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What is a cryptocurrency wallet and how does it work?


To securely store the crypto investments, traders will need a cryptocurrency wallet. Cryptocurrencies are changing the world. They allow for decentralised transactions to take place without the need of a middleman like banks, PayPal, or Visa. Now traders can trade assets with complete autonomy and security thanks to the innovative blockchain technology that cryptocurrencies are built on. But how do they keep cryptocurrency secure like a bank would keep cash safe? This is where a cryptocurrency wallet is needed!

In this beginner’s guide, traders will learn what crypto wallets are, how they work, what types of wallets exist, and how to set up the first wallet. 

What is a cryptocurrency wallet?

A cryptocurrency wallet is software that allows a person to store, send, and receive cryptocurrency.  Think of it as a bank account for crypto. Crypto wallets come in all shapes and sizes, from mobile wallets on smartphones and online wallets that users can access on the Internet to hardware wallets that are physical devices similar to a USB stick.

While some cryptocurrency wallets allow traders only to hold one digital currency, such as Bitcoin, others enable bitcoin holders to store all digital assets in one place.

What is a cryptocurrency wallet address?

Every crypto wallet comes with a cryptocurrency wallet address. Wallet addresses are composed of letters and numbers, and each address is unique. Like the word “address” suggests, a cryptocurrency address enables users to send and receive cryptocurrency, just like a postal address is able to send and receive documents. Bitcoin wallet holders can share it with others. Wallet addresses can also be used to track transactions on a public blockchain explorer, similar to searching a database.  

How do cryptocurrency wallets work?

A cryptocurrency wallet plays the same role as a personal bank account but for digital currency. Using the crypto wallet to hold funds, make and accept payments, and send money. However, crypto wallets work differently than bank accounts.  

A cryptocurrency wallet has private and public keys. Once wallet holders create a wallet, a private-public key combination will send to the wallet holder automatically. The public key is the cryptocurrency wallet address that use to receive money, while the private key is more like a password that gives access to cryptocurrency. But please notice that never share private keys with anyone. 

The public key (i.e., cryptocurrency wallet address) is similar to a bank account number that can be shared with others, and the private key is a PIN to access the wallet, similar to a PIN for your bank account. These two keys enable a user to make or receive payments. If someone wants to send cryptocurrency, they only need to copy the public wallet address and send it to the sender. Once the transaction is completed on the sender’s end, the receiver will see the cryptocurrency reflected in the wallet within minutes (or sometimes seconds).

On most cryptocurrency exchanges, public and private keys are managed for traders and the only thing the traders need to worry about is a public address to receive cryptocurrencies. Most personal crypto wallet providers, like MetaMask or Trust Wallet, give investors complete ownership of private and public keys, typically by providing a recovery phrase (also known as the seed phrase) to ensure that investors can regain access to their wallet should any technical issues arise.  

The recovery phrase is a list of random words that helps users access their wallets. It’s important to write the seed phrase down and ensure not to share it with anyone.

Example of using a cryptocurrency wallet

Alice wants to send bitcoin to her friend Bob. Both are avid cryptocurrency users and store their crypto in the popular mobile wallet, Trust Wallet. To receive the bitcoin, Bob sends Alice his public bitcoin wallet address via WhatsApp. She copies the address and opens Trust Wallet on her smartphone. There, she opens her bitcoin wallet and pastes the wallet address into the recipient bar. Next, she puts in the amount of bitcoin she wants to send to Bob and then confirms the transaction. 

Bob will receive his bitcoin within around 20 minutes in his mobile wallet. He can view the transaction on a public blockchain explorer in real-time.

Types of crypto wallets

There are several different cryptocurrency wallet options, each with its own level of user-friendliness and security. Crypto wallets fall under two categories: hot wallets and cold wallets. 

Now, let’s take a closer look at the different types of crypto wallets in these categories:

How to choose a crypto wallet?

There are several things to look for when selecting a cryptocurrency wallet. Here are the essential things to consider when choosing a crypto wallet:

Why are crypto wallets so important?

