Read our comprehensive beginner’s guide to choosing and using cryptocurrency wallets.
If you want to buy bitcoin or any other digital currency, you’ll need to choose a wallet where you can securely store your coins or tokens. But if you’re just starting out, choosing a wallet and learning how to use it can feel complicated and overwhelming.
That’s why we’ve put together this beginner’s guide to cryptocurrency wallets. Keep reading for information and advice on how crypto wallets work, the different types of wallets available and how to choose one that’s right for you.
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What is a cryptocurrency wallet?
A cryptocurrency wallet is a software program that allows you to store, send and receive digital currencies.
Because cryptocurrency doesn’t exist in any physical form, your wallet doesn’t actually hold any of your coins – instead, all transactions are recorded and stored on the blockchain.
Some cryptocurrencies have their own official wallets, while other products allow you to store multiple currencies within the same wallet.
But be aware that different digital currencies have different address types, and you’re usually only able to send coins between like wallet addresses – for example, you’ll need to send bitcoin to a bitcoin wallet address and Ethereum to an Ethereum wallet address.
How do cryptocurrency wallets work?
Instead of holding physical coins, a wallet has a public key and a private key.
- Public key. This is a long sequence of letters and numbers that forms the wallet address. With this, people can send money to the wallet. It’s similar to a bank account number in that it can only be used to send money to an account.
- Private key. This is used to access the funds stored in the wallet. With this, people can control the funds tied to that wallet’s address. It’s a lot like your PIN number in that you should keep it 100% secret and secure. However, it’s worth noting that not all wallets give you sole ownership of your private key, which essentially means that you don’t have full control over your coins.
As well as storing your public and private keys, crypto wallets interface with the blockchains of various currencies so that you can check your balance and send and receive funds.
How wallets and blockchains interact
The blockchain of any cryptocurrency contains a public record of all the transactions that have been made since it began. Your wallet address keeps a record of all your transactions, and therefore also tracks your crypto balance. By following the chain all the way to the present day, a wallet can figure out how many coins you have.
For example, let’s say Alice sends Bob 0.001 BTC. Once this transaction has been verified and added to the blockchain, the ledger records that the amount of bitcoin at Alice’s wallet address has decreased by 0.001 and that the amount of bitcoin at Bob’s wallet address has increased by 0.001 BTC.
The amounts sent and received as well as the public wallet addresses are all public information.
Types of cryptocurrency wallets
Now that you know how crypto wallets work, let’s take a closer look at the five different types of wallets available, each with its own advantages and disadvantages in terms of security, ease of use, convenience and a range of other factors.
Hot wallets vs cold wallets
As you’re researching and comparing a range of wallets, you’ll probably come across the terms “hot wallet” and “cold wallet”, or perhaps the concept of “cold storage”.
So, what does temperature have to do with crypto storage?
- Hot. A wallet is hot when it’s connected to the Internet. Nothing on the Internet is 100% secure, so funds kept in a hot wallet are always at a slight risk of theft or loss from software bugs or hackers.
- Cold. A wallet is cold when it’s safely offline and can’t be deliberately or accidentally compromised over the Internet.
Holding on an exchange vs in a walletIf you don’t want to go through the added step of setting up a crypto wallet, it’s possible to store your cryptocurrency in the wallet attached to the exchange you purchased from. This is a quick and convenient solution, providing fast access to your crypto whenever you need it, but it’s not recommended for a couple of reasons.
- You don’t control the private key to your exchange wallet. Instead, it’s controlled by the exchange, which effectively means that you don’t fully own your cryptocurrency.
- Exchanges are a popular target for hackers and thieves. There have been many well-publicised incidences of exchange customers falling victim to hackers as well as examples of fraud perpetrated by dodgy exchange operators.
With this in mind, the safest solution is moving your coins into a secure wallet that lets you retain control of your private key.
How to choose a cryptocurrency wallet
Now that you know all about the different types of wallets available, it’s time to find one that’s right for you. To do that, you’ll need to consider your needs and compare a range of wallets based on several key factors, including the following:
- The type of wallet you want. This factor comes down to personal preference. For example, if security is your number-one priority, you’ll probably want to compare hardware wallets. But if your main goal is being able to quickly and conveniently access your coins, a mobile or web wallet may be your preferred choice.
- Ease of use. Sending, receiving and storing cryptocurrency can be complicated and confusing, particularly for beginners. It’s essential that any wallet you choose suits your tech knowledge and level of crypto experience. So while crypto novices might focus on finding a wallet that is simple to set up and use, experienced holders might look for more advanced features, for example an in-wallet exchange and multisignature transactions.
- Security features. Find out what security features the wallet includes, such as 2-factor authentication and multisig functionality. Will your private key be stored online or offline? Has the wallet ever suffered any security breaches?
- Other features. Check what other features the wallet includes, such as the ability to exchange between currencies within your wallet or providing easy access to live fiat exchange rates or other market information.
- Supported cryptocurrencies. Are you looking for a wallet that stores just one crypto, like bitcoin, or are you in the market for a multi-currency wallet? Make sure the wallet you choose is actually compatible with the cryptocurrencies you need to store, and remember that some coins and tokens can only be held in an official wallet.
- The team behind the wallet. Next, see what sort of information you can find out about the people behind the wallet. How long have they been in business? What qualifications do they have? Are they continually working to upgrade and improve the wallet?
