What Is a Crypto Wallet? A Simple Guide

A crypto wallet is a digital tool that lets you access, manage, and control your cryptocurrency. There are several different types of wallets — online accounts, mobile apps, and hardware devices — each offering different levels of convenience and security.

It’s important to know that despite the name, a crypto wallet doesn’t actually “store” your coins. Instead, it holds the vital information you need to interact with the blockchain, specifically your private keys and public addresses.

For anyone new to the digital asset space, understanding how digital wallets work is essential. Below, we break down what a crypto wallet really is, the pros and cons of different wallet types, and how to confidently set one up and start using it.

What Is a Crypto Wallet?

You might assume that a crypto wallet is simply a digital version of a physical wallet that holds cash or cards. In reality, it works very differently.

The Important Part: It Doesn’t Store Your Crypto, It Stores Your Keys

A crypto wallet doesn’t hold any actual cryptocurrency. Instead, it stores a private key — a randomized code that gives you access to your crypto, which resides on the blockchain.

Your private key proves ownership of your assets and allows you to send and spend your coins. Your private key is also used to generate a public key and a crypto address, which you share to receive crypto from others.

If someone gains access to your private key, they can control and transfer your crypto. This is why it’s important to keep your private keys secure and never share them with anyone.

Your “Seed Phrase” Is the Master Key to All Your Funds

When you first set up your own crypto wallet, it generates a seed phrase — typically a list of 12 to 24 random words. Also known as a secret recovery phrase, this phase acts as the master key to your private keys and wallet. If your wallet becomes unusable or inaccessible — say, your hardware device gets lost or your software wallet is a laptop that no longer runs — you can use your seed phrase to restore access to your funds on a new wallet.

While that acts as an essential safeguard, keep in mind that if someone else gets hold of your seed phrase, they can import your wallet on their own device and instantly take control of your crypto. It’s important that you never share your seed phrase and store it safely offline.

Why You May Need a Crypto Wallet

Many cryptocurrency exchanges and other crypto platforms offer custodial wallets, which store your private keys for you. This provides a simple and convenient way to access your crypto — you just log into your account. However, some crypto users opt to set up a personal (self-custody) wallet off an exchange or platform. Here’s why:

To Fully Control Your Digital Assets

Many users keep their crypto on the exchange or platform where they bought it, which is simple and convenient. The potential downside of this arrangement is that the third party group holds and manages the wallet on your behalf. This means your access to funds ultimately depends on that platform’s systems, policies, and uptime.

Setting up your own private wallet, on the other hand, gives you self-custody. In other words, you have complete control over your assets. A self-custody wallet also allows you to connect directly with decentralized applications (dApps), including decentralized finance (DeFi) platforms for lending, crypto staking, and more.

To Reduce the Risks of Using an Exchange

When you keep your crypto keys on an exchange, you’re trusting that platform to keep your assets secure. If the exchange is hacked, mismanages funds, or goes bankrupt, you could lose some or all of your holdings. While some exchanges offer limited private insurance, crypto holdings are not insured by government programs like the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC).

By moving your crypto into a personal wallet, you may minimize exchange-related risks. That said, it’s important to remember that simply engaging in crypto is highly risky and speculative, and that you could lose all the money you use to buy these assets, regardless of how you choose to store your keys.

Recommended: How Will the Genius Act Impact Stablecoin and Bitcoin?

Decision #1: Deciding Between Hot Wallets vs. Cold Wallets

If you decide to get a wallet, your first major choice is between a hot wallet and a cold wallet. Each has its own benefits and drawbacks, depending on how you plan to use your crypto.

Hot Wallets (Software)

Hot wallets are digital wallets that remain connected to the internet. Common examples include:

•  Mobile wallets: Smartphone apps designed for storing and managing crypto on the go.

•  Desktop wallets: Software installed directly on your computer.

•  Web wallets: Wallets accessed through your browser, typically hosted by a third-party provider.

