Gareth Johnson
Gareth Johnson
Updated on August 5, 2021

Are you interested in Bitcoin and other cryptocurrencies? Do you want to explore digital assets but aren’t sure where to start? Well, you are in the right place because the first step towards owning digital assets is setting up a cryptocurrency wallet.

Digital assets like Bitcoin and other altcoins can only be accessed and transferred through cryptocurrency wallets. We prepared this guide to explain what digital wallets are and how they work in order to help you pick the best wallet for your cryptocurrency needs.

Person using laptop with crypto wallet showing on screen

What Is A Cryptocurrency Wallet?

Most people think a cryptocurrency wallet holds their digital assets because that’s how real-life wallets work. We keep our credit cards and paper money in our wallets and only take them out when we need to. This is not true for digital wallets because they don’t actually hold any currency. Instead, they store the keys to your cryptocurrency assets that exist only on the blockchain.

What Is a Blockchain?

Blockchain technology lies at the foundation of most cryptocurrencies. It is how digital currencies prevent double-spending without a central authority to manage the books, so to speak.

It is a simple concept. Think of a ledger with multiple pages full of transaction records. Every transaction gets recorded on a timestamped page and every page is ordered chronologically. Only, instead of pages, there are blocks full of transaction data, and these blocks are bound together with cryptography to prevent fraud. There is no central authority that records or monitors the transactions because blockchain software manages the security and allows everyone to verify the validity of the blocks, and therefore the validity of the records.

Blockchains are public and pseudonymous. Anyone can view the transactions on the blockchain, but they can’t know immediately who those transactions belong to. This is because blockchains use cryptographic addresses instead of names to represent accounts.

When you make cryptocurrency transactions, you don’t actually take digital assets out of your wallet and send them to someone. There is nothing to send, really. Digital assets are only represented by the numbers on the blockchain. So when you want to make a transaction, you simply tell the blockchain what you want and if you follow the right procedure, the blockchain adjusts your accounts on the ledger. All you need to store and control your digital assets is a way of interacting with the blockchain. That is exactly where crypto wallets come in.

How Do Cryptocurrency Wallets Work?

In order to interact with a blockchain, you need security keys. These keys show which addresses on the blockchain belong to you and give you the authority to manage the balances associated with those addresses.

A cryptocurrency wallet is a software program that generates and stores your security keys to help you interact with the blockchain. You can send or receive digital assets and monitor cryptocurrency balances through your wallet.

Each cryptocurrency wallet generates two keys. One of them is a public key that is used to generate wallet addresses that you can use to store, send, and receive cryptocurrencies. You can share your public addresses with other people in order to receive digital currency or confirm that they are receiving currency from you.

The second key is your private key. This is the key that controls your digital assets and should always be kept private. Cryptocurrencies don’t have higher authorities you can contact in order to fix your accounts if you lose your keys. There is only the blockchain and the blockchain only recognizes the private key, not you personally, so keeping your key safe is of utmost importance. This is the only proof of ownership you have when it comes to digital assets. 

A good cryptocurrency wallet will keep your keys secure and accessible to you. 

What Are The Different Types Of Cryptocurrency Wallets?

There are five different wallet types for using cryptocurrencies. They are often distinguished as hot wallets vs. cold wallets. Hot wallets are online, i.e. connected to the internet. Online wallets that are provided by crypto exchanges, software wallets that run on computers (as programs), and mobile app wallets are hot wallets. Cold wallets are offline (i.e. they’re not connected to the internet) and they come in the form of hardware devices and paper.

It is important to understand what each type of wallet offers in order to decide what kind of wallet will suit your needs. Let’s look at each wallet type, one by one.

Illustrated concept of hardware wallet on top of smartphone

Online wallets

You can access online wallets through a browser without having to download software. Many cryptocurrency exchange platforms offer web-based wallets. Be aware that some of these are custodial wallets, which means that your private keys are stored by the exchange company. With custodial wallets, you are entrusting the protection of your keys to an external party. There are also non-custodial online wallets that allow you to keep your private keys or use a shared control system through multi-signature security systems. Web wallets are easy to use, fast to set up, and are very convenient to trade with, but they are also vulnerable to cyber-attacks. Use these wallets with two-way authentication and only to move small amounts of cryptocurrency.

Desktop Wallets

You don’t have to entrust your private key to a third-party provider with a desktop wallet. You can download and install desktop wallets to store your private keys on your computer. However, the internet connection makes your computer – and wallet – vulnerable to attacks. If you are hacked or your drive gets corrupted, you might lose access to your accounts. This could be a good option if you know your way around computers and have the technical capabilities to keep up with the necessary security updates.

