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 at first, but doing this essential groundwork, and properly understanding how blockchain assets work, will set you up for success on your crypto journey.

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

Understanding What A Crypto Wallet Is

A crypto wallet is essentially an interface that allows people access to their digital assets. This is possible because crypto wallets store your private keys. So, to fully understand what a crypto wallet is, you’ll need to know a little bit about private keys.

Private keys are cryptic codes that are part of a cryptographic system ensuring security through mathematical complexity. They allow you access to your share of cryptocurrency on the blockchain. They’re like the password to your bank locker, unique to you, and if someone else gets hold of it, they can access or move your funds. 

You must keep your private keys secure because they’re what prove ownership and authorize transactions on the blockchain. Alongside your public key, they are used in the process of signing transactions in web3. These keys are critical because they’re what prove you own your crypto on the blockchain.

Simply put, a crypto wallet isn’t like your everyday wallet where you store your cash or cards. Instead, it’s a secure place to store these private keys, granting you access to your digital assets that live on the blockchain. 

Why Are Crypto Wallets Important?

Crypto wallets are your gateway to experiencing the ethos of web3 in full force. They allow you to explore blockchain technology, transact with it, build and secure your digital value, and join the generational shift away from the problems of TradFi and the disadvantages of web2 architectures across domains like art, tech, finance, culture, and more. 

Crypto wallets also provide an essential layer of security by shielding you from the daunting task of managing complex, raw, private keys, securing them in a manner that significantly reduces the risk of unauthorized access or accidental exposure. 

They offer convenience by eliminating the need to juggle strings of binary numbers, thus reducing human error and simplifying the management of your crypto assets, whether you’re dealing with one or multiple accounts. 

Moreover, they protect against financial loss through features like secret recovery phrases (or seed phrases), which can be used to regain access to your funds should you lose your device, thereby offering peace of mind and an additional layer of security when you interact with web3.

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 crypto 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.

Types of Crypto Wallets

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 a cryptocurrency storage solution where a third party, like an exchange, holds and manages your private keys, giving them control over your digital assets. This is exactly like trusting your valuables to a bank. This means you don’t have direct control; the provider manages your account and has crypto reserves on wallets they control, in turn offering you an interface where you log in and access your funds with an email and password. 

The only benefit here is ease; you’re spared from the responsibility of safeguarding your keys, and if you forget your password, recovery is straightforward. However, this convenience comes at a cost. 

You don’t truly own your crypto – the exchange does. They can deny you access under certain circumstances, and you’re often subjected to KYC (Know Your Customer) processes which give the exchange your personal data. Moreover, these centralized entities must comply with local laws, potentially exposing your assets to legal risks or provider-related issues. If a Centralized Exchange (CEX) goes bankrupt, your funds will also disappear.  

Remember the mantra: “Not your keys, not your crypto.” If someone else controls your private keys, you do not have ownership.

In contrast, non-custodial wallets put you in the driver’s seat, giving you complete sovereignty over your private keys and, consequently, your assets. This setup ensures you have full autonomy; no intermediary can interfere with your funds without your explicit permission. With non-custodial wallets, like those from Ledger, you embody the essence of blockchain’s promise: self-custody. This type of wallet is your only choice if maintaining true ownership of your digital assets is paramount, offering both security and the freedom to interact with the blockchain on your terms.

As you dive into the world of crypto wallets, one thing becomes clear: where and how you store your private keys matters. Online wallets, though convenient, are constantly exposed to internet-based risks like phishing attacks, malware, and hacking, which compromise their safety. On the other hand, offline solutions—like hardware wallets—take your keys out of reach from these threats, creating an impenetrable fortress for your digital assets. Let’s explore the differences between online and offline wallets and why hardware wallets like Ledger are the gold standard for crypto security.

Software Wallets

A software wallet is an application that you install on your computer or mobile phone that interacts with the blockchain; allowing you to send, receive, and manage your crypto assets. They’re handy for daily transactions since they’re always connected to the internet, but that fact is also what compromises their security.

We can categorize these into two broad categories:

Mobile Crypto Wallets

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

Many mobile wallets now support features like staking, interacting with decentralized applications (dApps), and even direct integration with crypto payment systems for in-store purchases. 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 vulnerable to malware and spyware. 

Although the security landscape for many mobile wallets has evolved with advancements like hardware-backed keystores for private keys and encryption, they remain susceptible to device theft, malware, and SIM swap attacks. 

