- Crypto storage and more: Crypto wallets let you store, send, and receive cryptocurrencies like Solana and Bitcoin and access decentralized exchanges and other crypto apps.
- Diverse wallet choices: There are many different types of crypto wallets (such as Backpack Wallet) with different levels of user-friendliness and security, catering to a wide range of user preferences.
- Protecting your wallet: Crypto wallets are very secure, but you must take proper security precautions and avoid sharing or misplacing your login credentials and falling for scams.
What Is a Crypto Wallet and How to Choose the Right One?
- Your crypto portal: Crypto wallets are your main way to store, send, and receive cryptocurrencies – in addition to other exciting features
. - Different wallet options: Software-based wallets are more convenient and easy to use, but hardware wallets are more secure. Choose a wallet that fits your preferences.
- Protecting your wallet: Safeguard your wallet by all means possible, including using 2FA, protecting your private key, and avoiding phishing scams.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a tool that lets you store, send, and receive cryptocurrencies like Solana, Bitcoin, Ethereum, and countless others. For most people, crypto wallets are their primary means of interacting with different blockchain applications and platforms – in addition to safeguarding their crypto.
Contrary to what many believe, crypto wallets don’t technically “store” your cryptocurrency. Cryptocurrencies exist purely as transaction records on a blockchain’s decentralized ledger.
Wallets let you access and manage these records using keys—cryptographic codes essential for accessing and managing your crypto holdings. These keys come in two types: public and private keys, each serving a crucial role in the security and functionality of your wallet.
Understanding Wallet Keys
To fully grasp how crypto wallets work, you must first understand wallet keys. There are two main types of cryptographic keys to know: private keys and public keys.
Public Key:
This is your wallet’s address, which you can share with others to receive cryptocurrency. Think of it as a bank account number or an email address you share to receive messages (or, in this case, crypto).
Private Key:
This is your secret key that gives you access to your wallet. It’s akin to the password (that can never be changed) to your email account, so be sure to keep it private. Private keys are used to sign transactions and prove ownership without revealing the key itself. If someone gets hold of your private key, they can access your funds and take control of your wallet.
Why are Crypto Wallets Important?
Crypto wallets are the primary means for storing and transferring your cryptocurrency, which makes them invaluable for every crypto user. More specifically, crypto wallets provide you with:
Security:
Crypto wallets protect your private keys, which are necessary for accessing and managing your cryptocurrencies. Without these keys, you can't control your digital assets, making them a prime target for hackers. By keeping your private keys secure, wallets help prevent unauthorized access and theft.
Control:
With a crypto wallet, you maintain full control over your assets. Unlike traditional financial systems where banks hold your money, crypto wallets allow you to be your own bank. This means you have the freedom to send, receive, and store your cryptocurrencies without relying on a third party.
Accessibility:
Crypto wallets make it easy to access and use your digital assets from anywhere in the world. Whether you want to send money to a friend, pay for goods and services, or invest in new projects, a crypto wallet provides the necessary tools to manage your assets on the go.
A growing number of crypto wallets also have rolled out additional features that go beyond basic wallet functionalities. This includes the ability to directly access a growing number of web3 applications directly from your wallet, including decentralized exchanges (DEXs) for direct peer-to-peer crypto trading, crypto lending platforms, and a wide array of other on-chain services.
As a result, crypto wallets have become one of the most popular ways for crypto holders to engage with the broader web3 universe.
Types of Crypto Wallets: Hot Wallets vs. Cold Wallets
There are many brand options, but all wallets types fall under two overlapping categories: custody (custodial vs. non-custodial) and access type (hot vs. cold).
Hot Wallets
Hot wallets are software-based crypto storage solutions that are connected to the internet, which makes them ideal for frequent transactions and easy access. They are convenient but generally less secure than cold wallets.
Common hot wallets include:
Web Wallets: Web wallets let you access blockchains directly through your browser extension, so there's no need to download or install software. This includes wallets provided by exchanges and other browser-based wallet services.
- Examples include: Backpack (extension) and MetaMask
Mobile Wallets: These are apps you install on your smartphone. Mobile wallets are great for everyday use and offer features like QR code scanning for quick payments.
- Examples include Backpack (iOS or Android) and Trust Wallet
Desktop Wallets: These are software programs you install on your computer. As long as your computer is virus-free, these wallets generally provide a high level of security and control – but they are only accessible from the device they are installed on.
- Examples include Electrum and Exodus.
