Beginner's Guide to Crypto - Crypto Wallets 101
What are crypto wallets?
Crypto wallets are like bank accounts but specifically for cryptocurrencies. They are software programs that digitally store the record of your crypto on a blockchain. They are essentially the intermediary for you to manage your balance, transfer and even purchase cryptocurrencies.
Crypto wallets have a public address which is like your bank account number which you give to receive deposits. Your private keys are like your PIN number which you use in order to access the money (crypto) in your wallet. Your seed phrase is like your security back up questions to verify your account in case you need to reset your password.
Unlike bank accounts however, there is no central bank that has access and control over the funds in your wallet - you are the only person responsible for your cryptocurrency wallet. That means that any funds that are lost or stolen from your account can never be retrieved again. Therefore, it is of utmost importance that you do not lose your private keys and seed phrase.
|Bank Account||Cryptocurrency Wallet|
|Controlled by the bank||Controlled by you|
|Records are stored in the bank’s centralized database||Records are stored on the blockchain|
|Records could be tampered with, changed, or subject to human and/or computer error||Records are immutable, secure, and verified by many unrelated parties|
|If you lose your pin or bank card, the bank can give you new ones||If you lose your private keys (i.e. the “PIN” to your crypto wallet), you will lose access to your funds|
|Your balance is protected from loss and theft up to a certain amount (in certain countries)||If your funds are lost or stolen, you’re 💩out of luck|
|You have to open different bank accounts to store different kinds of currencies (e.g. USD, CAD, EUR, etc). You must ask permission and file paperwork for each one.||Most crypto wallets store multiple types of cryptocurrencies within one wallet. You do not need to file paperwork or ask permission to download and use a wallet.|
There are three major types of cryptocurrency wallets - software wallets, hardware wallets and paper wallets. Each type of wallet can fall into two categories: custodial and non-custodial. Custodial wallets entrust a third party with custody of your private keys so that if you lose them, your funds may be recovered. However, if the third party becomes compromised or is not trustworthy, these funds can be stolen from you. Non-custodial wallets entrust your keys to you and you alone.
Software wallets can exist as custodial or non-custodial implementations and are available to download onto your desktop or accessible through the web or your mobile phone. Hardware wallets are a piece of dedicated hardware, such as a USB-style device, that stores your cryptocurrency offline, keeping the private key stored on the piece of hardware itself and unplugged from your computer and internet when not in use. Hardware wallets are the most secure way to store your cryptocurrencies since it cannot be hacked as it’s offline.
You can also create a paper wallet which is simply a piece of printed paper that has a wallet address, a private key and a QR code that you scan to access the wallet. It’s very secure since it’s not connected online and also very inexpensive. This is a great way to store your funds if you want to save them as you would money in a savings account and not spend them actively. However, if you haven’t made a copy and you lose it, there’s no way to restore your wallet so make sure you print at least two and keep them somewhere safe and secure!
Continue to the next article to learn all about software wallets, including some reviews of software wallets.