What does a crypto wallet do and what do you need one for?

what does a crypto wallet do

If you’re new to crypto you’ll be scratching your head trying to understand how the cryptocurrency ecosystem works, so you can navigate around it. One of the first questions you’ll ask yourself is – what does a crypto wallet do? In this article we’ll run through exactly what a crypto wallet does and what you’ll use it for, in non-tech head terms.

What is a crypto wallet for?

A crypto wallet is a way to store the private keys that you need to ‘unlock’, access and transact with your crypto assets.

The crypto ecosystem is very different to fiat currency coins and dollar bills that you physically keep in your wallet or purse and in the bank. Crypto is non-custodial and decentralised. What this means for you is that the security of your coins is up to you. No-one is going to look after them for you. There are no government guarantees like there are for fiat currency stored in the bank. On the flip side, you have complete control and autonomy over your finances.

The way you secure your coins is through your crypto wallet.

Another concept to understand with crypto is that your coins remain on the blockchain ledger and don’t actually exist in your wallet. Instead you wallet holds the private keys to any coins you own, and through those keys you can access the blockchain ledger and see – in your wallet – how many coins you have. Your wallet, which holds your private keys, allows you to securely validate and confirm the transactions you make with your crypto assets – like sending them to someone else’s public address on the blockchain. Anyone who has access to your private keys can easily access and steal your coins, so security is super important when it comes to a crypto wallet.

The last thing to understand about crypto is that there are different types of crypto wallets that you use for different things depending on the levels of cyber and physical security you’re after and what you want to do with your coins.

The different types of crypto wallets

If you think about fiat currency, there are a bunch things we do with our dollars and coins. We store some in the bank, we invest some, we use them to buy things, we carry them around with us. These same sorts of transactions are available with crypto and all require some kind or interaction with a crypto wallet. Lets run through a few of these under the two main categories of crypto wallets – offline (cold wallets) and online (hot wallets):

Offline wallets (cold storage)

These are the safest type of cryptocurrency wallets because your private keys are kept separate from the internet and not exposed to cyber attack. The biggest vulnerability with these wallets is physical security – either from theft or loss.

Crypto hardware wallet

This is the bank vault for your crypto private keys. It’s a physical device that you use to store your private keys offline and separate from the internet. This is the most secure and safest form of crypto storage because a lot of the cyber attack vectors for crypto come from connection to the internet.

Crypto hardware wallets are where you store your coins long term for the highest level of protection. You usually keep the device at home – somewhere hidden and safe.

If you’re looking for a great hardware wallet to store your crypto, then check out our review of the top cryptocurrency wallets for 2021.

Crypto seed storage metal wallet

This is a physical wallet too but usually some form of indestructible and engraved metal plate construction. You use it to store you seed recovery phrase for your hardware wallet. Your seed recovery phrase is like your spare house keys. If anything happens to your hardware wallet, you’re going to need your seed recovery phrase to recover access to your coins on the blockchain.

You should always keep your seed phrase storage wallet in a separate location to your hardware wallet.

We’ve also researched and reviewed the best seed storage wallets for you.

Online wallets (hot wallets)

These are less safe forms of storage, but they are necessary to interact with if you want to traverse the crypto ecosystem. They’re not for long term storage of large amounts of coins. They’re like the wallet in your pocket that you use daily.

Crypto wallet app

If you transact with your crypto on the go and use your mobile phone, then you’ll end up downloading a crypto wallet app. This is an online wallet – in app form – that you can use to check your crypto balances and receive crypto (through a public address that the wallet provides). As crypto becomes more mainstream, the features and functions offered by these wallets are expanding. Some crypto wallet apps allow you to buy, swap, stake and trade your crypto – all from within the one wallet.

You might also use a crypto wallet app to interact with Decentralised Finance protocols like Aave, Compound or with decentralised exchanges (dEX) like UniSwap or PancakeSway if you want to yield farm or participate in swap pools.

There are also apps that act like crypto wallets but are primarily a place to lend and borrow crypto – like the Celsius Wallet or BlockFI. If you want to earn interest on your crypto while you hodl it without the complications of using a dEX or DeFi protocol, you might use these wallets and their services.

It’s likely you’ll have several of these crypto wallet apps on your phone, depending on how active you are in the crypto ecosystem. One thing to remember is that because they are online, they’re not safe to store large amounts of crypto.

Crypto wallet browser extensions

what does a crypto wallet do

These are crypto wallets that you download and take the form of browser extensions for popular web browsers like Chrome, Brave or Firefox. You’ll use these if you’re on your desktop a lot. They are a convenient way to interact with DeFI platforms and protocols (websites). The browser apps seamlessly connect with these websites directly in your Chrome browser and allow you to move your coins in and out of smart contracts that govern DeFi transactions like lending and borrowing.

Like crypto wallet apps, they’re online and have a larger attack surface than a hardware wallet.

Crypto exchange wallets

If you sign up to an exchange to trade crypto, then for any crypto you buy you’ll keep your private keys on the exchange. Centralized crypto exchanges like Binance and Coinspot provide their own coin wallets where your crypto assets will appear when you are using the exchange. These wallets are only as safe as the exchange itself and exchanges do get hacked from time to time, so you be aware of this.

More and more exchanges are offering DeFI products from within the exchange as a reward for keeping your crypto there. On Binance for example you can earn interest, stake, and pool your coins all from within the exchange. Exchanges often have a supporting app – for example the Binance Wallet – that you can use to transact your crypto on the go.

Hardware wallet and crypto wallet app integrations making it safer to transact your crypto

A new development in the crypto world is making transacting your coins safer. Wallet developers from the hardware and software worlds are getting together and partnering up their services so that you can transact with the convenience and flexibility of an online crypto wallet app, but utilising the safety and security of a hardware wallet.

MetaMask – the crypto wallet app and browser – now provides support for both Trezor and Ledger hardware wallets. Exodus wallet has an integration with Trezor. Your can move your crypto to Exodus easily from your Trezor Model T hardware device and use Exodus to manage the crypto in your Trezor.

For you, this means interacting with DeFi and making passive income on you crypto with peace of mind that your coins and tokens are as safe as they can be. So if you’re looking for the safest crypto wallet to use, check out our reviews of Ledger and Trezor, as well as the MetaMask and Exodus reviews here.

If you want to delve further into how crypto wallets work, have a read of our FAQs page here.