What Is a Cryptocurrency Wallet?
A cryptocurrency wallet is an application that functions as a wallet for your cryptocurrency. It is called a wallet because it is used similarly to a wallet where you put cash and cards. Instead of holding these physical items, it stores the passkeys you use to sign for your cryptocurrency transactions and provides the interface that lets you access your crypto.
Modern cryptocurrency wallets make the blockchain accessible to everyone. When cryptocurrency was first introduced, sending cryptocurrency was a manual task that required entering long keys. Today, the software does most of it for you.
The first wallet was that of Bitcoin’s developer, Satoshi Nakamoto. The second wallet belonged to Hal Finney, who corresponded with Nakamoto and reportedly was the first to run the Bitcoin client software wallet. Nakamoto sent him 10 bitcoins as a test, and the cryptocurrency craze began.
Key Takeaways:
- A cryptocurrency wallet is a device or program that stores your cryptocurrency keys and allows you to access your coins.
- Wallets contain an address and the private keys needed to sign cryptocurrency transactions. Anyone who knows the private key can control the coins associated with that address.
- There are several different types of wallets, each with its features and levels of security.
- Many cryptocurrency wallets can be used to store keys for different cryptocurrencies.
Understanding Cryptocurrency Wallets
Cryptocurrency wallets are software applications on computers or mobile devices such as phones or tablets. They use an internet connection to access the blockchain network for the cryptocurrency you’re using.
Cryptocurrencies are not “stored” anywhere—they are bits of data in a database, scattered all over it; the wallet finds all of the bits associated with your public address and sums up the amount for you in the app’s interface.
Sending and Receiving Cryptocurrency
Sending and receiving cryptocurrency is very easy using these applications. You can send or receive cryptocurrency from your wallet using various methods:
- Enter the recipient’s wallet address.
- Choose an amount to send.
- Sign the transaction using your private key.
- Add an amount to pay the transaction fee.
- Send it.
Types of Cryptocurrency Wallets
Custodial and Noncustodial Wallets
- Custodial Wallets: Hosted by a third party that stores your keys for you.
- Noncustodial Wallets: You are in charge of keeping your keys safe.
Hot and Cold Wallets
- Hot Wallets: Connected to the internet.
- Cold Wallets: Unconnected to the internet.
Subcategories
- Software Wallets
- Hardware Wallets
- Paper Wallets
Software Wallets
Software wallets include applications for desktops and mobile devices. These wallets can:
- Access your cryptocurrency.
- Make transactions.
- Display your balance.
- Include exchange integration features.
Examples: Trezor, Electrum, Mycelium.
Hardware Wallets
Hardware wallets are the most popular type because they:
- Store your private keys offline.
- Resemble USB drives.
- Automatically sign cryptocurrency transactions, reducing hacking risks.
Examples: Ledger, Trezor.
Paper Wallets
Paper wallets involve writing down or printing your keys and QR codes. These are less commonly used today due to:
- High risk of loss or damage.
- Storage challenges.
Crypto Wallet Security
Security is critical for cryptocurrency wallets. Safeguards include:
- Encrypting the wallet with a strong password.
- Using two-factor authentication for exchanges.
- Storing large amounts offline in cold wallets.