What Is a Crypto Wallet? Understanding Types, Uses and How They Work

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Once you’ve bought cryptocurrency, you will need a safe place to keep it. Unlike traditional money, you cannot store cryptocurrency in your purse — you will need a special crypto wallet. But what is a crypto wallet, and how does it work? Here’s what you need to know.

Introduction to Crypto Wallets

A crypto wallet can be either a software program or a physical device that allows you to store your crypto. It also enables you to securely access and manage cryptocurrency. A crypto wallet can come in the form of a hardware wallet that looks like a USB stick or a mobile application like the Coinbase Wallet.

Security and storage are some of the biggest concerns when it comes to investing in crypto. If you are not careful, you might lose the currency you are holding. This is where crypto wallets come into the picture.

When you hold your crypto in your wallet, you have full ownership and control over your private keys and funds allowing you full autonomy. On the other hand, crypto held in an exchange means control is given to them to buy, sell and trade your cryptocurrency. You also rely on the exchange for security.

How Crypto Wallets Work

Understanding what a crypto wallet is and how it functions can be a bit intimidating. If you have a basic overview of private and public keys and the role of blockchain, it is a little easier to conceptualize.

Private and Public Keys

A crypto wallet is equipped with two sets of keys: a private key and a public key.

The public key is like an address that is used by the sender to send crypto to your wallet. The private key is like the password to your safe deposit box in which you have stored the crypto. Anyone who has access to the private key will be able to make transactions with the crypto that you own. That is why the private key needs to be guarded very carefully.

Role of Blockchain in Wallets

Like everything related to cryptocurrencies, the workings of a crypto wallet are also associated with the blockchain network. Wallets do not store actual cryptocurrency but provide access to the blockchain records. 

Blockchain is a public database that stores crypto-related data in the form of blocks. These blocks contain records of all crypto transactions and the owners of the respective keys. The software inside a crypto wallet stores these addresses and allows the holders of the crypto to make transactions with the currencies that they own.

Types of Crypto Wallets

You have choices between two types of wallets, a hot or cold wallet. Here’s a look at the examples, benefits and risks of each wallet. 

Hot Wallets — Online Wallets

Hot wallets are cryptocurrency storage solutions that are connected to the internet. They provide people with quick and convenient access to digital assets. 

Examples of hot wallets include the following: 

• Mobile wallets: These applications can be installed on cell phones for people who want to manage their cryptocurrencies on the go. 
• Desktop wallets: These are software programs that can be installed on a desktop or personal computer. 
• Web wallets: Online platforms like Coinbase Wallet that can be accessed through web browsers offer convenience for quick transactions.

Hot wallets are beneficial for those who need to frequently access their crypto wallets. Many hot wallets are user-friendly and have accessible interfaces so that even beginners can use them. However, hot wallets are vulnerable to phishing, cyberattacks and hacking. 

Cold Wallets — Offline Wallets

Cold wallets are generally offsite storage for your cryptocurrency. These wallets are not connected to the internet so they provide greater security than a hot wallet. 

Some examples of a cold wallet include the following: 

• Hardware wallets: These are physical devices you can buy to store your cryptocurrency. The cost of the devices start around $80.
• Paper wallets: You can use an offline generator to produce your keys. Print these keys and store them in a safe and secure place. 

Because they are not connected to the internet, cold wallets offer enhanced security because this wallet isn’t susceptible to online hacking. One drawback is that cold wallets are prone to getting lost or damaged. 

How To Choose the Right Crypto Wallet

So how do you choose the right crypto wallet? You should balance the security of the wallet with how easy it is to use. 

Here are some factors to consider: 

Security Features

What kind of security features does the wallet have? If it is a hot wallet or one that is connected online, you want to ensure there are multiple lines of defense to protect your wallet. 

• Is the wallet equipped with multi-factor authentication? This is a fancy way to ask if the wallet has multiple ways to verify identity in case one factor (like a password) is compromised. 
• Is the wallet encrypted? Encrypting means that there is a password required to access and manage the account. 
• Does the wallet have backup options? Some wallets have a seed phrase backup. This is typically a phrase of 12 to 24 words that you need to write down. Some wallets have the option to export your private keys. Other wallets will have an encrypted cloud option where you can store your seed phrase and private key.

