*This article was originally posted in 2020 and was updated in March 2023.
What is a crypto wallet?
In order to invest in popular cryptocurrencies, you first need a crypto wallet. When you hear the word wallet, you probably think of a traditional tangible item that holds some cash, your debit and credit cards, and your ID. A crypto wallet, also referred to as a digital wallet, has some similarities to a conventional wallet.
It stores the information necessary to access your accounts (like your ID) and a way to directly access your funds (like a debit card). Unlike traditional wallets, however, there isn't actually any currency stored in a crypto wallet … but more on that later.
In the simplest terms, a cryptocurrency wallet is a software app or physical device that stores a set of keys that allow you to hold, access, and use digital currencies like bitcoin.
How does a crypto wallet work?
A crypto wallet works by using two keys; one public and one private.
Your public key is your wallet address that is used by anyone who wants to send you cryptocurrency. This address is a mix of numbers and letters between 26 and 35 characters long. To make this address more usable, it is often displayed as a QR code that can be easily scanned by a camera device.
It is safe to share your public key with others as it can only be used to add funds to your crypto wallet and cannot be used to remove funds or see what is inside your wallet.
Your private key acts more like a PIN or verification code that is used to verify you are the cryptocurrency owner and allows you to access your crypto holdings. As the name suggests, your private key should remain private and known only to you.
In reality, your private key is a really long string of numbers. To make it easier for people to use, most crypto wallets will share your private key with you as a seed phrase. A seed phrase represents this random number in an ordered sequence of 12 to 24 words.
It is best to keep your seed phrase written on a piece of paper precisely as displayed when setting up your crypto wallet. We recommend locking this piece of paper up in a safe or another equally secure place. NEVER share this information with anyone.
It might be easier to think of your crypto wallet as a keychain because the only information it stores are your public and private keys. Your cryptocurrency lives on the digital ledger known as the blockchain and is encrypted with the information from your wallet that states you are the owner.
It sounds pretty complicated, but most crypto wallets come with apps that have easy-to-use interfaces that allow you to keep track of your holdings with live price charts. Some, like Olliv, even allow you to buy or sell crypto right from the app.
How to pick the right crypto wallet
Now that you understand how cryptocurrency wallets work, let's get into the different characteristics of a wallet. Crypto wallets come in many different formats, but before deciding which one will work best for you, there are two questions to consider:
Is it a hot or cold wallet?
When talking about crypto wallets, the terms hot and cold refer to internet connectivity. A hot wallet is always connected to the internet. This constant connection makes it more vulnerable to a cyber attack than a cold wallet that does not require an internet connection and is stored offline.
A hot wallet could be an excellent option for someone who makes frequent transactions from their crypto wallet. In contrast, a cold wallet might be a better option for keeping more long-term crypto holdings.
Is it custodial or self-custodial?
A custodial wallet, also known as a hosted wallet, is maintained by a third party. In most cases, that third party is a cryptocurrency exchange. The main benefit of a custodial wallet is that you have the option to recover your password if you happen to lose or misplace it. However, the drawback is that you do not own your private keys — the third-party hosting your wallet does.
There is a saying in the crypto industry, "if you don't control your keys, you don't control your coins." When using a custodial wallet, there is always a risk that the third party involved could be hacked or compromised and you could potentially lose your crypto.
Another risk factor of using a hosted wallet is that crypto exchange websites sometimes crash due to high activity volumes. When this happens, you can't access your coins, so you could potentially miss out on a strong return.
For these reasons, we never recommend using a custodial wallet — stick with a self-custodial wallet that is not hosted by a cryptocurrency exchange and stay in complete control of your crypto.
The most popular types of crypto wallets
Hardware wallets store your private keys on a hardware device like a USB thumb drive. When making a transaction using a hardware wallet, you must plug the device into your computer and enter a PIN. They connect online to make transactions but are typically stored offline, increasing the security of your coins.
A software wallet is a wallet app that can be downloaded on your smartphone or on your computer's desktop. They are non-custodial hot wallets that become cold when the device is not connected to the internet. Because they can be easily accessed from your phone, software wallets are great for using crypto on the go. Some software wallets, like Olliv, also allow you to buy or sell crypto directly from the app without the oversight of a centralized third-party like an exchange.
Olliv recommends using self-custodial wallets, such as those created on the Olliv platform, because they give you control.
Now that you know everything you need to know about crypto wallets, you should be ready to get started buying and selling cryptocurrencies. Visit a CoinFlip ATM near you or sign up for our online Order Desk to add some crypto to your wallet today!