Cryptocurrency

How Crypto Wallets Work: Four Key Things You Should Know

Market Trends

Let's have a look at four key things that you should know about the crypto wallets procedure

Cryptocurrencies are the rave of the moment with their growth spurred by the allure of interesting returns and disillusionment with legacy financial institutions. In the last 12 months, cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and Shiba Inu (SHIB) have gone on to record impressive gains beyond the stocks in leading companies. On the other hand, worrying levels of inflation have forced investors to consider cryptocurrencies as an alternative to hedge their assets.

For investors wading into the field, it is easy to be overwhelmed by the complex terms of blockchains, DeFi, nodes, and crypto-wallets. Worry not! This article will guide you through one of the most important aspects of investing in cryptocurrencies – crypto wallets. This in-depth guide will detail how crypto wallets work and important things that investors should bear in mind before making the choice of a crypto wallet.

What Is a Crypto Wallet?

Crypto wallets come in different forms but at their core, they are devices or software for investors to access their cryptocurrencies safely and securely. Apart from merely storing, cryptocurrency wallets allow users to send, receive and manage cryptocurrencies.

Cryptocurrency wallets can be likened to physical wallets that individuals use to store their fiat currencies. Crypto wallets are basically the digital versions of physical wallets and are used in storing cryptocurrencies. Since cryptocurrencies are generally decentralized, crypto wallets perform the role of banks in traditional finance as the need for intermediaries is often dispensed with.

How Do Crypto Wallets Work?

Cryptocurrency wallets work by combining the duo of private and public keys. A public key, also known as an address, is generated once you create a cryptocurrency wallet and it can be safely shared with third-party users. Like an email address, users can share the address with other individuals to receive emails from them without the fear of getting hacked.

On the other hand, private keys are meant to be private like passwords. Private keys are used to access your funds on the blockchain and if it falls into the wrong hands, there is a real possibility of losing your crypto holdings.

Both private and public keys are theoretical or random numbers with varying lengths that are dependent on the particular requirements or algorithm of the blockchain. Given the complex figures as it is made up of long, winding numerals, most crypto wallets make use of seed phrases to help users remember their private keys. Seed phrases are a randomly generated list of words between 12 or 24 that are essentially an unencrypted form of the private keys used to help users access their crypto wallets.

Thanks to technological advancements, it is now possible to send cryptocurrencies through QR codes instead of a long string of numbers that make up the public key.

Types of Crypto Wallets

One of the first things to know about choosing a crypto wallet is to identify the type of wallet that suits your needs. There are different kinds of cryptocurrency wallets but they are all broadly classified into two kinds – hardware wallets and software wallets.

Software Wallets

Software or hot wallets are simply web browser extensions, computer programs, or mobile applications that allow individuals to hold, send or receive cryptocurrencies. Software wallets are also called hot wallets because they are connected to the internet and the private keys are stored in the wallets and then the ownership is transferred to the users.

Some exchanges allow users to store their cryptocurrencies on their infrastructure and these are referred to as hosted wallets. For example, buying cryptocurrencies on exchanges like Binance and Coinbase and storing them on the platform constitutes using hosted wallets which are a subset of software wallets.

Software wallets can be subdivided into web-based wallets that are browser extensions, desktop wallets, or mobile wallets taking the form of applications.

Hardware Wallets

Hardware or cold wallets are physical devices that allow users to store their cryptocurrencies without the need to connect to the internet. They are also referred to as cold wallets or cold storage and are preferred for their security features.

Hardware wallets sign transactions with private keys offline and often take the form of a USB, hard drive, or CD. This ensures that the private keys do not interact with the server at any time, making it nearly impossible for hackers to compromise the system.

Hardware wallets interact with a  computer either through a web-based interface, a separate software wallet, or a company-created app.