Supported Cryptocurrencies

You will need to look into whether your wallet supports the cryptocurrency that you purchased. For instance, some wallets may be compatible with Bitcoin or Ethereum, but maybe not other alt coins.  

Ease of Use

You must evaluate how easy it is to access, track and sell your cryptocurrency in your wallet. Having a user-friendly interface with clear instructions on how to manage your cryptocurrency is helpful so you’re not spending too much time trying to troubleshoot your wallet. 

Cost 

Software wallets are usually free. If you plan to use and access your crypto wallet frequently, a software wallet is likely a better fit. They are easily downloadable on your phone or browser, but are more prone to security risks. Some examples of software wallets include Coinbase and MetaMask. 

Hardware wallets have a cost associated with them. They range from $79 to $249 depending on the model and features. These are physical devices and are considered more secure. One example of a hardware wallet is Trezor Safe 3, which costs $79.

Setting Up a Crypto Wallet

It isn’t that difficult to set up a crypto wallet once you’ve decided whether a hot or cold wallet works for you. Here is a step-by-step guide on how to set up a hot and a cold wallet: 

Hot Wallet Setup

1. Choose a reputable hot wallet. Select a hot wallet that speaks to features you prefer and aligns with your financial and lifestyle goals. Some options for hot wallets include Coinbase, Exodus and MetaMask. 
2. Download the app to your computer or phone. For your computer, visit the website and download the appropriate version. For the app, use the Google Play or Apple Store and download the correct version for your operating system. 
3. Create a new wallet account. Open the application and set up your account. You will be asked to supply a password. Make certain you choose a secure password.
4. Protect your seed phrase. The wallet will generate a seed phrase that is 12 – 24 words. It may be used to recover your wallet if needed. Make sure you write your seed phrase down and store it carefully. 
5. Fund your wallet. You will need your wallet’s public address to add cryptocurrency. Use this address to transfer funds. 
6. Add security features. Enable 2FA authentication if applicable, and also regularly update the wallet software. 

Cold Wallet Setup 

Setting up a cold wallet is an effective way to store your crypto offline. Here is the step-by-step process:

1. Choose the type of cold wallet. You can choose either a physical device to store your private and public keys offline or a paper wallet, which is a physical document containing your public and private keys. 
2. Get your cold wallet. Purchase the physical device at a reputable manufacturer, or for a paper wallet use a trusted generator to generate your keys. 
3. Set up the cold wallet. If it is a physical device, you need to connect it to your computer or mobile device and follow the manufacturer’s instructions. Set a pin to protect the device. Then back up the seed phrase and store it carefully. If it is a paper wallet, generate the keys offline and store them in a secure place. 
4. Transfer the cryptocurrency. Send your cryptocurrency to your cold wallet. 
5. Secure the cold wallet. If it is a hardware device, store it in a secure place. If it is a paper wallet, consider laminating it and placing it in a safe place. 

Benefits of Using a Crypto Wallet

With your own crypto wallet, you have the freedom to control your funds. Unlike an exchange, you can buy, sell or trade crypto at your discretion. Since you’re not relying on an exchange, you have enhanced privacy and are less subject to security breaches. 

Crypto wallets also offer flexibility to send and receive funds anywhere in the world. 

Are Crypto Wallets Secure?

The security of a crypto wallet is dependent on the type of wallet and how the user protects it. 

A hot wallet is connected to the internet. You can use a hot wallet for frequent access, but it is also vulnerable to hacking. There are a few ways to prevent your hot wallet’s security from being compromised. You can use a strong and unique password, enable multi-factor authentication, update your software and stay vigilant. 

A cold wallet is a physical device and is less susceptible to being compromised online since it is not connected to the internet. However, you should store your cold wallet in a secure place to prevent theft. 

Suchetana Bhattacharyea contributed to the reporting for this article.

Information is accurate as of Feb. 11, 2025.

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