Mobile Wallets

These are mobile apps you can download to your mobile device in order to manage your cryptocurrency from anywhere. This is a convenient option, especially if you want to use digital currencies for retail or you want to be able to trade when you are on the move. However, mobile wallets are not very secure. If your SIM card is hacked or you lose your phone, you will be forced to say goodbye to your private keys and your funds.

Hardware Wallets

This is a cold storage option that keeps your keys offline. Hardware wallets are similar to USB sticks or external drives. You make transactions by connecting them to your computer with a USB cable. They are designed specifically for security purposes and they often come with PIN protection. Hardware wallets are generally considered the safest option to store large amounts of cryptocurrency. However, the extra security can be a double-edged sword, as well. If you forget your PIN or misplace your hardware wallet, you won’t be able to retrieve your funds. 

Paper Wallets

If you are a traditionalist or you want to install an extra security measure in case of technological failure, print your keys on paper for safekeeping. There are paper wallet generators that will provide you with a QR code for transferring funds with ease. However, beware that paper can be easily destroyed or copied. Make sure you store your paper wallet in a secure location.

Person holding smartphone to trade cryptocurrency in front of laptop

What Is the Best Cryptocurrency Wallet?

Well, there is no one true wallet to hold them all when it comes to cryptocurrency because much depends on what you need from a wallet. While some people want improved security and full control of their keys, others value convenience and speed. The best wallet for you is the one that suits your needs well. Consider why you want cryptocurrency and how you plan to use it. Do you plan to invest in digital assets? Will you trade frequently? Do you need to be able to access your wallet from anywhere? Which currencies do you plan to buy? Picking the right wallet depends on how you answer these questions. You can also combine two wallets – one hot wallet for fast transactions, and one cold storage wallet that can hold most of your assets.

If you have trouble answering these questions or you want to know more about your options before making a decision, check out our wallet suggestions.

Ledger Nano Wallets

Ledger Nano is one of the biggest names in the hardware wallet market. There are two hardware wallets available Nano S and Nano X. Both support over a thousand digital currencies. Nano S is the cheaper model and it is often advertised as beginner-friendly. Nano X is an advanced model and thanks to the Bluetooth feature, it can connect to your mobile device to be used anywhere. Both models come with a 24-word recovery phrase you can use to recover your private keys and PIN code for extra security. Ledger offers a desktop client as well as a mobile app to manage your digital assets with ease.

Trezor Wallets

Trezor is another famous hardware wallet. It is open-source and has an excellent support service as well as a dedicated community. Trezor One and Trezor Model T both support over a thousand digital assets. Trezor also offers a web wallet interface and a desktop client to make managing your digital assets easier. Thanks to the recovery phrase feature, you can access a backup wallet even if you lose your Trezor device. Trezor has a PIN code and a passphrase feature that allows you to generate “hidden wallets” inside the device, which can only be seen by entering the passphrase.

Exodus Wallet

Exodus is a desktop and mobile wallet you can use to store and trade more than a hundred digital assets, including Bitcoin, Ether, Litecoin, and Dogecoin. It has a simple, easy-to-navigate interface that makes it a good choice for cryptocurrency beginners. It has a swap feature that allows users to exchange between over a hundred different cryptocurrencies using the wallet’s interface. Advanced users may not be satisfied with Exodus due to the limited number of digital assets available and the closed source code.

Coinbase Wallet

Coinbase is one of the most popular cryptocurrency exchanges and it provides its own web service wallet. You can simply connect your bank account to Coinbase to buy cryptocurrency, and you can easily trade on the Coinbase platform. However, Coinbase stores your keys on its own servers so if you want complete control over your digital assets, you should transfer your assets to another wallet. You can use the Coinbase mobile app for trading on the go. Be aware that Coinbase transaction fees can be expensive.

Bonus Options

There are a few other wallets that are worth checking out before making a final decision. 

The Mycelium mobile wallet app for iPhone and Android is a good option if you want to be able to send and receive cryptocurrencies with your phone. It has a  QR code scanner for ease of use and a backup option in case you lose your phone.

Keepkey is another hardware wallet for Bitcoin, Litecoin, Ethereum, Dogecoin, and Dash. Keepkey doesn’t have an operating system and claims to be safe against malware.

Electrum is a Bitcoin wallet for Mac, Linux, and Windows. It supports cold storage wallets and has multi-signature features. 

A Few Words Before You Go…

Hopefully, you gained a better understanding of why cryptocurrency wallets are so important for crypto security. A digital wallet generates and stores the keys that are necessary so you can interact with the blockchain and control your digital assets. There are different kinds of wallets on the market, each with its pros and cons, so you should pick a wallet based on your specific plans and needs. While hot wallets, i.e online, mobile, and desktop wallets are very convenient to use, cold wallets offer extra security measures that make them attractive. You can also use multiple wallets instead of settling on one type.