are important to successfully invest in crypto. But one of the most important aspects of owning crypto is storing them in a safe and secure place.
This is where a crypto wallet comes into play.
Consider a traditional wallet you use to store your cash and credit cards. You keep these valuables safe by keeping them in one place. It’s the same for your crypto transaction records that are stored on the blockchain.
A crypto wallet is similar. It’s a digital tool used to store, send and receive digital assets such as Bitcoin, Ethereum and others.
In this beginner’s guide, we’ll dive into the world of digital wallets, exploring the types available, how they work, and how you can keep your digital assets safe.
What is a crypto wallet?
A crypto wallet is hardware or software that interacts with blockchains and lets you store or trade digital assets, such as Bitcoin, Ethereum or any other type of crypto.
With a crypto wallet, you can manage your digital assets, send and receive crypto, monitor your real-time transactions, and keep your digital currency safe.
Tip: Many crypto wallets also provide oversight of your investments and the market through dashboards with monitoring and reporting tools.
Crypto wallets don’t actually hold your crypto like a traditional bank account. Instead, it stores your private keys that are used to access your crypto transactions.
These keys are essentially a long string of numbers and letters that act as your digital signature. Without them, you cannot access your funds.
There are two main types of crypto wallets:
- Hot wallets: These are pieces of software, connected to the internet, that help you buy, sell and store your investments. They are often considered more convenient, but less secure.
- Cold or hardware wallets: These are offline, physical objects that help you keep your crypto safe. They offer the highest level of security, but require additional steps to access your funds.
We will discuss the benefits of each type of wallet later in this article.
Crypto wallets can also be classified based on the types of digital currency they can send and receive. To buy and sell Bitcoin, you will need a Bitcoin wallet or a wallet compatible with that type of currency. The same goes for an Ethereum wallet, and so on.
Many wallets offer additional features such as the ability to exchange between different cryptos or even earn interest on your digital assets.
How do crypto wallets work?
Crypto wallets are essential for anyone who wants to buy, own or sell crypto. Your wallet stores your private and public keys and interacts with different blockchains to allow you to securely send and receive digital assets.
All crypto wallets work using the same principles via tools called keys. However, just as your crypto wallet isn’t a physical wallet, these are not physical keys that you carry around, either.
The keys in your wallet are used to facilitate transactions and keep the crypto in your wallet secure. Each wallet has a public address, a public key and a private key.
What is a public address?
A public address is a unique identifier used to receive crypto. Think of it as the destination address for your digital assets.
When you buy crypto, the seller sends a record of ownership to your public address. When someone wants to send you crypto, they use your public address to send it to you.
As the name suggests, this address is public and can be shared with anyone without compromising the security of your crypto.
What is a public key?
A public key verifies that you’re the owner of a public address that can send and receive crypto.
It’s a long string of letters and numbers. An example of a public key could be X8asDFk76z9T100zrU79xbM777.
Public keys can be used to encrypt messages that are sent to your public address, ensuring that only the intended recipient can read them.
They’re matched to the private key held within the crypto wallet, but unlike traditional banking details, these keys don’t provide any personal information about the wallet’s owner. This means that you can share your public key without risking security.
What is a private key?
A private key acts as the password for crypto wallets. It’s a secret code that allows you to access and transfer your crypto.
Your private key is linked to your public key and is necessary to verify any transactions on the blockchain. It’s like the password to your online bank account. It is the key piece to your crypto security — never share or give this key to anyone.
Anyone using a crypto wallet needs to take precautions to protect their assets, including creating secure passwords, regularly backing up wallet data, enabling two-factor authentication, and keeping their private keys in a secure location.
What types of crypto wallets are available?
When it comes to choosing a wallet, it depends on your individual needs and preferences. If you plan on frequent trading and transactions, a hot wallet may be more suitable for you. If you’re looking for more security for your long-term holdings, a cold wallet is the way to go.
Hot wallets
Hot wallets are connected to the internet, making them convenient and easy to access. They’re often used for frequent trading and transactions, as they allow for quick and easy access to funds.
However, because they’re connected to the internet, hot wallets are more vulnerable to hacking and theft. It’s important to only keep a small amount of funds in your hot wallet at any given time.
There are different types of hot wallets, including desktop wallets, mobile wallets and online wallets.
| Wallet type | How they are accessed |
|---|---|
| Desktop wallets | These are installed on a user’s computer and can only be accessed there, limiting your access — and hackers’ access — to your funds. While desktop wallets offer a higher degree of security than other hot wallets, they are still vulnerable to cyber-attacks. |
| Mobile wallets | These are downloaded on your phone and provide easy access to your funds, making them ideal for traders who regularly buy, sell and access their crypto. While there are still security threats, fingerprint and face ID technology in today’s mobile devices can help make mobile wallets safer. |
| Online wallets | These are accessed through a web browser and offer a high degree of convenience, as they can be accessed from anywhere in the world with an internet connection, but are considered less secure than other wallets. |
Cold wallets
Crypto hardware wallets, or cold wallets, are physical tools for keeping crypto. They’re not connected to the internet, making them far more secure than hot wallets — and ideal for long-term storage.
