- August 17, 2022
Pew Research reveals that around 16% of Americans use cryptocurrency. Cryptocurrencies are picking up the pace and becoming a dominant force globally.
As it becomes a more mainstream way of investing for people, both rich and poor, many new crypto investors are looking to understand how it all works. It starts with asking, “What is a crypto wallet?”
Read on to unravel all the details in a simple-to-understand guide. Learn what a crypto wallet is and how it works.
What Is a Crypto Wallet?
It is not a wallet that you fold and put in your pocket. Instead, a cryptocurrency wallet is a physical device or software program. This program or device lets you store your crypto as well as, send and receive crypto transactions.
A crypto wallet has two pairs of keys, which are public keys and private keys. The public key derives from a private key, serving as your “address” to send crypto to your cryptocurrency wallet.
What Is a Cryptocurrency Wallet & How Does It Work?
Crypto Wallets Have Many Public Keys
You can give over one different public address. Plus, you can use your keys to receive cryptocurrency in your wallet. The private key is an essential piece of the wallet.
Private keys are much like a safe deposit box. Any individual with access to a wallet’s private key can take control of the wallet’s balance.
Unlike a safe deposit box, users of crypto that hold their own private keys and who make transactions with their non-custodial wallets become a bank of their own.
A non-custodial wallet refers to a wallet that is not hosted by a third party or by an exchange.
Crypto Wallets Are User Friendly
The idea of cryptocurrencies is still a new concept for most people. Still, learning how to create a crypto wallet is designed in a way that is simple for most people to understand.
There are straightforward web wallets, like MetaMask, or there are desktop wallets, such as Electrum, which come with a GUI (graphical user interface).
How Does a Crypto Wallet Work?
Blockchain is a public ledger. It stores data in “blocks.” They record all transactions.
Cryptocurrencies are not actually stored “inside” of a wallet as it would typically sound. Instead, the coins exist on a blockchain. The wallet software lets you interact with your balances maintained on the blockchain.
The crypto wallet stores addresses. It lets the owner move coins elsewhere. It also allows other people to see the balance that is at any address.
If you are a beginner, keep in mind that various types of cryptocurrencies exist. Therefore, when sending crypto, you must send it to the address of a cryptocurrency wallet with the same kind of crypto.
Let’s say that you send a BCH (or Bitcoin Cash) to a BTC address (or Bitcoin address); that will not work. You will lose those funds forever.
How to Receive Crypto Funds
While every crypto wallet can have nuances, the steps for receiving funds are typically similar. First, you must retrieve an address from your wallet. (Also, your public key.)
In your wallet, locate the “generate address” feature. Click this.
Next, either scan a QR code or copy the alphanumeric address. Share this with the individual who is sending you cryptocurrency.
How to Send Crypto
First, you will need an address for the wallet receiving the funds. In your chosen wallet, find the “send” feature—type in the wallet’s address where you wish to send your coins. If you are using our ByteWallet, you will find detailed instructions HERE.
Next, select how much crypto you wish to send. Then, click “confirm.” If you wish to transfer a large amount of cryptocurrency, send a test transaction first with a small amount before going big.
Remember that when you send coins, it requires a fee in exchange for processing your transaction.
Sending money with a long string of letters, numbers, or QR codes is new to many. It may feel strange at first, however, after a few transactions, the process becomes more comfortable.
Types of Crypto Wallets
There are two kinds:
- Software wallets
- Hardware wallets
A software wallet is a browser extension or a simple desktop program. Software wallets make it easy to store, send, and receive crypto. You may hear the term “hot” wallet because you hold the funds online.
Hardware wallets are similar, except they are physical devices that plug into a computer. Again, you hear the term “cold” storage because the private key is offline. They can cost about $100, roughly.
A hardware wallet is a little more complicated than a software wallet. Usually, hardware wallets will interact with a computer device in one of the following three ways.
- A company-created app
- A separate software wallet
- A web-based interface
A software wallet is a mobile app or computer program that will hold your online private key. Also another way that a software wallet is unique from a hardware wallet is that it can support multiple types of cryptocurrencies.
A brilliant piece of advice that an expert will tell you is that when using a software wallet, you want to create backups regularly. Should your hard drive or web browser run into issues or crash, you can misplace your wallet’s private keys. As a result, there is the potential to lose your funds permanently.
Software wallets have three main types, which are defined as follows.
An example is MetaMask. MetaMask works as a browser extension, sending ETH transactions.
Web-based wallets make it simple for a user to interact with it in terms of DeFi (decentralized finance) protocols and decentralized applications.