- Cost. While most crypto wallets are free to use, choosing a hardware wallet means you’ll have to be willing to part with some cash. Consider the upfront price and shipping costs when making your decision. Some wallets will also charge a fee for every transaction you carry out, so check the fine print to find out whether this is the case.
- Reputation. What level of community trust does the wallet have? Check out a range of independent online reviews to gauge how other users rate the wallet and whether they would recommend it.
Using your cryptocurrency wallet
You’ve chosen your wallet and completed the set-up process. Now it’s time to learn how to use it, so check out the step-by-step instructions below on what you’ll need to do.
How to send cryptocurrency from your wallet
To send funds from your wallet, you’ll need a wallet address (the recipient’s public key). These addresses are given in one of three ways:
- A long alphanumeric string (numbers and letters)
- A QR code (for smartphone wallets)
- A URL-like web link (clickable – opens your wallet automatically)
Once you have this address, you will need to do the following:
- Log in to your wallet.
- Click on “Send”.
- Enter the recipient’s wallet address. Please note that you can generally only send and receive like-coins – for example, you can only send bitcoin to bitcoin or Ethereum to Ethereum. You can’t send bitcoin to an Ethereum wallet address.
- Specify the amount (and possibly the currency) you want to transfer.
- Check any transaction fees that apply, making sure you have enough coins in your wallet to pay the fees.
- Review the details of the transaction to make sure you’ve correctly entered all the information.
- Click on “Send”.
Please note that the exact process will vary depending on the type and brand of wallet you choose. For example, hardware wallet users will typically need to connect their wallet device, enter a PIN or password and manually verify the transaction on the device itself.
How to receive cryptocurrency in your wallet
Receiving coins is even easier than sending them. However, wallets vary greatly in the way this is done: some will provide you with a fixed public address, some will give you a new address for every transaction and others will provide a combination of the two.
- Log in to your wallet.
- Click on “Receive” link.
- Copy the public wallet address provided.
- Send your address to the person who will be sending you a payment.
- Wait for the funds to arrive in your wallet.
Holding funds in your crypto wallet
If you want to hold onto your crypto, there’s typically not much you need to do once the funds have arrived in your wallet. You can log into your wallet whenever required to check your balances. Some currencies may allow you to earn interest on your coins by “staking” your holdings (you may need to follow specific instructions in your wallet to do this).
Other than that, the main thing you need to focus on is maintaining a high level of security at all times.
How to keep your wallet safe
Wallet security is a crucial consideration for any crypto owner, so keep these tips in mind to ensure you keep your funds as safe as possible:
- Research before you choose. Don’t just choose the first bitcoin wallet you come across. Thoroughly research the security features and development team behind a range of wallets before making your final decision.
- Enable 2-factor authentication. This is a simple security feature available on an increasing number of wallets. It’s simple to use and provides an extra layer of protection for your wallet.
- Pick your password carefully. Don’t be lazy when choosing a password. Make sure all usernames, PINs and passwords related to your crypto wallet are as strong as possible.
- Consider a multisignature wallet. Multisig wallets require more than one private key to authorise a transaction, which means another user or users will need to sign each transaction before it can be sent. Though this means it’ll take a little longer to send funds, you may find that the extra peace of mind is well worth the minor hassle.
- Update your antivirus protection. Make sure your PC, laptop, smartphone or tablet has the latest antivirus and anti-malware software installed. Make sure to also set up a secure firewall on your computer and that you never install software from companies you don’t trust.
Glossary: 2-factor authenticationUsed by the most secure and trustworthy wallets, 2-factor authentication requires a regular username and password combination and another authentication method.
This is often a PIN code that is sent to your smartphone as an SMS, may expire after a set amount of time and is different every time you log in. This means that an attacker needs to know your username and password as well as be in possession of your phone.
Some wallets also require the use of a secondary app installed on your smartphone that generates these PIN codes for you, again adding another layer of security.
- Update your wallet software. Take care to also update your wallet software regularly so that you always have the latest security upgrades and protections installed.
- Make a backup. Ensure that you have a wallet backup stored in a safe place so you can recover your crypto funds if something goes wrong, for example if you lose your smartphone.
- Check the address. When sending or receiving funds, make sure you’re using the correct wallet address. Similarly, if using an online wallet, make sure it is secure (i.e. check that its URL starts with “https://”)
- Don’t use public Wi-Fi. Never access your wallet over a public Wi-Fi network.
- Split your holdings. Consider splitting your crypto coins up between online and offline storage. For example, you can keep a small portion of your funds in online storage for quick and convenient access, and store the bulk of your holdings offline for extra security.
- Private key protection. Remember – you can’t access your coins without your private key, so don’t disclose it to anyone. Also check whether the wallet you choose allows you to retain full control of your private keys, or whether you’ll have to surrender ownership to a third party such as an exchange.
There’s no such thing as a one-size-fits-all “best cryptocurrency wallet”. The right wallet for you will be one that matches your needs, so if security is your number-one concern, you’ll probably end up choosing a different wallet to someone who wants fast and easy access to their coins.
The key thing to remember is to do your research and compare a range of wallets. Start with our range of crypto wallet reviews to get an idea of what’s available and the key features you need to consider.
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Disclosure: At the time of writing, the author holds ADA, ICX, IOTA and XLM.