Advantages:

•  Convenience: Hot wallets offer fast, easy access to your cryptocurrency for regular transactions, such as spending, buying, or selling.

•  Multi-device access: You can usually access your holdings from anywhere with an internet connection using various devices.

•  User-friendly: Most hot wallets are free to download and feature intuitive interfaces, making them well-suited for beginners.

Disadvantages:

•  Potential vulnerability to hacks: Because they’re generally always online, hot wallets may be susceptible to hacking and malware.

•  Custodial risks: Some hot wallets are custodial meaning a third party controls your private keys. If the provider is hacked or goes out of business, your funds may be lost.

•  Device dependence: If your device (phone or computer) is compromised, your wallet could be too.

Cold Wallets (Hardware)

Cold wallets are offline devices that store your private keys without any internet connection. The most common type is a hardware wallet, a small physical device (often resembling a thumb drive) that connects to your computer or mobile device via USB or Bluetooth. It’s important to know, however, that some hardware wallets are not necessarily cold wallets, since they may connect to certain software or apps. Another type is a paper wallet, which is simply a printed copy of your public and private keys.

Advantages:

•  Heightened security: Because they’re stored offline, cold wallets can offer protection from online hacking attempts, making them preferred by many crypto users for security.

•  Full ownership and control: Noncustodial wallets give you complete control of your private keys and funds.

•  Enhanced verification: Many hardware wallets require manual confirmation on the device itself to sign a transaction, adding an extra layer of security.

Disadvantages:

•  Less convenient: You need to connect your wallet to a device every time you want to access your funds or perform transactions, which isn’t ideal for frequent transactions.

•  Upfront cost: Unlike hot wallets which are often free, hardware wallets can cost anywhere from $50 to over $300.

•  Risk of physical loss or damage: If the device or paper wallet is lost, stolen, or damaged — and you don’t have your seed phrase — you could lose access to your crypto permanently.

Decision #2: Who Holds Your Keys?

The second major decision is whether you or someone else controls your private keys. This distinction divides wallets into two main types: custodial and noncustodial.

Custodial Wallets

A custodial wallet is one where a third party — like an exchange, or more traditional trading platform, or a dedicated wallet service provider — holds your private keys on your behalf. In this setup, the service provider is responsible for the security and management of your assets, allowing you to rely on their infrastructure and protection measures.

Advantages:

•  Convenience: Custodial wallets are typically easy to set up and offer intuitive, beginner-friendly interfaces.

•  Built-in support: You usually have access to customer service to help with issues like lost passwords or transaction errors.

•  Less personal responsibility: You don’t need to manage or secure your own private keys and seed phrases.

Disadvantages:

•  Lack of control: Because a third party manages your private keys, you don’t have full control over your digital assets.

•  May be vulnerable to hacks: Crypto exchanges can be targets for hackers. If your wallet is being held on the platform’s server (in a hot wallet) and their systems are compromised, your funds could be at risk.

•  Provider insolvency: If your wallet provider goes bankrupt, your assets may become part of their bankruptcy estate, leaving you as an unsecured creditor with limited recovery options.

Noncustodial Wallets

A noncustodial wallet gives you full control over your holdings without relying on a third party. This means you are responsible for managing your own keys and safeguarding your assets. Noncustodial wallets can be hot (software-based) or cold (hardware-based).

Advantages:

•  Total control: Only you hold the private keys, meaning you’re not dependent on a third party to access or transfer your funds.

•  Potentially enhanced security: If your funds are being kept on a centralized server, moving them to a private wallet may help protect them from exchange hacks and platform failure. (Note that many exchanges, as well as banking and trading platforms that offer crypto services, will keep a portion of your cryptocurrency in offline cold storage, which significantly reduces the risk of online theft and hacking.) Because funds aren’t stored on centralized servers, they may have greater protection from exchange hacks and platform failures.