Cold Wallets
Cold wallets are offline, providing a higher level of security against online threats. They are best for long-term storage and larger amounts of cryptocurrency.
Common cold wallets include:
Hardware Wallets: These are physical devices that generate and store your public and private keys offline using a random number generator (RNG). Some hardware wallets also let you set up a PIN and a recovery phrase as a backup.
- Examples include Ledger or Trezor.
Paper Wallets: These are physical pieces of paper with your private and public keys printed on them. While they offer complete offline security, they are vulnerable to physical damage and loss.
- Examples include: handwritten notes, printouts
Custodial vs. Non-Custodial Wallets
In addition to the above, most crypto wallets are also classified between custodial and non-custodial solutions.
Custodial Wallets
Custodial wallets are managed by a third-party platform. In other words, a third party holds your private keys, and you have to trust that entity to keep your assets safe. While this means you’re not fully in control of your crypto, custodial wallets do offer some benefits – particularly for new crypto users. For instance, many custodial wallet providers have email or phone-based account recovery processes or, in some instances, insurance policies that can cover potential crypto losses.
Custodial wallets are typically offered by institutional service providers, such as centralized exchanges, payment processors, and traditional investment platforms like Grayscale and Bitwise. If you are not prompted to record a recovery phrase (seed phrase) when you set up a crypto wallet, then it is most likely a custodial wallet.
Non-Custodial Wallets
With non-custodial wallets, you hold your private keys, which gives you full control over your crypto. This type of wallet is often preferred by those who prioritize security and control. However, it also means that if you lose your keys, there’s often no way for you to recover access to your wallet.
All hard wallets and most downloadable software wallets are non-custodial. If you are prompted to record a recovery phrase (seed phrase) when you set up a crypto wallet, then it is most likely a non-custodial wallet.
Multisignature (Multisig) Signing
While the wallet types outlined above cover essentially every available crypto wallet type, you can also use these solutions in tandem to create more robust security systems.
Multi-Signature: This set-up requires multiple private keys to authorize a transaction, adding an extra layer of security. This is useful for organizations or individuals seeking additional security measures.
For instance, you can use a multi-sig wallet to create multiple private keys for yourself. By storing these keys in different places, you can significantly reduce the chances of ever getting hacked.
Alternatively, a multi-sig wallet may involve two private keys with two different cold storage devices held by a user and one hot wallet held by a third-party custodian, with two keys needed to sign off on any transaction.
Examples of cold storage devices include:
Backpack wallet supports multi-signature signing with support across three worldclass hardware wallets (Keystone, Trezor, and Ledger). We have a whole article on multi-sig here if you want to learn more.
Advancements in Crypto Wallet Technology
Account Abstraction: The latest generation of web3 wallets are simplifying wallet setup and usage with account abstraction– a method of replacing a wallet’s key management and transaction approval processes with more intuitive user interfaces. For instance, instead of juggling seed phrases and complex security steps, users can use account abstraction to log in to their wallet with familiar methods like email or biometrics.
This setup also allows for social recovery features, letting users regain access through trusted contacts, rather than risking loss with traditional private keys. This evolution makes crypto more accessible, reduces the chances of losing access to funds, and offers a more secure, user-friendly entry point into the digital asset world. It's like having a digital fortress that's easier for you to enter but still keeps unwanted users out.
How to Choose a Crypto Wallet
Choosing the right crypto wallet comes down to your personal crypto user preferences. If you’re an active trader, a web wallet is great for quick access and convenience. But if you're more interested in holding crypto long-term, cold wallets may be your best bet since they’re less vulnerable to cyber threats.
When trying to decide between different crypto wallet options, consider the following factors:
Security:
If safety is your top concern, you can opt for a cold wallet. And if you’re leaving your crypto on an exchange’s custodial wallet, make sure your funds are insured.
Convenience:
For daily transactions and active web3 application usage, hot wallets are usually more user-friendly.
Supported Cryptocurrencies:
Make sure the wallet supports the coins you want to store. Most wallets are only compatible with specific cryptocurrency token standards.
Ease of Use:
Hot wallets typically have simpler user interfaces, which is helpful for new crypto users.
Backup and Recovery:
Check if the wallet offers easy ways to back up your data and recover wallet access. Most non-custodial wallets don’t offer this feature, but some do.
Reputation:
It’s important to only use crypto wallets issued by well-regarded trusted brands, with a strong track record of customer satisfaction.
Cost:
While most software wallets are free, hardware wallets cost money. Pick what works for your budget and your security habits.
