What Is a Crypto Wallet? A Guide to Safely Storing Crypto

December 14, 2021 · 7 minute read

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What Is a Crypto Wallet? A Guide to Safely Storing Crypto

What Is a Crypto Wallet?

Referring to crypto storage as a “wallet” isn’t quite accurate, given that cryptocurrency exists on a blockchain. A crypto wallet is really where you store and secure your proof of ownership — using pairs of public and private keys that give you, and only you, access to your crypto.

Similar to other forms of investing — where you need a bank or brokerage account and passwords to execute transactions — you need a wallet in order to buy, sell, transact, and keep your crypto secure.

You can use a physical device (sometimes called a cold wallet), or software that’s on your computer, phone, or in the cloud (called a hot wallet). Keep reading to learn about the different types of wallets and how to use them to optimize both the trading and security of your crypto.

Why Do You Need a Crypto Wallet?

To understand why you need a crypto wallet, it might be helpful to compare crypto transactions to more traditional financial transactions using a fiat currency (e.g. dollars, euro, yen, etc.).

Traditional banking

When you deposit, withdraw, or invest ordinary money, the financial institution is at the center of every transaction. Although you can access your funds through a private account and passwords or PIN numbers, the financial institution manages, records, and finalizes all your transactions.

Cryptocurrency transactions

Crypto transactions are different because cryptocurrency is not only digital, it’s decentralized and lives on a distributed network known as a blockchain. There is no middleman or central authority like a bank, brokerage, or stock exchange involved. (That’s why these systems are often called “trustless,” because you don’t need to trust a third party; transactions are conducted independently.)

Crypto transactions typically require accessing the blockchain. That’s what a crypto wallet enables you to do, and why you need a crypto wallet. The wallet is where you store your public-private key pairs that give you access to your crypto on the blockchain and execute different transactions.

Recommended: Crypto 101: A Beginner’s Guide

How Does a Crypto Wallet Work?

A crypto wallet is pretty simple. The wallet software generates pairs of keys, one public and one private, which allow you to send and receive and otherwise manage your crypto.

A public key can be shared publicly to allow others to send cryptocurrencies to a wallet. In fact, a wallet address is basically a hashed version of a public key — shortened and compressed. A private key is a cryptographic string of numbers and letters which is mathematically related to a public key.

Private and public keys come in pairs because the public key is derived from the private one.

These days most wallets will accommodate many types of cryptocurrency, but not all of them do, so you have to check before buying or sending crypto.

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4 Different Types of Crypto Wallets

​​Most people divide crypto wallets into two categories — hot and cold. Here, we’ll add two more: the paper wallet and the custodial wallet.

1. Cold Wallets

A cold wallet is simply a hardware device, like a thumb drive, where you can store your private keys. A cold wallet is not connected to the internet. You can attach it to your computer using a cable or via bluetooth (although some people believe a bluetooth can be a vector for an attack).

Hardware wallets are less vulnerable to viruses or hackers, and crypto thefts from cold wallets are rare. These devices typically cost between $100 to $200. Ledger and Trezor are both well-known hardware wallet manufacturers.

2. Hot Wallets

The term “hot” refers to the fact that the private keys are held online at all times. While this makes your private keys more accessible when you want to make a transaction, the fact that you must access your wallet using an internet connection may also make it potentially vulnerable. Hot wallets can include desktop and mobile wallets.

Web wallets are online services that you can interact with from almost any device, similar to the way you would access your email. These can be more vulnerable to hacks and cyber theft.

Recommended: Cold Wallets vs. Hot Wallets

3. Paper Wallets

Paper wallets are an outmoded type of crypto storage that’s basically a crude type of cold wallet. A paper wallet involves printing out the private keys on a piece of paper using a key generator program.

While it’s relatively easy to store the private key to your crypto this way, trying to spend or trade some or all of that crypto can be complicated. Most crypto exchanges don’t support paper wallets.

Also, given how easy it is to lose a paper wallet or accidentally destroy it, this is generally not considered a smart way to safeguard your crypto. A paper wallet is vulnerable to theft — and to simple human error in recording the keys accurately. Remember: If you lose your private keys, forget them, misplace them, or if the keys are stolen, you can’t access your crypto and will lose your assets.

4. Custodial Wallets

Some investing apps and platforms, like crypto exchanges, allow you to buy, sell, and store your crypto using an embedded or hosted wallet, meaning the wallet is held on the platform. These wallets are “custodial,” in that the service or exchange actually holds the private keys to your crypto and therefore ultimately controls your assets.

The advantages of a custodial wallet is that it allows you to execute transactions seamlessly from the service or exchange you’re using. The downside is that you don’t have full control over your assets, and there have been some instances where an exchange was hacked.

