If you’re new to cryptocurrency, one term you’ll come across is crypto wallet. A crypto wallet is either a digital tool or a physical device that helps you access and manage your assets. It doesn’t hold the crypto itself, as that remains on the blockchain. Instead, it stores the private keys needed to access your assets and send, receive, or buy with your cryptocurrency. Let’s take a closer look at how crypto wallets work and the different types available.
The information presented here does not constitute financial advice but is for educational purposes only. Please do your own thorough research or consult a professional to better assess the risks of investing in cryptocurrencies.
A crypto wallet stores the private keys needed to access and manage digital assets on the blockchain, not the assets themselves.
Public keys let you receive cryptocurrencies, private keys let you send them, and seed phrases act as a backup.
Wallets can be custodial or non-custodial, hot (online) or cold (offline), including software, hardware, and paper formats.
Crypto wallets use private keys and recovery phrases for access, often combined with passwords or two-factor authentication.
A crypto wallet is essentially a digital intermediary between users and the blockchain network. Imagine a crypto wallet as your personal bank account in the digital world, but instead of holding money, it safeguards your digital assets through cryptographic keys:
Your public key acts as a unique digital address, much like an email address, allowing others to send tokens or crypto coins to your wallet.
Your private key is the true gatekeeper of your wallet, signing transactions when you send or receive cryptocurrency to prove that you are the owner authorising the movement of funds.
Once a transaction is signed and broadcast, it is recorded on the blockchain. The blockchain maintains a ledger of all activity and tracks any changes in ownership of every digital asset.
The private key that’s needed to access assets with a crypto wallet is often protected with a password or PIN. Most wallets also generate a seed phrase as a human-readable backup of your private key.
Crypto wallets support a variety of cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), and Solana (SOL). Some types also support non-fungible tokens (NFTs) and allow interaction with decentralised finance (DeFi) applications.
Anyone who knows your private key or seed phrase can control the assets at the addresses associated with it. From a security standpoint, public keys can be shared with no issues. For the private keys and seed phrases, however, a safe storage place is needed to avoid loss or theft of cryptocurrency balances. If both private key and seed phrase go missing, you won’t be able to recover your funds.
Self-custody crypto key wallets let users securely manage their digital assets without relying on a custodian (such as an exchange) to hold their private key. Users have full autonomy over how and when to transact. This is in keeping with blockchain’s core principle of “not your keys, not your coins”, which refers to the idea that you don’t truly own your cryptocurrency if you don’t control the private keys.
Choosing a reputable physical hardware wallet can add an extra layer of defence against unauthorised access, as the private keys are kept offline and away from internet-based threats.
Cryptocurrency wallets differ in two main ways: how they are controlled and whether they have internet connectivity. Wallets can either be managed by a third party, known as custodial wallets, or by the user themselves with non-custodial (or self-custody) wallets. Wallets can also be categorised as online “hot wallets” or physical “cold wallets” that operate entirely offline.
Custodial wallets
With custodial crypto key wallets, the provider holds and manages your private keys for you. This is also a common setup among crypto exchanges, where trading is often bundled together with other services such as swaps and staking.
Leaving storage of keys in the hands of a third party may appeal to some users, but of course it also relies on trust. Any security breaches on the provider’s side could place assets at risk and, in the worst-case scenario, result in the loss of some or all your funds.
Non-custodial wallets
Also known as self-custody wallets, the user has complete control over their private keys, allowing direct interaction with the blockchain. Using this type of crypto wallet can mean greater privacy and security since no outside party has access to the funds. However, it also means the user is fully responsible for keeping their keys and recovery information safe.
Platforms like Bitpanda offer both a custodial platform that manages users’ keys and a separate non-custodial Web3 wallet, giving users full control over their private keys if they choose.
Hot cryptocurrency wallets are connected to the internet, so users have fast and easy access to their digital assets for active trading. Most are software-based. This constant connectivity can make digital currency wallets vulnerable to hacking or phishing attempts, and protection is only as strong as the wallet provider’s security measures. Strong passwords and two-factor authentication (2FA) can be utilised to mitigate some of the risk associated with online crypto wallets.
