The cryptocurrency is intangible and can not be held like paper money; it is kept online in an application or software. This application could be on the web or a device, and that is crypto wallet. Cryptocurrency wallets store private keys and ensure your digital assets are safe and accessible anytime. Cryptocurrency wallets offer the functionality of encrypting, decrypting, and executing smart contracts for crypto transactions.

Crypto wallets do not store crypto tokens. The tokens are stored on the blockchain network. A crypto wallet keeps your private and public keys and holds the password to enable you to access digital assets. Cryptocurrency wallets could be in the form of a device, program, software, or application that stores the public or private keys for crypto transactions.

What Is a Crypto Wallet?

A cryptocurrency wallet is believed to hold your crypto tokens and ensure you have access to them when you need to make transactions or exchanges. Technically, a crypto wallet does not hold a digital asset; it only serves as a gateway to the blockchain and provides the key (public/private) to access the tokens. The blockchain offers the public ledger that stores data in blocks. It also contains records of all transactions, the balances of different addresses, and the key holders of the addresses. The crypto coins exist on the blockchain, while the wallet allows interaction between the owners or holders of the coin and the balances on the blockchain.

Cryptocurrency wallets are program software that allows you to store your digital assets and send and receive crypto transactions. Some crypto wallets will enable you to store addresses, swap tokens, and stake tokens and give you access to decentralized apps (dApps) built on various networks. There are several crypto wallets with their use cases. For instance, Web wallets like MetaMask and desktop wallets like Electrum come with a Graphical User Interface (GUI) and are made as simple as possible.

The crypto tokens are not tangible assets you can hold or fold into your pocket. Instead of having them as physical assets and storing them in a wallet, crypto tokens stored in crypto wallets exist as passkeys that you use to sign in, engage in cryptocurrency transactions, and access your holdings. Crypto wallets contain a public key, while you, the holder of the tokens, have your private keys needed to access your wallet and conduct crypto transactions.

The cryptocurrency is a bit of data stored in the blockchain. These data are scattered all over the database (blockchain). It is the function of the wallet to find all the bits associated with your address and display them in your software or application interface. While these processes look ambiguous, using crypto wallet applications or software is easy. The procedure to use crypto wallets is streamlined and somewhat straightforward. You will enter the recipient’s wallet address, choose the amount of token you want to send, seal the transaction by providing your private key, add the transaction fee, and send. Whichever crypto wallet or task you carry using the crypto wallet, you must be connected to the internet and have your private key.

How Does a Crypto Wallet Work?

The primary function of a crypto wallet is to enable users to send, receive and store crypto tokens. Some crypto wallets have additional features like swapping tokens, staking coins for a fixed return, and providing access to other decentralized apps built on the blockchain network. Sending digital assets via your crypto wallet requires you to provide the recipient’s QR code or copy the alphanumeric address of the receiver and follow the remaining steps.

How a crypto wallet works depends on the crypto wallet you are deploying for your usage. The two general categories include hardware wallets and software wallets.

The software wallets are desktop programs and browser extensions that enable crypto holders to send, receive and store their digital assets. In software wallets, the tokens are kept online, and the wallet is often called “hot” wallets. They hold private keys online and are unique to each cryptocurrency. Software wallets can be deployed on the web or in the form of applications you can install on your phone or laptop.

Under the software wallets, there are three main types. They include web-based wallets, which can be deployed as a browser extension and enable users to interact with decentralized apps and finance protocols. An example of a web-based (software) wallet is MetaMask.

The desktop wallet and the mobile wallets are other types of software wallets. Desktop wallets are used on a desktop or laptop computer, while mobile wallets allow users to store tokens and send and receive transactions.

The hardware wallet: Hardware wallets are devices that store crypto tokens offline. They are plugged into the computer’s USB ports, and all signing happens off your computer. Hardware wallets keep private keys offline or in cold storage. Hardware wallets are commonly used because you can store your private keys and delete them from devices. You can plug them into your computer to make crypto transactions.

The differences between Hardware and Software wallets are covered in depth in this article.

Pros of a Crypto Wallet

Some of the notable advantages of Crypto wallets are:

Easier and faster transactions: Crypto wallets enable you to send and receive money as fast as possible. Sending tokens to another wallet is easy and seamless, and it is easy to exchange and swap tokens using a crypto wallet.

Self-ownership: Only you own your private key that can access the token. Unlike money in traditional banks that banks technically own, your tokens belong to you.

Accessibility: Crypto wallets give you full access to your crypto holdings. You can engage in whatever transaction you want and send funds to any wallet at any time or location.

Cons of a Crypto Wallet

The shortcomings of a Crypto wallet include:

Security vulnerabilities: Crypto wallets are vulnerable to attacks and theft. Because they hold valuable digital assets, they always attract thieves and fraudulent persons. There have been several cases of thieves hacking into crypto wallets and siphoning their funds.

Learning curve: Crypto wallets are somewhat technical, and you require basic computer knowledge to use the crypto wallet and get familiar with the blockchain ecosystem.

User responsibility: Once you sign up and activate your crypto wallet, you become your account officer and assume responsibility for all actions. If anything goes wrong, you bear the liability.

Custodial vs. Non-Custodial Wallets

Typically, once a user has purchased cryptocurrencies, he/she must decide where and how to store them. From this point of view, there are mainly two different types of wallets: Custodial and Non-Custodial.

A custodial wallet is one where the private keys, which give access to the cryptocurrencies stored in the wallet, are held by a third party. This means that the owner of the wallet does not have full control over their funds, as they are reliant on the third party to provide access to them.

Non-custodial wallets, on the other hand, are wallets where the user holds their own private keys. This means that the user has full control over their funds and does not need to rely on a third party to manage their access to them. Non-custodial wallets are generally considered to be more secure than custodial wallets, as the user is not trusting a third party with their private keys.

Actually, there are some cryptocurrency wallets that use a system of three keys, also known as a multisignature (multisig) wallet. This can be used to set up a wallet with two out of three keys required for transactions, where two parties (such as the wallet provider and its bank) must both approve transactions before they can be completed. This can provide an additional layer of security, as the funds in the wallet cannot be accessed or moved without the approval of multiple parties. Multisig wallets can be either custodial or non-custodial, depending on who holds the keys.

Conclusion

A crypto wallet is likened to a crypto bank account solely controlled by you. The crypto-token is not available in a wallet; it only contains private or public cryptographic keys, and these keys track ownership of addresses and send and receive cryptocurrencies.

The security of a crypto wallet is essential. The security measures deployed by these wallets vary, and some require you to use strong passwords, two-factor authentication, etc.

There are several crypto wallets online; ensure that whichever one you use for your digital assets is from reliable and trusted developers.