•  More advanced features: Many noncustodial wallets are built to connect seamlessly with various decentralized applications (dApps), including non-fungible token (NFT) marketplaces and blockchain games.

Disadvantages:

•  Total responsibility: If you lose your seed phrase or misplace your device, there’s no recovery option.

•  No customer support: There’s typically no official help for technical issues or transaction errors. Users must rely on community forums or troubleshoot themselves.

•  Steeper learning curve: Noncustodial wallets require a basic understanding of blockchain technology, key management, and security best practices, which can be challenging for beginners.

How to Use Your Wallet to Send and Receive Crypto

Once you’ve set up your crypto wallet, you can use it to send and receive digital assets. While the exact steps vary depending on the wallet, here’s a general guide to help you get started.

How to Safely Receive Crypto Into Your Wallet

To receive crypto, you’ll typically need to share your wallet address — a unique string of characters representing your wallet on the blockchain. Here’s how to find it:

1.   Open your wallet: Log in to your wallet application on your phone or computer.

2.   Choose an asset: Select the specific cryptocurrency (like Bitcoin or Ethereum) you want to receive.

3.   Find the “Receive” option: Look for a button or menu item labeled Receive or Deposit

4.   Get the address: Your wallet address may be displayed at this point, either as an alphanumeric string or a QR code. You can copy the address, send the QR code as an image, or let someone scan the QR code directly.

5.   Verify the transaction: Ask the sender for the transaction ID so you can track and confirm the transfer yourself using a blockchain explorer.

How to Securely Send Crypto From Your Wallet

To send crypto, you’ll typically need to:

1.   Open your wallet and select “Send”: Log in to your wallet and choose the Send or Withdraw option.

2.   Select the cryptocurrency: Choose which digital asset you want to send from your available balance.

3.   Enter the recipient’s address: Paste or scan the recipient’s public wallet address. Always double-check for accuracy — even a single incorrect character can result in permanent loss of funds.

4.   Enter the amount: Specify the amount of crypto you want to send. Many wallets let you enter the amount in either crypto units or a fiat currency.

5.   Review the details: Double-check the recipient’s address, amount, and the network being used. Some networks require a memo or destination tag — make sure to include it if needed.

6.   Confirm the transaction: Once everything looks correct, confirm the transaction. You may be asked to enter a password or PIN, or approve the action through two-factor authentication for added security.

Your Essential Wallet Security Checklist

Your crypto’s safety also depends on how well you protect your wallet. Follow these golden rules to help safeguard your digital assets.

Rule #1: Record and Store Your Seed Phrase Securely Offline

Your seed phrase is the universal key to your crypto wallet. If it’s compromised, your funds can be stolen instantly — and there’s no way to recover them. To keep it safe:

•  Use durable materials: You could write your seed phrase on paper and store it in a safe place, but paper is vulnerable to fire, water, and wear. For long-term protection, consider using a specialized metal format designed to withstand extreme conditions.

•  Choose a secure location: Avoid obvious hiding spots like a desk drawer or under your keyboard. Instead, use a safe or a safety deposit box.

•  Create multiple copies: Make two or three copies and store them in separate secure locations to protect against loss or damage.

•  Never store or share it digitally: Your seed phrase should never touch an internet-connected device. Avoid taking photos, uploading it to the cloud, or sending it via email or text — all of which can be compromised by hackers or malware.

Rule #2: Consider a Cold Storage (Hardware) Wallet for Any Significant Amount of Crypto

If you hold a substantial amount of crypto, you may consider a noncustodial cold (hardware) wallet. This method offers strong protection against online threats such as hacking and malware by keeping your private keys completely offline. That said, many banking and brokerage platforms that offer crypto services keep a portion of their customers’ cryptocurrency in secure, offline cold storage. This practice significantly reduces the risk of online theft and hacking.

If you’re using noncustodial wallets, a good rule of thumb is to only keep the crypto you plan to use in the near term in your hot wallet. Once you’ve completed your transaction, transfer your funds back into cold storage.

