The crypto market has crossed $1 trillion in value. Participating in this new asset class and market means having a cryptocurrency wallet. A crypto wallet is a program in which digital assets and tokens are stored, though technically, cryptocurrencies are not stored anywhere. Crypto wallets keep the investor’s private keys–the passwords that give you safe access to the cryptocurrencies so that you can send and receive them. The wallet generates a public key from the private key (password). There are many types of crypto wallets; each with different features and corresponding uses and risks. Here’s a look at what they are and how they function:

How Do Crypto Wallets Work?

• Digital wallets do not actually store currency like traditional wallets, which means that digital currencies don’t exist anywhere in a physical form; what exists are records of transactions, which are stored on a blockchain
• Crypto wallets store unique public and private keys and interact with multiple blockchains, which allows users to monitor their balance and transact
• To receive coins, the wallet generates an alphanumeric address or a QR code that you can share with the sender. To send crypto, you need a similar address from the intended recipient’s wallet  
• There can be multiple public keys (a kind of password that is generated by the user’s private password) for the same wallet and you can share these with other wallets for transactions.

Types Of Crypto Wallets

There are two broad types: hot wallets (connected to internet and always accessible) and cold wallets (not connected to internet; allow you to store cryptocurrency offline).

Hot Wallets

• Desktop wallet: You download an app, which generates a data file to hold the user’s keys
• Mobile wallet: The app is downloaded on to a mobile phone  
• Web wallet: The private keys are stored online and managed by a third party. You can access the wallet from any device

Cold Wallets

• Paper Wallets: The keys, QR codes and barcodes are printed on paper
• Hardware Wallets: These bypass the online exposure of private keys, which are saved on a physical device in an offline environment.

Suitability And Risks 

• Crypto wallets offer convenience and security to the user. Usually a wallet supports most cryptocurrencies
• For everyday use, an online hot wallet may be better. However, if you want to only buy and hold the crypto asset for long, a cold (offline) wallet may be the right choice
• Decide if you want to access your wallet from anywhere or do you want a specific device to do that
• Cold wallets are considered safer as the keys are saved offline, which makes hacking difficult. Although, the risk of losing the device remains
• Many users simply use a wallet provided by the crypto exchange. But others prefer a higher degree of security and, therefore, use a personal wallet (online and offline modes). Crypto exchanges themselves use cold storage methods as well.