An example is the Electrum wallet. You can use it with your laptop or desktop computer.
A good example is the Blockchain wallet. It lets users send and receive transactions, store crypto, and sweep an existing wallet’s private keys. These go into the application when they scan a QR code with a smartphone.
The type of wallet you should use should depend on your goals. They all essentially accomplish the same tasks, so it is more about convenience for you based on your habits.
You can store private keys in a paper wallet; however, paper wallets have a high risk of error. In addition, if you have a significant amount of cryptocurrency, a paper wallet would be too dangerous for you.
For large amounts of crypto, it’s best to use a different crypto wallet.
Pros for Crypto Wallets
Using a non-custodial crypto wallet has some perks. First, it is self-ownership of money. If you possess your private keys, the cryptocurrency belongs to you.
If you compare this to a traditional bank, money in the bank is essentially the bank’s property.
Second, there is much freedom in the transactions. Whenever you want, you can send a transaction to anyone you want to.
It is challenging to stop a transaction because no one controls the network. As a result, cryptocurrencies are “decentralized” and censorship-resistant.
Cons to Crypto Wallets
There is an element to user responsibility. Being your own bank means that you have total liability. Anything that can go wrong will be 100% on you.
Next, it is new, which means there is a learning curve. First, you need basic computer knowledge. Beyond this, you must get yourself acclimated to a new type of financial ecosystem.
How to Get a Crypto Wallet
The steps will vary depending on the wallet you have.
The easiest and most popular is the hosted wallet. If you purchase crypto with an application like Coinbase, your cryptocurrency is automatically available in your hosted wallet.
They use the term “hosted” because a third party is keeping your crypto on your behalf.
Now, in this article, you have read about the dangers of losing your keys. With a hosted wallet, you do not need to worry. The most significant benefit to a hosted wallet is that you will not lose your crypto if you forget your password.
The downside is that a hosted wallet will not give you everything cryptocurrency has in its offering. But, of course, that can change over time, as hosts will keep adding more features.
When you set up a hosted wallet, here is the step-by-step process.
1. Choose a platform with which you are most comfortable.
You want to find a platform that you have the most faith in. Features should include ease of use, security, and compliance with government and financial regulations.
2. Create your account.
Creating an account should be a breeze. Enter your personal details. Then, choose a secure password.
Professionals recommend adding an extra layer of protection, like 2FA or two-factor authentication.
3. Time to buy or transfer cryptocurrency.
Many platforms and exchanges for crypto will let you buy it with a credit card or bank card. If you currently own some crypto, you could transfer it too. Then, you can send it for safekeeping to a new hosted wallet.
Setting up Self-Custodial Wallets
With this kind of wallet, you have complete control. You do not need a third-party or custodian with a non-custodial wallet. You keep your crypto safe.
Remembering the password is on you. You do not want to forget or lose it because then you cannot access your crypto.
The “private key” can also be called a “seed phrase.”
If someone discovers your “seed phrase,” they have complete access to your assets. So why have a non-custodial wallet in this case?
Non-custodial has more advanced activities, including borrowing, lending, staking, yield farming, and more.
Here is how to set up a non-custodial wallet.
- Download a wallet app
- Create your account
- Store your private key in a safe place
- Transfer crypto to your wallet
You cannot buy crypto with traditional currencies, such as the US dollar or a Euro. Instead, you must transfer it from somewhere else.
There are options to create a wallet like this for free, we recommend our ByteWallet for trusted cryptocurrency storage and convenient fiat and crypto banking features. Learn More.
Setting up Hardware Wallets
It is about the size of a thumb drive. A hardware wallet stores your private keys offline and costs around $100. Many people prefer not to use a hardware wallet because of its complexity and cost.
Here is how to set it up.
1. Buy the hardware.
The hardware, as mentioned before, is not always the best option. The best-known brands to buy are Trezor and Ledger.
2. Install the software.
The brand you buy will determine the software you must use. They each have software that you will need to set up the wallet.
Download the software from the company website. Then, follow the instructions they give you to create the wallet.
3. Transfer crypto to your wallet.
Like the non-custodial wallet, you cannot buy crypto from traditional currencies like a US dollar. Instead, you must transfer crypto to your wallet
What Kind Of Crypto Wallet Should You Use?
When first using cryptocurrencies, many people ask, “What is a crypto wallet?” Crypto wallets are an important place to start in your journey of buying and selling cryptocurrencies.
There are many nuances, but once you choose the wallet that is best for you and becomes acclimated to the system, it is a breeze.
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