What Is a Crypto Wallet?

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.

Understanding what crypto wallets do, and what they are for is essential in managing your own digital assets. So without further ado, let’s dive into what a crypto wallet is and everything else you need to know using one.

What Is a Crypto Wallet?

A crypto wallet is an interface that allows you to access and manage your funds on a blockchain, including sending and receiving valuable digital assets. In other words, your crypto wallet is the bridge between you and your crypto on the blockchain, allowing you to take part in crypto trading, DeFi platforms, or even NFTs.

However, despite what the name suggests, a crypto wallet does not actually contain your coins or tokens – those stay on the blockchain itself. Rather, the purpose of a cryptocurrency wallet is to secure private keys that allow you to access that crypto.

What are Crypto Wallets For?

Each account on the blockchain is controlled by a private key. That private key gives the owner access to your blockchain address and everything stored there.

In its raw form, a private key is a long string of 1s and 0s, but this is where the risk comes in: storing a number like that is impractical. How many humans do you know that could record 256 bits in binary?

Besides, 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.

This is where crypto wallets come in. They remove the need to record lists of 1s and 0s, eliminating the risks of recording them incorrectly, or simply taking up too much space. They store your private keys so you don’t have to.

How Do Crypto Wallets Work?

Most crypto wallets can generate and store multiple private keys, meaning you can manage multiple blockchain accounts with a single wallet. That’s because most modern cryptocurrency wallets use an HD structure that allows you to generate and recover your accounts using a single code called a seed phrase (or secret recovery phrase). 

This 12 to 24-word mnemonic phrase will let you restore all of your accounts with any compatible cryptocurrency wallet provider, acting as a master key to all of your accounts. Each account in an HD wallet operates separately, controlled by a separate private key. This means when you sign a transaction with one account, it doesn’t affect the other.

Each account you generate has a private key and a corresponding public key. While the private key grants the owner access to the blockchain account, the public key serves as the account’s unique identifier. It’s like a username, allowing the blockchain and its participants to find and send assets to your account.

When you sign transactions using your private key, this verifies that you authorize the terms of the transaction. To execute the transaction, the blockchain nodes verify your account has the funds required to execute your request and that your signature is authentic using your public key. In fact, that’s where your blockchain address comes from, it’s simply a more human-readable translation of your public key.

What Types of Crypto Wallets Are There?

There are several different kinds of crypto wallets, but the first categories you should understand are custodial and non-custodial wallets.

Custodial Wallets vs Non-Custodial Wallets

A custodial wallet is usually issued by a centralized crypto exchange, and it does not give you full control over your funds. In short, the crypto exchange keeps hold of the private key that grants true ownership to your assets. Much like a bank, the wallet provider owns your account and simply lets you use it.

The upside? You don’t need to worry about losing your keys (since you don’t hold them). You can log in with an email address and password, and follow a familiar password recovery process to regain access to your account.

The downside? The custodial wallet provider reserves the right to deny users access to their funds, meaning you don’t have true ownership of your assets. Plus, they will force you to undergo a KYC procedure which can be quite invasive. Centralized entities are subject to local laws and regulations, so wallet providers of this nature often face legal challenges too.

Remember: “Not your keys, not your crypto”. If a centralized entity controls the private keys of your account, you don’t really own the assets stored there.

In contrast, non-custodial wallets give you complete control over your private keys and, by extension, your assets. This model ensures you maintain full autonomy over your funds. Non-custodial wallets have no intermediary with the authority to freeze, access, or manage the assets without your consent. These are the types of crypto wallets Ledger makes, and the type of wallet you should rely on if you want to retain ownership of your assets.

Types of Non-custodial Wallet

Even under the non-custodial umbrella, there are countless types of cryptocurrency wallets from which to choose. However, let’s dive into some of the most common types of crypto wallets, how they work, and what to consider when choosing one.

Software Wallets

Software wallets, often known as hot wallets, operate as software on a host device such as a smartphone or laptop. These hot wallets store your private keys on that host device and rely on its screen. 

Unfortunately, since they are connected to the internet, software wallets are vulnerable to malware and spyware like all hot wallets. Plus, since your laptop or smartphone’s screen is not secure, software wallets are also vulnerable to spoofing attacks, wherein an attacker will change the details on your screen and convince you to sign a malicious transaction. As such, software wallets should only be used to hold minimal value, or alternatively, they should be used alongside a hardware wallet.

Mobile Crypto wallets

A mobile wallet is a software application that is installed on a smartphone or tablet. 

Like all software wallets, it stores your private keys on the host device, in this case, your smartphone. This means your mobile crypto wallet is considered a hot wallet and is vulnerable to malware and spyware.

Desktop Crypto Wallets

A desktop wallet is a software application installed and operated on a desktop computer. They work similarly to mobile wallets, though less convenient due to their lack of portability.  As a software wallet, they also store private keys on the host computer, but as they are less likely to connect to multiple wifi networks and rarely connect via NFC, they are widely regarded as more secure than mobile wallets. That said, they are still vulnerable to malware like all types of hot wallets.

