A beginner’s guide to crypto wallets
Finding the right wallet for your digital assets is an important step in your web3 journey. This article explores different types of wallets, how they work, and how to choose the right one for you.
Topics to read before diving into this course:
At the end of the lesson, you will be able to answer the following questions:
What are crypto wallets?
What are the kinds of crypto wallets?
What should I consider when choosing a crypto wallet?
What are crypto wallets?#Copy URL to this article section
A crypto wallet is an app or device that lets you interact with a blockchain. This works just like your wallet in real life, too. To illustrate better, let’s compare the two.
We use our wallets in real life to store our money, ID cards, credit cards, pictures, and even receipts from doing groceries. We can use what’s inside our wallet to make payments and show identification.
Crypto wallets work in a similar way, but it all happens digitally. A crypto wallet allows you to perform transactions on a blockchain, store digital assets (like tokens of NFTs), establish your identification as the wallet owner, and sign legal documents or encrypt information.
Blockchain technology allows you the ease of sending and receiving digital assets, so having your own crypto wallet gives you control over what you own in the blockchain.
When interacting with a blockchain (and thereby owning a crypto wallet), it is important to know the following concepts:
Secret recovery or seed phrase
Private and public keys
Ways to secure your crypto wallet
Secret recovery phrase or seed phrase#Copy URL to this article section
When setting up your cryptocurrency wallet, there are several security features that you should not take for granted. One of these is the secret recovery phrase, also known as seed phrase. This is a set of random words that represent data when combined.
A secret recovery phrase is unique for each account. If your wallet gets damaged, or in any event that results in losing access to your hardware, you can recover your assets by entering your secret recovery phrase.
IMPORTANT: Your secret recovery phrase should NOT be stored online either as text or image. It should be written down on a piece of paper and kept in a secure location.
MetaMask showing the Secret Recovery Phrase when an account is created
Private keys and public keys#Copy URL to this article section
A private key is a string of letters and numbers that acts like a password to an account inside a wallet, just like securing your house with a key.
On the other hand, a public key is like your home address. It allows you to receive money or assets into your account. During transactions, this is the address you give to the other party.
What kind of crypto wallets are there?#Copy URL to this article section
Crypto wallets come in different shapes and forms. Here are some examples categorized based on safety and the amount of control you can have over your digital assets.
Software and hardware wallets#Copy URL to this article section
Software wallets (also known as hot wallets are entirely digital and require internet connection, since private keys are stored online. Some popular examples are MetaMask and Ronin wallet, which are widely used in the crypto space.
Meanwhile, hardware wallets (or cold wallets) are physical devices that allow storage of private keys offline. Examples you may have heard of are Trezor Model T and Ledger Nano S.
Software Wallet: MetaMask
Hardware Wallet: Trezor Model T
Custodial and non-custodial wallets#Copy URL to this article section
On the other hand, the difference between custodial and non-custodial wallets is the owner’s control over their own assets.
Custodial wallets (e.g. Binance wallets, Coinbase wallets) are typically offered by a centralized business such as a cryptocurrency exchange. These wallets are controlled by a third party which holds your private key to ensure that your assets are safe.
Custodial Wallet: Binance
Non-custodial wallets (e.g. Metamask wallet) give you full control and ownership over your digital assets. This means that you control your private key, and you are solely responsible for keeping your assets safe.
Non-custodial wallet - MetaMask
What should I consider when choosing a wallet?#Copy URL to this article section
The concept of crypto wallets is straightforward, but the wide variety of options can make choosing the right one for you an intimidating task. If you don’t know where to start, here are some things you may consider when choosing a wallet.
Security features#Copy URL to this article section
Since crypto involves digital assets, the most important thing to think about when choosing a wallet is the level of security and its accessibility.
Software wallet security#Copy URL to this article section
Many software wallets use multiple levels of security and backup methods, but they are prone to hacking schemes. Since it can only be accessed through the internet, user errors such as browsing sketchy sites and trusting unreliable crypto projects make a crypto wallet vulnerable to hackers.
Hardware wallet security#Copy URL to this article section
Hardware wallets are known to have additional layers of security, such as the physical act of pressing buttons on the device itself each time a transaction is made on the blockchain. Because of this, they are more secure than their software alternative. However, this is not to say that the security level in hardware wallets is impenetrable. You are still vulnerable to hacking schemes when the device is connected online. There is also a risk of losing your assets when you lose your hardware wallet and forget to store your seed phrase.
Whichever wallet you choose, avoiding user errors and being informed is still the greatest layer of security you can give your assets. Learn how to secure your wallet properly.
Compatibility#Copy URL to this article section
The compatibility of your digital assets is another crucial factor when choosing a crypto wallet.
Not all wallets support all cryptocurrencies, and some can only hold one type of coin at a time. An example of this is Electrum wallet, which can only store Bitcoin and nothing else.
Electrum Bitcoin Wallet
To avoid having to create multiple wallets for multiple coins, it is better to have a wallet that supports many blockchain networks. MetaMask is a good example of a non-custodial software wallet that supports a variety of large blockchain networks, like Ethereum, Binance Smart Chain, and Polygon. Many hardware wallets also support a variety of large blockchain networks. One of which is The Trezor wallet, which became widely used since Axie Infinity rose in popularity since it supports the Ronin blockchain (i.e. an Ethereum-linked sidechain made specifically for Axie Infinity). It also supports various tokens like Bitcoin, Ether, and Binance Coin.
If you choose to have a hardware wallet, you have to pay extra for the additional security that you get from holding and keeping the actual hardware. Software wallets are usually free, which makes them a good place to start if you’re a beginner. MetaMask and Binance wallets are free and reputable wallets that even crypto natives themselves use.
User-Friendliness#Copy URL to this article section
If you are a beginner, starting out with an accessible crypto wallet that is easy to navigate and understand can help you ease into the web3 space, especially if it’s convenient for exchanges of tokens. Some software wallets, like MetaMask and Ronin wallet, are great because of their user-friendly interface. The same can also be said for several hardware wallets.
When choosing a wallet, it is also a good idea to read user reviews. Narratives from first-hand experiences of using the wallet can help you learn more about its functions and performance.