When venturing into the cryptocurrency market, you need to look into how to store your cryptos. A crypto wallet is a program or hardware device that enables you to store or transfer cryptocurrencies like bitcoins. There are different crypto wallets, including hardware wallets, software wallets, and paper wallets. The security of your crypto wallet largely depends on how its security key is stored.

The principle behind crypto wallets is that, unlike fiat currency, you cannot store digital currencies in your physical wallet. However, a crypto wallet allows you to hold private keys to access your cryptos. In simple words, it will enable you to store your cryptocurrencies and facilitate the sending and receiving of crypto transactions.

A crypto wallet has two types of keys:

  • Private keys.
  • Public keys.

The public keys are derived from the private keys and are used to send cryptos to your wallet. Note that crypto wallets can derive many public keys, which means you can give out different public keys to receive cryptos in your wallet.

The private keys are the most critical aspect of your crypto wallet. Just like a key to a safe deposit box, anyone who accesses your private keys can access your cryptos. Therefore you are the one in control of your private keys and not any third party or a crypto exchange.

How do crypto wallets work?

To understand how crypto wallets work, we will talk about blockchain for a minute. Blockchain, the crypto technology, is a public ledger that stores data in the form of blocks. The data records all the balances in a specific crypto wallet address and who holds the keys to that address. As such, crypto is not merely stored in a wallet. The cryptocurrencies exist in the blockchain, and the wallet lets you interact with the balances on the blockchain.

The crypto wallet stores the address that allows you, as the owner, to transfer the coins and also lets others see the balance held in a specific address. Therefore when sending cryptos, you should ensure you are sending to a crypto wallet address with the same type of cryptocurrency. For instance, if you send bitcoins to a litecoin address, the funds are lost for good.

A crypto wallet allows you to use, send, store or receive cryptos. Other crypto wallets have more features like swapping between tokens, accessing decentralized apps, and staking tokens for a fixed return to the user.

Types of crypto wallets

Crypto wallets are categorized into two main types: hot and cold wallets.

  • Hot wallets, also known as software wallets, are desktop programs that allow you to store, send and receive cryptocurrencies. Therefore the coins are stored online, and you access them through the internet. You should be careful with this because it is susceptible to hackers.
  • Cold wallets, also known as hardware wallets, are physical devices such as a USB that stores your cryptos offline. You plug it into your computer to access your cryptos. This is much secure since it keeps your private keys off the computer.

The takeaway

Research your crypto wallet options in terms of cost and security before making your choice.