Conversely, because cold wallets work entirely offline, they are often favoured by security-focused users. Because they stay offline, it can be hard for hackers or malware to gain access. Equally, they may be less convenient for frequent crypto trading, requiring manual connection to access or move funds.
These are apps you install on your computer or a mobile device to manage your cryptocurrencies. You have immediate access to your crypto holdings and, with non-custodial software wallets, full control over your private key. Wallet data is typically encrypted and protected by a password, PIN, or biometric authentication.
There are two main digital wallets for cryptocurrency:
Crypto mobile wallets – Apps specifically for smartphone or other mobile devices that let you manage your assets on the go, often with QR code scanning for sending and receiving crypto.
Crypto desktop wallets – Installed on a computer, desktop wallets give users strong control over their assets and may include features like managing multiple currencies or storing transactions locally, but they may be vulnerable if the device is compromised.
Users can also manage their crypto online through their browser, without needing to install any software. Web wallets are often provided by exchanges or online platforms and tend to be custodial, with the provider handling the private keys. Some providers support Web3 features, so you can connect to dApps, use DeFi services, and manage NFTs straight from your browser.
Hardware wallets store private keys offline on a dedicated, encrypted device that often resembles a USB stick. The keys are stored inside a secure chip, and the wallet never exposes them to your computer when plugged in. They are often used for long-term crypto storage because even if a computer has malware, the keys stay unreadable in plaintext. They may not be the most user-friendly option for everyday use.
This is a type of cold storage in physical form. Public and private keys are typically printed on a piece of paper. Some people use lamination or engraved metal plates for extra durability. If not kept safely, they can be vulnerable to loss or theft. Plus, some consider paper wallets to be incompatible with crypto’s nature as a form of digital currency.
Web3 wallets go beyond holding the access keys to cryptocurrencies – they also connect you to decentralised apps (dApps), NFT marketplaces, DeFi protocols, and DAOs. They double as a digital identity, letting you sign into platforms seamlessly without sharing personal data. This setup gives you direct control over your assets, cutting out intermediaries.
Follow these steps for how to store cryptocurrency in a wallet:
Choose your wallet type: Decide whether you want a custodial wallet, where the provider manages your private keys, or a non-custodial wallet, where you have full control.
Download the wallet app: For software wallets, download the official app on your mobile or desktop.
Secure your recovery phrase (seed phrase): Your wallet will provide a 12- to 24- word seed phrase, which is important for backups.
Set a strong password or PIN: Protect your wallet with a unique, strong password or PIN.
Test with small transactions: Sending small amounts of cryptocurrency first can help to ensure everything works correctly without risking significant sums.
Receive and add funds: Use your wallet’s public address to receive cryptocurrencies, whether from an exchange, purchasing directly within some apps, or transferring from another wallet.
If you lose your private key or recovery phrase, your funds cannot be recovered. That’s why some people opt to store them offline as well.
It can also be helpful to familiarise yourself with the basics, including learning how to send, receive, and manage crypto, and understanding the immutable nature of blockchain transactions.
New to Bitpanda? Get started today!
Sign up hereLog into your Bitpanda account and go to your portfolio.
Under Trade, select the cryptocurrency you want to send and click on Send.
Choose the correct blockchain network that matches the receiving wallet.
Select an existing wallet address from your address book, or add a new one by entering the wallet address, wallet name, and wallet host.
Enter the amount you want to send and review the transaction.
After confirming, the transfer is broadcast to the blockchain and cannot be reversed, so double‑check all details.
Click on Confirm.
The right cryptocurrency wallet depends on how you plan to use your cryptocurrencies. Consider:
Security – Hardware wallets provide robust offline protection, while users may need to take extra security measures if using an exchange or software wallet.
Convenience – Hot wallets offer quick access for daily trading, whereas cold wallets may require additional steps to send or receive funds.
Features – Wallets vary in terms of their support for multiple cryptocurrencies, Web3 apps, and NFTs.
Interested in learning more about cryptocurrencies? Take a look at our knowledge hub, where you can find a variety of articles and resources to expand your crypto know-how.
We answer some common questions about cryptocurrency wallets.
Disclaimer
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