The wallet you ultimately decide to use should reflect your balanced priorities.
How to Obtain and Use a Crypto Wallet
Once you’ve researched different wallet types and chosen one that works for you, be sure to obtain it directly from the wallet issuer. This typically involves purchasing or downloading the wallet from the provider's official website and carefully verifying the URL to ensure it's legitimate. This is crucial because there are many fraudulent sites designed to look just like the real ones. And if you're opting for a hardware wallet, double-check that it arrives with its seal intact and the packaging untampered with to ensure it's secure.
Once you’ve obtained your wallet, it only takes a few easy steps to set it up.
Below is a rundown of how to set up your wallet, using Backpack Wallet as an example:
- Install Your Wallet: Download the Backpack wallet (either as a browser extension or a iOS or Android mobile app).
Note: For hardware wallets, reference the manufacturer's setup guide; you may need to connect the device to your computer to install the required software.
- Set Up Wallet: Once you open the wallet software, you'll have the option to either create a new wallet or import an existing one (using either your seed recovery phrase or private key). For a new wallet, follow the steps to generate a wallet address and private key.
Note: You should immediately back up your wallet to prevent loss. Follow the instructions to save your recovery phrase or create a backup file and store it securely.
- Explore Wallet Interface: Before transferring any cryptocurrency to your wallet, be sure to spend some time exploring the wallet interface. Get comfortable with functions like sending and receiving funds, viewing transaction history, and adjusting different settings.
- Fund Your Wallet: To fund your crypto wallet, first find your public address (displayed as a string of characters and a QR code).
Note: You can share your public address with a sender or use it to transfer your crypto from another wallet or platform. Just be sure to double-check the address before every transfer to ensure it's correct, and make sure the crypto you’re transferring is supported by your wallet.
- Transact With Your Wallet: Each time you send cryptocurrency or interact with a DApp, your wallet creates a digital signature. This signature verifies that the transaction is legitimate and that you’re the one authorizing it.
Note: Make sure you only execute transactions you understand and approve of.
How To Keep Your Crypto Wallet Secure
Once you’ve funded your crypto wallet, it’s important to do everything you can to make sure your assets stay secure.
Here are some important things to keep in mind:
- Protect Your Password & Seed Phrase: Always create a strong, unique password for your wallet. Write down your seed phrase on paper and store it in a secure, offline location. Never share your seed phrase or store it digitally.
- Enable Two-Factor Authentication: For wallets that support it, activate 2FA for an added layer of security. Use authenticator apps like Google Authenticator or Authy instead of SMS-based 2FA for better protection against SIM-swapping attacks.
- Use Multiple Wallets: Spread your crypto holdings across multiple wallets to reduce the risk if any of your accounts are compromised. Consider using a burner wallet for airdrops, so your main holdings are safe if anything goes wrong.
- Be Alert for Phishing Scams: Be cautious of unsolicited emails, messages, or links claiming to be from your wallet provider. Always verify the sender and URL before entering any sensitive information. Bookmark your wallet's official website to avoid phishing sites.
- Avoid Public Wi-Fi: Avoid accessing your crypto wallet over public Wi-Fi networks, as they can be insecure. If necessary, use a virtual private network (VPN) to encrypt your connection and protect your data from digital eavesdroppers.
- Stay Updated: Regularly update your wallet software to the latest version. Wallet updates often include critical security patches and new features that enhance your wallet’s safety and functionality.
Closing Thoughts
Cryptocurrency wallets are your primary means of securely storing, sending, and receiving digital currencies. And increasingly, these wallets are becoming gateways to the vast and growing universe of blockchain applications and services. Whether you’re a crypto veteran or new to the game, it’s important to explore different options and choose a wallet that fits your personal needs.
And remember – a crypto wallet is only as secure as its private keys. So be sure to safeguard your wallet login and recovery details, avoid suspicious transactions and messages, and explore all other security features at your disposal. This way, you’ll be free to explore the crypto space with confidence and peace of mind.
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Disclaimer: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial, legal or other professional advice, nor is it intended to recommend the purchase of any specific product or service. You should seek your own advice from appropriate professional advisors. Where the article is contributed by a third party contributor, please note that those views expressed belong to the third party contributor, and do not necessarily reflect those of Backpack. Please read our full disclaimer for further details. Digital asset prices can be volatile. The value of your investment may go down or up and you may not get back the amount invested. You are solely responsible for your investment decisions and Backpack is not liable for any losses you may incur. This material should not be construed as financial, legal or other professional advice.
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