Cold wallets can come in the form of hardware devices, such as USB sticks or specialized devices such as Trezor and Ledger, or even as pieces of paper with codes that contain proof of crypto ownership.
The physical nature of these wallets can make them more secure because they are less likely to be accessed online by hackers.
Of course, cold wallets can still be stolen or lost, and you can forget how to access them. Many people put their hardware wallets in a safe deposit box at a bank or other secure location.
How do I decide which wallet to use?
Deciding which type of wallet to use depends on a variety of factors, including the frequency in which you trade, the budget allocated to your crypto wallet, and the unique features of the wallet.
Defining each of these factors will help to inform you which wallet you should use:
- How often you trade. If you’re an active trader who makes daily transactions, you’ll need a wallet with fast processing times and low fees. A hot wallet would be better, as it allows for instant transactions and easy access to your funds. Cold wallets are better suited for those looking to make less frequent trades.
- What you want to trade. Different wallets support different cryptos, so it’s essential to choose a wallet that supports the specific assets you want to trade. If you’re looking to trade lesser-known cryptos, you’ll need a wallet that supports a wide range of assets, preferably a multi-currency wallet.
- Your peace of mind. If you’re worried about hacking, having a physical cold wallet, stored in a safe deposit box at the bank or somewhere at home, provides the safest, most secure option. Others may be confident in their ability to keep their hot wallets secure in exchange for the convenience.
- How much it costs. While some hot wallets are free, others come with subscription fees. Most cold wallets, like other types of hardware, cost a one-time fee. Look out for transaction fees, which may vary by wallet. For instance, some cold wallets charge higher fees compared to others.
- What it can do. While the basics of each crypto wallet are the same, additional features can help set them apart. Hot wallets especially come with varying features, ranging from staking to lending capabilities, and decentralized finance functions. If you are an active trader who wants to dabble in DeFi or stake your assets, you may require a hot wallet with advanced functionality.
Five tips for keeping your crypto wallet secure
Even if you have the best wallet on the market, you should still take precautionary steps to keep your wallet secure and to prevent data breaches. Some simple tips include keeping your private key away from prying eyes and being mindful of which networks you connect to while accessing your wallet.
- Keep your private key private. This is the most important part of securing your wallet, as it’s essentially the key that unlocks access to all of your digital assets. Never share your private key with anyone, and always use two-factor authentication whenever possible.
- Keep your cold wallet secure. Make sure to keep your cold wallet in a safe place, such as a locked drawer or safe.
- Have a backup plan. This could mean keeping a copy of your private key in a secure location, or setting up automatic backups of your wallet data. That way, if anything goes wrong with your main wallet, you’ll still be able to access your assets.
- Don’t get phished. One way that people fall victim to crypto theft is through phishing scams. These are usually emails or messages that look like they’re from a legitimate company or organization, but are actually fake. The goal of these scams is to get you to share your private key or other sensitive information, which the scammers will then use to access your assets. To avoid falling for a phishing scam, always double-check the source of any message or email before responding, and never share your private key with anyone.
- Mind the network. Be careful about which networks you connect to when accessing your wallet. Make sure to only use trusted networks, and to always verify the authenticity of any new connections before allowing access to your wallet.
With the eToro platform, you can buy and trade the popular cryptos while also taking advantage of our award-winning social trading features, cutting-edge market insights and easy-to-use tools.
Final thoughts
Crypto wallets are an integral part of investing in cryptoassets. Although crypto exchanges have built-in security features, the very nature of decentralization means that many investors prefer to store and secure their cryptoassets.
Consider how you will use your cryptoassets when you are likely to sell your holdings and how much time you are willing to spend learning how to best utilize your crypto wallet.
Learn more about crypto on the eToro Academy.
FAQs
- What is a crypto wallet?
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A crypto wallet is a software program that stores private and public keys that are used to send and receive digital currencies. It also stores blockchain information, which is used to keep track of transactions.
- Does your crypto still grow in a wallet?
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Even when your crypto is in a wallet, its value will continue to fluctuate with the crypto market. Depending on the performance of the market, the value of your cryptoassets may rise, fall or stay much the same.
- How do I choose a crypto wallet?
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When choosing a crypto wallet, you should consider factors such as security, user experience and supported currencies. It’s important to choose a wallet that is reputable, has good reviews, and offers features that meet your needs.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.