Crypto Wallet Browser Extension 

These crypto wallets are accessible via a browser extension and are considered the most user-friendly and fastest interface to interact with a protocol. However, like all software wallets, they are susceptible to hacking risks. Since they are connected directly to your browser, they are always connected to the internet, leaving your keys very accessible to attackers.

Offline (Cold) Crypto Wallets

To keep your assets safe, your best option is to keep your private keys offline and isolated from any internet-connected devices, often called “cold” crypto storage. While there are a few different cold crypto storage options, the most popular cold wallets are paper wallets and hardware wallets.

Crypto Paper Wallets

A paper wallet is one of the simplest forms of cold storage wallet: it’s simply a piece of paper with private and public keys printed on it, usually in the form of a QR code. Since it is completely offline, a paper wallet is immune to online hacking threats. These are some of the earliest types of crypto wallets which were more common in Bitcoin’s younger era.

However, paper wallets aren’t user-friendly at all. They don’t use that handy HD structure most hardware and software wallets do; you won’t receive a seed phrase and you’ll need a separate paper wallet for each crypto account you have. 

Plus, sending crypto with a paper wallet can be tricky. There’s no handy interface included and it’s imperative to generate your key while your device is offline—otherwise, it may be compromised. 

Besides that, paper wallets limit your ability to explore: you can’t connect to a DeFi app with a paper wallet, and sending and receiving cryptocurrencies is a labor-intensive bore.

Their final damning vulnerability: physical damage or loss. Unfortunately, paper just isn’t that robust, and without a seed phrase, it can be impractical to protect and manage multiple paper wallets.

For this reason, hardware wallets are the more obvious choice for cold storage wallets.

Crypto Hardware Wallets

A hardware wallet is a physical device that stores private keys in a computer chip isolated from your internet-connected device. Like a paper wallet, crypto hardware wallets offer cold storage. And while hardware wallets are often called cold wallets, this isn’t accurate. A hardware wallet is simply a type of cold wallet.

When you sign a transaction with a hardware wallet, the signing process occurs offline, protecting your private keys from potential attackers and eliminating the risk of a tampered transaction. Once the transaction is signed, it’s safe to transfer to an internet-connected device, which your hardware wallet will usually do via a USB cable.

Unlike a paper wallet, hardware wallets are much more intuitive and user-friendly. They use an HD structure, much like a software wallet, so you can manage multiple accounts with a single device, and restore every account using a single seed phrase. Hardware wallets also offer an interface, usually in the form of a companion app, that allows you to interact with the blockchain, send and receive digital assets, and in some cases, even access blockchain apps.

Since they are secure and practical, hardware wallets offer the most practical solution for securing assets long-term and accessing the widest range of networks, platforms, and services.

How To Choose a Crypto Wallet

Each type of crypto wallet has its strengths and weaknesses, making some more suitable for certain purposes than others. To decide which is the right cryptocurrency wallet for you, there are a few things you’ll want to consider.

Crypto Wallet Checklist

Ask yourself the following questions if you’re trying to choose which crypto wallet is best for you.

Does It Offer Self-Custody?

As you know, custodial wallets don’t offer you ownership. You need a non-custodial wallet to be the only person in control of your digital assets. If you’re going to use a custodial wallet offered by a centralized crypto exchange, such as Binance or Coinbase, you should always transfer your assets to a non-custodial wallet as soon as you can.

Is It Secure?

You want a crypto wallet that is resistant to both digital online threats and physical hacking. Hardware wallets and paper wallets offer cold storage, meaning your private keys are protected from the internet’s threats. However, the way in which your paper wallet generates your keys, and the way your software or hardware wallet generates and stores your seed phrase can differ greatly.

Even the security of different hardware wallet providers will differ, due to the components they use and the implementation of their operating system or embedded apps.

The security of your crypto wallet can also depend on how you use it. While hardware wallets keep your keys offline, they can’t protect you if you sign a malicious transaction. Some hardware wallets will have measures in place to help you avoid making mistakes and signing away your assets. For example, Ledger crypto wallets benefit from a secure screen driven directly by the Secure Element, which stops hackers from spoofing transaction details on your Ledger device’s screen. 

Is it compatible with other crypto wallet types (hardware to software and vice versa)

Software wallets are convenient: they are free and let you access a whole range of apps and services, but they aren’t great at keeping your funds secure since they store private keys online.

Then hardware wallets are great at protecting your private keys, but sometimes software wallets are required to connect to specific apps or platforms. Thus, you’ll want to use a hardware wallet and a software wallet, and you’ll want them to be compatible. That way, you can access whichever platform you like without leaving your private keys in a vulnerable position.

Is it compatible with your chosen device?

Not all crypto wallets work on all devices. Some software wallets will have a desktop version but no mobile version or vice versa. You’ll also find that the companion apps for hardware wallets may not work on every internet-connected device either. If you use a less common operating system on your phone or laptop, this is an important feature to check before making your choice.

