What Is a Crypto Wallet?
|— Private keys define the ownership of crypto assets. But they can be difficult to manage and secure.
— Anyone can access your blockchain address once they have the corresponding private key. Hence keeping it secure is essential.
— Crypto wallets hold your private keys and allow you to manage your blockchain assets.
If you’re new to crypto and you’re wondering how crypto wallets work – and why you need one – you’ve come to the right place. Crypto can seem like a steep learning curve. Trust us – doing this essential groundwork, and properly understanding how blockchain assets work, will set you up for success (not to mention security) as you embark on your crypto journey.
Crypto is simply a form of value that exists on the blockchain. Put simply, blockchain is a digital ledger that keeps track of digital assets and, in fact, that’s where your crypto is really stored. The only way you can access the funds at a specific blockchain address is with something called a private key. This private key corresponds to your address within the blockchain. It gives you control of that address and the value stored there, and you can spend or exchange it when you want. Your crypto wallet is the link between you and your private key.
Thus, understanding what crypto wallets do, and what they are for is essential in managing your own digital assets.
What Is a Crypto Wallet?
Put simply, a crypto wallet is an interface that allows you to access and manage your funds on a blockchain. It acts as a sort of control panel, showing you exactly how much crypto you have. Plus, it allows you to communicate with the blockchain, sending and receiving valuable digital assets. You might say that your crypto wallet is the bridge between you and your crypto funds on the blockchain.
However, despite the name, a crypto wallet does not contain your coins or tokens – those stay on the blockchain itself. Rather, its purpose is to secure the all-important private keys that allow you to access your blockchain address, and everything stored there. To understand how that works, let’s first look at what a crypto wallet is for.
What Is a Crypto Wallet For?
Your crypto wallet exists purely to protect your private keys whilst giving you access to them. These private keys give you access to an address for sending and receiving cryptocurrency. They also offer the interface you will use to verify your identity, access specific tools, communities, and more. If you want to take part in crypto trading, DeFi platforms, or even NFTs, you’re going to need a crypto wallet.
But, Why Do We Even Need Crypto Wallets in the First Place?
To explain, a private key in raw form, is a scary-looking string of 256 1s and 0s. For a crypto user, storing this private key is both risky and impractical. To explain, anyone with your private key can access all of your funds.
For example, writing your private key down is an insecure way to store it. All it takes is one person to see this number, and all your crypto is gone. What if you have multiple crypto accounts? You’d need to write and store the private key for each one, amplifying the chances of somebody seeing this precious piece of information and understanding what it means.
Even storing it on your computer poses a risk. Remember: any device that is connected to the internet is at risk from hackers and malware. This means that storing your private key on your device also makes it vulnerable to hacks.
So, to interact with the blockchain safely and easily, you need to manage multiple keys at once, and must allow you to transact without ever revealing the keys to any other parties. And this is exactly what a crypto wallet is for.
What Types of Crypto Wallets Are There?
There are different kinds of crypto wallets: Software, hardware. Some – like exchange wallets – are custodial. But what does that mean exactly?
Let’s explore each of these further:
A custodial wallet is usually issued by a centralized exchange, and it does not give you full control over your funds. In short, the exchange keeps hold of the private key that grants true ownership to your assets.
Exchange wallets are custodial, which means that instead of trusting YOU with your own private key, the exchange itself holds it on your behalf. Instead, what you’ll get is login credentials for the platform, and this is how you’ll access your wallet. These platforms allow you to recover your account at ease, but it comes with a price – the cost of true ownership.
Storing your cryptocurrencies in a custodial crypto wallet is like parking your car in someone else’s garage. Even though you own the car, the key to the garage is with the garage owner. In case, when the garage owner doesn’t share his key with you, you’ll not be able to drive your car around despite owning it. This is a pretty accurate analogy for exchange wallets.
A Software wallet, more often known as a hot wallet, operates as software on a host device and they store your private keys within its interface. Mostly, these wallets are non-custodial, meaning they give you custody of your keys. However, they store your private keys on an internet-connected application on your phone or laptop and this is a risk.
These devices are always automatically connected to the internet, which makes them very convenient. You simply need to log in to begin interacting with online applications via the wallet interface on your computer.
However, this also means the keys to your crypto are always online – this means a hacker can use your personal device and connection as a vector for accessing your private keys remotely. The most common way crypto users get scammed is via a hacked device. So having a hot wallet might be easy, but it doesn’t offer the security you might want.
So with that in mind – how exactly DO you keep those keys away from hackers dwelling online?
A hardware wallet is a physical device that stores the private keys to your cryptocurrency funds away from the internet. Even if you make transactions with it, the wallet confirms the transactions in an offline environment. This process helps keep your private keys away from the risks of the internet at all times.
Furthermore, hardware wallets are non-custodial wallets. You are the only one who owns access to your private keys and funds. Thus, when you use one, you own the private keys associated with your cryptocurrencies. If you take crypto security seriously and understand the novel risks faced by this type of asset, you’ll know that this type of storage is the only truly safe option.
Hardware wallets are often called cold wallets, but this isn’t accurate. A cold wallet might not be hardware (there are other varieties), and not every hardware wallet is “cold”. Instead, a cold wallet, beyond keeping your private keys offline, goes a step further by never interacting with smart contracts or Web3 platforms. Avoiding signing smart contracts negates the risk of your wallet signing a malicious transaction, which puts the contents of your wallet at risk even if your keys are offline. The purpose of a cold wallet is purely for “vaulting” assets. To learn more, check out the Ledger Academy article on how to segregate crypto assets.
What Is The Safest Crypto Wallet?
If you’re looking to protect your crypto, the only real option is buying a hardware wallet. This way, you can retain custody of your assets and keep your private keys safe- and offline.
Ledger devices are some of the most secure crypto wallets in existence, securing your private keys with a Secure Element Chip. This component is used in a variety of secure environments such as credit cards, passports, and payment systems. Renowned for bringing the highest level of security to any system where sensitive data is managed. This means that, beyond keeping your private key offline and away from hackers, the Ledger device itself is also completely impenetrable from external threats, thanks to the state-of-the-art components inside.
If you actively trade cryptocurrencies Ledger is a great option. Not only due to its incredibly secure hardware wallets, such as the Ledger Nano and the Ledger Stax, but also because of its companion app Ledger Live, a software that enables you to easily manage your assets from your desktop or mobile. Ledger is the gateway to all your crypto needs, safely.