Functionality

In choosing a cryptocurrency wallet, it is important to factor in the purpose that the wallet will be serving. If the wallet is to be used for storing cryptocurrencies for the long term, then a cold wallet will be ideal because it does not require a steady internet connection and can be stored for years without any concerns. However, connecting a hardware wallet to make transactions might be a bit of a hassle and it is best suited for long-term storage.

On the other hand, if you plan to use your crypto wallet to make regular transactions, then you might want to consider a hot wallet. The transfer of cryptocurrencies is a lot easier with software wallets because of the functionalities that they offer to users including the ability to scan QR codes.

Security of Wallets

In making the decision for a cryptocurrency wallet, users will have to consider the security of their chosen wallets. Generally, hardware wallets are more secure than software wallets because the private keys do not interact with the internet at any point in the transaction chain. This makes it difficult for hackers to attack the cryptocurrency holdings.

On the other hand, hot wallets might be vulnerable to security breaches because both private and public keys are stored on the internet. A way around this is to keep the amount that is meant to be transferred in a hot wallet and the rest of your holdings in cold storage. Furthermore, users can rely on the infrastructure of a reputable and secure cryptocurrency exchange to store their assets.

Fees

The fees associated with using cryptocurrency wallets should be considered before settling on a choice. Hot wallets and those hosted on exchanges charge fees on each transaction. However, some wallets allow users to set up a fee preference based on how fast they want their transactions to be processed. Apart from the transaction fees, there are usually no fees attached to creating a hot wallet.

Hardware wallets are a bit pricey and can cost anywhere between $100 – $1,000 to buy the devices. The cold wallet does not charge users transaction fees but users will have to pay the fees that are associated with using a particular blockchain. For example, they may have to still deal with the gas fees associated with Ethereum and other ERC-20 tokens.

User Commitment

The choice of whether to choose a custodial or non-custodial wallet is another important thing to consider. Custodial wallets are wallets that have their private keys held by a third party while non-custodial wallets are those that users are vested with control over the funds.

The implication of this is that the users of a non-custodial wallet will have to seek the permission of the third party before they can access their funds while a non-custodial wallet vests total control of the funds to the users.

In the event that private keys are lost, users of a custodial wallet can regain access by placing a request with a third party. On the other hand, there is no hope for recovery in the event of users losing their private keys since they have sole custody. If you feel confident in securing your private keys, then a non-custodial wallet might be ideal for your needs.

Examples of Cryptocurrency Wallets

While there is a large pool of cryptocurrency wallets, here is a list of some of the leading cryptocurrency wallets in the space

1.    CoinStats Wallet

CoinStats Wallet is a non-custodial DeFi wallet that allows users to buy, sell, and swap. track and earn on their digital assets. In terms of security, the wallet uses military-grade encryption and allows users to swap and send funds directly from their wallets. Users can seamlessly buy cryptocurrencies with fiat by syncing their bank cards and also offer investors the chance to earn up to 20% interest on their holdings through staking.

CoinStats offers the best of all the worlds and stands apart from its peers with no history of security breaches. Like a hardware wallet, it allows for the safekeeping of assets and makes it easy for users to interact with their holdings like a typical software wallet.

2.    Trust Wallet

Trust Wallet is a software wallet that allows users to buy, store, collect NFTs, and earn cryptocurrencies. It boasts of a ton of features like allowing users to see all their collectibles in one place, trade cryptocurrencies without leaving the app, real-time price tracking features, and the ability to interact with decentralized applications (DApps).

3.    Ledger Nano X

The Ledger Nano X is a hardware crypto wallet that is suited for a range of cold storage needs. It comes loaded with advanced security features and it is compatible with a range of crypto assets. It resembles a USB drive and can connect to your computer with ease and the Bluetooth functionality means Ledger Nano X can still connect with your mobile phone in the absence of a computer.

Conclusion

So there you have it! All the key things that you would need to know before settling on a choice of crypto wallet in one place. To recap, you would need to pay attention to the functionality, security, applicable fees, and user responsibility associated with choosing a particular cryptocurrency.

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