It’s critical to ensure your mobile device is secure, with up-to-date security patches, strong authentication methods, and possibly a remote wipe feature in case of loss or theft. 

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.

Online Crypto Wallet 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.

Browser extensions or wallet extensions provide a quick way to access your crypto wallet directly from your web browser, particularly useful for interacting with dApps or making transactions on decentralized exchanges. 

Wallets like MetaMask or Trust Wallet have popularized this approach, offering both custodial and non-custodial options. The convenience they offer is counterbalanced by risks, including phishing scams where malicious sites mimic legitimate ones to steal your private keys. 

Security updates for browser extension wallets concentrate on bolstering phishing defenses, adding hardware wallet integration for transaction signing, and enhancing UI for better blockchain interaction, while users are recommended to download only from official sources, maintain updates, and be cautious of website legitimacy when managing transactions.

All in all, having your private keys online might be convenient for browsing Web3, but it also leaves you vulnerable to hacks deployed via your internet connection. For example, a sophisticated hacker can use your connected device as an attack vector, using it to penetrate your hot wallet and extract your private keys remotely. Securing private keys on a computer or phone means they are always exposed to this type of risk. What’s more, the screens on your internet-connected device can also be tampered with, leading you to sign malicious transactions. 

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 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. More accurately, a hardware wallet can act as a cold wallet if it never interacts with smart contracts. 

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.

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 the early days of Bitcoin.

However, paper wallets aren’t user-friendly at all. They don’t use that handy HD structure most hardware and software wallets do, meaning that 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 vulnerability is 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.

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. The right crypto wallet depends entirely on what configuration suits your demands for web3, but 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 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 you generate your keys for a paper wallet, 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 devices allow for Clear Signing, which translates complex transaction data into a human-readable format, allowing you to know what you’re signing. 

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.

Hardware wallets are great at protecting your private keys, but sometimes software wallets are required to connect to specific apps or platforms. In this case, you’ll want to use a hardware wallet together with a software wallet, and you’ll need 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 devices 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.

Does It Have a Secure Screen

As mentioned above, bad actors can spoof the transaction details on your device’s screen. The way to prevent this is to have a tamper-proof secure screen. In Ledger devices, the secure screen is driven directly by the Secure Element, meaning that you can be sure that what you see is what you sign.

Does It Have Recovery Features

You can always recover your crypto wallet accounts using your secret recovery phrase but what if you lose it? In this case, you would need a way to recover your accounts without it. Ledger provides such a service via Ledger Recover: it’s a fully optional paid service for those who want to access their crypto anytime anywhere, without their seed phrase. Ledger Recover is completely secure: you are the only person who owns your seed phrase, and the only person who has your complete seed phrase. 

What Is The Best Crypto Wallet?

The “best” crypto wallet is subjective, depending on what you prioritize most: security, ease of use, or specific features like DeFi integration. For security-first users, hardware wallets like Ledger devices are unparalleled, keeping your private keys offline and safe from online threats. If convenience is key, software wallets are ideal for those interacting with dApps or needing quick transaction access, though they require vigilant security practices due to their online nature. For beginners, they provide an easy entry point with support for numerous cryptocurrencies and an intuitive interface. 

How to Get a Crypto Wallet?

To get started, you’ll either create a new wallet and generate a unique seed phrase, or import an existing one. Hardware wallets must be purchased from the device manufacturer or a verified reseller, whereas software wallets can be downloaded from the internet for free. Always ensure you’re buying from reputable sources to avoid tampered devices, and for software wallets, secure your account with strong passwords and potentially 2FA. 

How To Use a Crypto Wallet?

Once you have your wallet, using it involves managing your digital assets. To receive cryptocurrency, you’ll share your public wallet address or QR code with senders. Sending crypto requires you to input the recipient’s address, specify the amount, and confirm the transaction details. 

With most hardware wallets, transactions are signed on the device itself for added security, ensuring you approve each transaction before it’s broadcast to the blockchain. You can check your balances directly in the wallet interface, and many modern wallets allow interaction with decentralized applications (dApps), staking, or yield farming, either directly or through third-party services. 

Always double-check transaction details to prevent errors, keep your software or hardware wallet updated to patch vulnerabilities, and never share your private keys or secret recovery phrase to maintain the security of your assets.

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 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, you will need a crypto wallet. Even if you’re just starting out, having a wallet gives you direct access to the blockchain and protects your assets. Think of it as your personal bank in the digital world.