Rule #3: Beware of Phishing Scams and Fake Wallet Apps

As crypto’s popularity grows, so do scams designed to trick users into revealing private keys or sending funds to fraudulent wallets. Common crypto scams include phishing emails (with links to fake websites) and counterfeit wallet apps that mimic legitimate ones.

To protect yourself:

•  Never share your private keys or seed phrase. No legitimate support team, app, or exchange will ever ask for this information.

•  Be cautious of unsolicited emails or messages. Don’t click on links in emails or texts. To verify an issue, go directly to the official cryptocurrency platform by typing its URL into your browser.

•  Only download apps from official sources. Get wallet apps from verified websites or trusted app stores. Check the developer’s information, reviews, and ratings before installing.

Rule #4: Enable Two-Factor Authentication (2FA) Wherever Possible

If your wallet or exchange supports two-factor authentication (2FA), you’ll want to turn it on. 2FA adds a critical extra layer of security — typically requiring a unique one-time code from your phone in addition to your password. In some cases, services will use fingerprint, facial recognition, or other biometric data as the second factor.

Even if someone obtains your password, they can’t access your account without the second authentication factor. It’s one of the simplest and most effective ways to prevent unauthorized access.

The Takeaway

A crypto wallet is the essential tool for accessing and managing your digital assets, but it’s important to remember that it stores your private keys, not the crypto itself. Whether you choose a convenient hot wallet and a highly secure cold (hardware) wallet will depend on your needs. Just keep in mind that for significant holdings, a cold hardware wallet is generally considered the gold standard for security. Whatever type of wallet you choose, be sure to safeguard your seed phrase and be vigilant against scams to protect your cryptocurrency.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

Learn more about crypto trading with SoFi.

FAQ

Can you convert a crypto wallet to cash?

Yes, you can convert your crypto wallet’s assets into cash typically by selling or liquidating your cryptocurrency on a crypto platform that supports fiat (government-backed) currency withdrawals. Once you sell your crypto for your local currency, you can transfer the funds to your bank account. Peer-to-peer (P2P) marketplaces and crypto ATMs are also options for cashing out. However, be mindful of transaction fees, withdrawal limits, and potential tax implications when converting crypto to fiat currency.

How do you get a crypto wallet?

To get a crypto wallet, you first need to decide on the type of wallet that suits your needs, such as a software wallet, hardware wallet, or platform-hosted wallet. Then, depending on the type, you will either download an app, purchase a physical device, or create an account with a platform. A critical step for many wallets is to securely back up your recovery phrase, which is used to regain access to your funds if you lose your device or password.

What happens if I lose my private key or seed phrase?

If you lose your private key, you lose access to your funds unless you have the seed phrase to regenerate it. If you lose both your private key and seed phrase, you will permanently lose access to your cryptocurrency because there is no way to recover your funds. If you only lose your private key, you can recover your wallet by using the seed phrase on a new device to restore access to your private keys and funds.

Are hardware wallets safer?

Cold hardware wallets are generally considered safer than software or online wallets because they store your private keys offline, away from potential hackers or malware. Since the device only connects to the internet when you make a transaction, it can reduce exposure to cyber threats. However, users must still protect the wallet’s seed (aka, recovery) phrase and keep the device physically secure.

Can I recover my funds if my custodial wallet provider goes out of business?

It depends. Assets related to cryptocurrency are not insured by either the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). If a crypto exchange or wallet provider fails, your crypto holdings are likely to become property of the bankruptcy estate, making you a general unsecured creditor, which means you will probably lose most or all of your funds.

However, if the exchange’s user agreement explicitly states that it keeps customer assets separate from company funds, you may have a better chance of recovery. In that scenario, your holdings may be considered your property, not the company’s, which could lead to them being returned to you.

---

About the author

---

Photo credit: iStock/momcilog

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOCRYP-Q425-012