Does it Support Multiple Networks?

Many crypto wallets, typically software wallets, are designed for a single network. While they use an HD structure, allowing you to generate multiple accounts (each with its own blockchain address), they will all be separate accounts on the same network. 

However, as the blockchain ecosystem has evolved to include multiple networks, cryptocurrency wallets introduced the features to support them. For example, Phantom was once a Solana-only wallet but now supports Ethereum, Bitcoin, and Polygon networks too.

Many hardware wallets— Ledger crypto wallet included— let you create multiple accounts on several blockchains. Plus, you can also connect your Ledger device to a range of third-party wallets to access tokens and chains not yet supported. So, if you’re planning to use multiple networks, you might want to bear that in mind.

Does it Support Multiple Asset Types?

Even within the same blockchain ecosystem, there may be multiple different crypto wallets you can choose from; with many designed specifically for supporting one type of asset over the other. For example, some cryptocurrency wallets will only offer support for coins, others will also support fungible and non-fungible tokens. Even if a wallet supports one type of token, it may not support another. Thus, if you want to manage a niche asset type, this is a key consideration.

Does it support extra features such as buying, swapping, or staking crypto?

Different wallets will have different features and strengths. Some may prioritize security for example, whereas others may put more emphasis on being user-friendly. 

Ultimately, the crypto wallet that’s best for you depends on what you intend to do with it. If you’re storing cryptocurrencies, security should be of the utmost importance. There are several different threats to your digital assets, with some cryptocurrency wallets providing better protection from these threats than others.

How To Get a Crypto Wallet?

Getting a crypto wallet depends on which type of wallet you choose. Let’s dive into the most popular types of wallets and how to get them.

How To Get a Hot Wallet

Creating a software wallet, also known as a hot wallet, is easy. Firstly, choose which hot wallet provider is best for you, install the software on your computer or smartphone, and initiate the wallet set-up. 

At this point you should be shown the seed phrase—write that down somewhere safe! If you lose access to your laptop or smartphone, you can use the seed phrase to recover all of your accounts. From there, your hot wallet should be ready to use. Either it will generate you an account to start, or you will be able to generate a new account yourself. This will give you a new blockchain address. 

How To Get a Hardware Wallet

To get a hardware wallet, you will need to buy one, as hardware wallets are physical devices. Buy yourself a Ledger hardware wallet here, or find a local reseller using this list to get started. 

Once you unbox the device, you can initiate the wallet setup. Install the companion app on your internet-connected device, record your seed phrase, and generate your first account to get a blockchain address and start transacting!

How To Use a Crypto Wallet?

Using a crypto wallet depends on the type of wallet you have and the action you want to execute, but for software and hardware wallets the process of sending cryptocurrency to a friend is something like the following:

1. Ask your friend for their crypto wallet address, the unique identifier for their account. 
2. Initiate the transaction from your crypto wallet’s interface, usually by clicking on a “transfer” or “send crypto” button. 
3. Input your friend’s crypto wallet address into the “recipient” field, and the amount of crypto you’d like to transfer to them in the “amount field” and press confirm. 
4. At this point, your cryptocurrency wallet will usually ask you to review the transaction details and ask you to sign. Most crypto wallets will also give you an estimate of the transaction fee you will have to pay.
5. If the transaction details are correct and you’re happy with the transaction fee, sign the transaction. This will allow your crypto wallet to send the transaction to the blockchain for verification. 
6. If you have the funds in your cryptocurrency wallet for the transfer and the transaction fee, the blockchain nodes will process the request, moving the selected funds to your friend’s account.

Crypto Wallets: Your Key to the Blockchain

When it comes to exploring the world of crypto and blockchain, nothing is more important than the security of your digital assets. Understanding the difference between cold wallets and hot wallets, and how they work is a fundamental step in ensuring that you manage your assets properly and stay safe from scams and other threats.

Of course, if you’re serious about your crypto management then a hardware wallet is the only reliably secure way to secure your assets. This way, you can retain custody of your assets and keep your private keys safe- and offline.

Ledger has provided users with world-class security for a decade by securing private keys with a Secure Element chip and driving device screens directly with that secure chip. This proven security model has guaranteed that no Ledger crypto wallet has ever been hacked—the main reason Ledger has been the most popular hardware wallet provider for over a decade. 

Crypto security is all about taking control of your own assets, with confidence and responsibility. Ledger is just making self-custody more accessible for everyone. After all, if not self-custody, then why crypto?

Frequently Asked Questions About Crypto Wallets

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 on the market, 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, Ledger crypto wallets are impenetrable from external threats, thanks to the state-of-the-art components inside.

Do I Need a Crypto Wallet?

If you intend to hold any crypto tokens or interact with a blockchain network, a crypto wallet is indispensable for ensuring the security and functionality of your digital assets. Also, your crypto is only as safe as your wallet. So, while you can store it on a crypto exchange, it is not advised to do so.