In general, it’s best to not store large amounts of crypto in online exchanges. You can move it into the exchange when you want to send or sell it, but otherwise keep it in cold storage.

Which Type of Crypto Wallet Is Best?

Even if you have a web wallet or custodial wallet on an exchange, best practices are to invest in a cold wallet as well, especially to store large amounts of crypto. But you have to consider the tradeoff between accessibility and security.

Using a hot wallet that’s connected to the internet, or a custodial wallet that’s linked to your online trading account, can give you easier access to your keys, which translates to less hassle when you want to send or receive crypto.

Storing your crypto using a cold wallet is less vulnerable to hacks, but a little more difficult when you want to trade.

Public & Private Keys: What You Need to Know

Public addresses and private keys are used to view your assets, send, and receive crypto.

A crypto wallet has many public addresses. Anyone can deposit or send cryptocurrency to a public address, but a corresponding private key is required to take the funds.

Your public wallet address is what you give to someone when you want them to send you cryptocurrency.

However, the address is simply a string of numbers and letters, so unless someone knows it belongs to you, your holdings and transactions are anonymous. This transparency combined with anonymity is part of what appeals to many people about cryptocurrencies.

Your private address should never be published or given out to anyone – like your email password. The private key is what’s used to sign off on transactions, and if someone has access to both your public and private keys they now have control over your assets.

There are dozens of online exchanges where you can purchase and sell cryptocurrencies. Many of these allow you to directly link your bank account so you can easily transfer between U.S. dollars and crypto.

You can also directly transact with individuals using wallet applications or paper wallets. QR codes are commonly used as a quick way to sell or send cryptos, or you can send out your full public address.

Other Uses for Crypto Wallets

Although the primary use for cryptocurrency wallets is to store and transact with cryptocurrencies, there are also other uses for this technology. Tokens or digital information stored in a blockchain that represent anything from goods in a supply chain to a plane ticket can also be stored in and accessed via a digital wallet.

Blockchains can also store personal information such as your identity, tax history, medical information, voting information, and more. In the future we may find ourselves using blockchain-based wallets in many facets of our lives.

Before you purchase cryptocurrencies, think about how you plan to use and access them. If you intend to hold them long term, a secure cold storage wallet is probably your best option.

If you want to access them from your phone, you may want to download an app from a particular exchange or wallet provider.

Also, think about which cryptocurrencies you want to hold, and look into the options available for each coin. Doing your due diligence on both the coin and the wallet may keep you from getting scammed. In the past, some exchanges have been hacked, stolen people’s money, or shut down completely.

Storing and Securing Your Wallet

The most important part of choosing your wallet type and using your wallet is making sure your storage and transactions are secure. Here are a few tips for securing different types of wallets.

•   Web and desktop wallets: Back up your wallet regularly. If something happened to your browser or hard drive, the private keys could be lost, and you would lose your assets.

•   Mobile wallets: Backups are also important. Also: Don’t use a mobile wallet on a wireless network unless you know and trust it. There have been cases of people having their wallet hacked while on public Wi-Fi networks (think: cafes, libraries, airports).

•   Hardware wallets: Your funds will already be secure — it’s more a matter of keeping the physical wallet and backup seed phrase in a secure location. Don’t store the seed phrase on any computer and don’t share it with anyone.

•   Paper wallets: The wallet needs to be in a secure location and protected from water or fire damage. Some recommend laminating the wallet and keeping it inside a fire-proof lockbox or safe deposit box.

The Takeaway

Setting up a crypto wallet is an essential step in being able to send, receive, and store cryptocurrency. These digital wallets hold the pairs of keys that give you access to the blockchain, where your crypto and crypto transactions actually live. Like a car, you need the keys to do anything with your crypto.

Fortunately, these days you have a number of options to choose from, including wallets that are connected to the internet or to the cloud (hot wallets), as well as physical devices known as cold wallets. Most hot and cold wallets are considered multi-asset wallets, in that they can accommodate a range of different types of crypto. And when you open a brokerage account with SoFi Invest®, you can trade crypto any time, 24/7. Always know that SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure.

Get started trading crypto on SoFi Invest today.

Photo credit: iStock/Elena Perova

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

1 SoFi will assess a fee for each crypto transaction outside of automatic direct deposit purchases. For more information, visit sofi.com/invest/buy-cryptocurrency.

You need both a SoFi Invest crypto account and a SoFi Invest active investing account to get access to no-fee crypto purchases with direct deposit. Active investing and brokerage services are provided by SoFi Securities LLC, Member FINRA/SIPC. Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

2 Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on June 30th, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

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