Wallet

A Wallet, in the cryptocurrency world, is like a wallet in the real world in that they are both used as storage devices, “holding” currencies or things of value.

But cryptocurrency wallets are more like traditional bank accounts, allowing the wallet holder to manage their cryptocurrency assets, such as individual currencies or other digital goods like NFTs.

An interesting thing to remember about a wallet is that it doesn’t actually hold the digital assets inside of it.

Much like a bank account, a wallet is made up of a unique public address called your public key (similar to your bank account number) that you can share with the world, your friends, family, and other businesses and companies that you trust, to send and receive digital assets.

A wallet also stores a private key (much like the PIN that you use to access your bank account at the ATM), which, when combined with the public key, confirms ownership of the wallet, and allows you as the wallet owner to view the digital record of your wallet transactions, and allows you to perform actions such as buying, selling, withdrawing, and swapping funds.

Remember, a wallet is an interface to a specific blockchain, where all the details of your wallet, like balance and transactions, are stored.

Wallets come in custodial or non-custodial forms.

Custodial wallets are controlled by a company or business (like Coinbase or Binance), and that company stores your private keys for you.

In contrast, non-custodial wallets put the responsibility of storing your wallet keys in your hands. An example of a noncustodial wallet is a USB thumb drive with software on it that lets you buy, store, swap and spend your crypto assets.

Custodial wallets are considered less safe than non-custodial wallets because if hackers were able to access an exchange’s network, they could potentially access your private keys and ultimately have complete control of your account balance, allowing them to steal your digital assets.

Keep in mind that while most large crypto exchanges have enterprise-level security systems in place to keep hackers away, there are many examples, even recently, of exchanges getting hacked and user account balances withdrawn and stolen.

Wallets can also be classified as either hot or cold.

Hot simply means that a wallet is connected to the Internet, and cold means the wallet is not connected to the Internet.

Not being connected to the Internet inherently means a wallet is safer, as it can’t be potentially accessed by hackers.

But a wallet not being connected to the internet introduces its own set of barriers for easily accessing and using your digital assets when compared to a centralized exchange wallet or mobile wallet

Wallets can be further categorized into three different flavors – hardware, software, or paper.

Related Terms

Desktop Wallet

A common type of crypto wallet used to securely store and manage your private keys on a computer hard drive. They’re considered more secure than web-based wallets, since you can only access them from wherever your computer is located, and again, you control your private keys.

Cold Wallet

Cold wallets are not connected to the Internet, providing added security over hot wallets. Cold wallets are not directly exposed to Internet security threats like hacks, phishing attempts, malware, viruses, and other attacks that could lead to the permanent loss of your cryptocurrencies and digital assets.

Non-Custodial Wallet

Also referred to as a self-custodial wallet, puts the responsibility of storing your wallet keys in your hands. Non-custodial wallets come in different variations, including web-based, software installed on a smartphone or computer, a hardware device like a USB thumb drive, or even paper.

Custodial Wallets

Personal or business wallets controlled by a company or cryptocurrency exchange (like Coinbase or Binance), which stores your private keys for you. Custodial wallets are considered less safe than noncustodial wallets because if hackers were able to access an exchange’s network, they could potentially access your private keys and ultimately have complete control of your account balance, allowing them to steal your digital assets.

Hot Wallet

A Hot Wallet is a cryptocurrency wallet that is connected to the Internet. Wallets can be classified as either hot or cold. Hot simply means that a wallet is connected to the Internet, perhaps because it’s a wallet at a centralized cryptocurrency exchange or a wallet offered as a web browser extension on your desktop […]