Cryptocurrency wallets allow users to store, send, and receive digital currencies and assets, giving complete control to the user of their digital funds. Crypto wallets also keep a record of holdings on the blockchain, which traders access with the wallet's private keys. The private keys show the ownership of digital money and allow owners to spend it. Losing private keys means losing money, so keep them secure. Lastly, traders need a crypto wallet to take part in the broader crypto ecosystem. For example, if a users wants to create, mint, and sell non-fungible tokens (NFTs) or use one of the many decentralised finance options, they will need a wallet to sign transactions.

Are cryptocurrency wallets secure?

Cryptocurrency wallets are generally secure. However, safety and security vary widely depending on the type of wallet that traders use. When using a non-custodial cryptocurrency wallet, traders are in control of the private keys and security is guaranteed as long as they never share the keys with anyone else.  

In the case where the private keys are managed by a third party, wallet holders have to rely on the reputation and security measures of the cryptocurrency wallet company. If they decide to use such a third-party service, do research to understand how they protect their users.  

Should traders keep crypto on an exchange or wallet?

Crypto exchanges are regarded as one of the least secure places to store cryptocurrencies. The only crypto users who hold funds on an exchange are typically traders who are actively day trading the market. That way, users don’t need to send funds to and from exchanges every time they want to place a trade.  

However, unless traders are actively trading, users should always store funds in a secure crypto wallet, not on an exchange.

Exchanges have a long history of security breaches and hacks that have led to billions of dollars in stolen funds. As a result, investors should only use exchanges to trade and then withdraw funds to a personal wallet once traders have completed the trading for the day, something that seasoned day traders do to securely store their funds overnight.  

Best crypto wallets

There are hundreds of cryptocurrency wallets to choose from. To make the choice easier, we have listed three of the most popular and secure crypto wallets in the market.

How to set up a crypto wallet?

Now, let’s take a look at how to set up a crypto wallet. To help traders get started, we have created step-by-step guides for Trust Wallet and Ledger.

How to set up Trust Wallet

How to set up Ledger Nano S wallet

To set up a Ledger Nano S, traders need the physical Ledger wallet, a computer, and the Ledger Live application downloaded and installed on their computer.

Thereafter, a 24-word recovery phrase will be shown word by word on the Ledger Nano S screen. Just like Trust Wallet, this recovery phrase is the only way to recover funds. Use the Ledger button to toggle between each word of the recovery phrase and then store it safely so access can be regained to the wallet.

How much does it cost to use a crypto wallet?

Most crypto wallets are free to download and use. Only hardware wallets have to be purchased and typically cost between $100 and $200 (USD?). While some wallets charge a small transaction fee when making a payment by the wallet, most crypto wallets only require to cover the blockchain transaction fee when making a crypto transaction. Blockchain transaction fees differ from chain to chain and can range from a few cents to tens of dollars.  

How to cash out from a crypto wallet?

To cash out bitcoin (or other cryptocurrencies) from the wallet, users will need to send the funds to a digital asset exchange, peer-to-peer trading platform, or a trusted individual who will send the fiat currency in exchange for crypto.  To cash out crypto using an exchange or a peer-to-peer marketplace.  First, set up an account on one of these platforms, which may also include completing an identity verification process.  

Once users have created an account, simply send crypto from a personal wallet to an exchange wallet and proceed to sell crypto for fiat currency.  

If users want to sell crypto to some trusty third party, the sender can send the money while sending the cryptocurrency to the person’s wallet. Ensure to get cash first, though. There’s no way to reverse a crypto transaction.

Can I store all my cryptocurrencies in the same wallet?

There are numerous crypto wallets that allow users to buy, sell and store multiple cryptocurrencies. Multi-currency wallets, like Trust Wallet and Ledger, make it easier to manage digital assets as users can store them all in one place.  

Crypto wallet scams

Finally, every new crypto user needs to be aware of wallet scams. Crypto wallet scams are schemes devised by cybercriminals to steal funds. The way it works is that scammers develop and upload fraudulent crypto wallet software onto an app store and then wait for inexperienced users to download them to store their crypto. 

Once funds have been deposited into a fraudulent wallet app, the scammers will steal them as they have coded the app in a way that allows them to siphon off funds without their victims noticing.

Before downloading or using any cryptocurrency wallet, make sure to download a reputable wallet from the verified wallet provider. The easiest way to do that is to download the app from the company’s official website. 

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