How Cryptocurrency Wallets Work: 5 Important Basic Things You Should Know

With the consistent argument about the need for cryptocurrency adoption, cryptocurrencies like Bitcoin, Ethereum, and the rest have a rapidly growing community. However, it is essential to note that one may not hold or store cryptocurrencies without wallets coming into the spotlight.

Don’t think if you are a big cryptocurrency investor or just a springboard into the industry, a crypto wallet is needed before trading cryptocurrency.

A crypto wallet is where an investor can organize and make decisions about their portfolio. Ironically, some cryptocurrency traders often forget to study the basic elements that contribute to its functionality crypto wallet Failure to do so may result in the loss of funds due to the different levels of security that each type of wallet has.

With that in mind, let’s check out the main things one should note about a crypto wallet, its functions, and the different types of wallets.

What is a cryptocurrency wallet?

Most of the time, the interaction that takes place on the blockchain is courtesy of a crypto wallet; One can hardly find any activity on the blockchain that does not require wallets.

Cryptocurrency wallets are needed to invest or trade cryptocurrency; Even getting crypto loans needs a wallet before taking any further step, so it is indispensable.

A crypto wallet can be linked to a traditional bank account; It is the place where one can manage and trade their cryptocurrencies, including other digital assets such as NFTs.

However, the data cannot be changed or processed in a crypto wallet, and it does not have to go through intermediaries to make a transaction, unlike the traditional financial system.

It is possible to have a wallet anywhere, on your desktop, mobile device, browser and even offline; It uses public and private keys to exchange money from one wallet to another.

How do cryptocurrency wallets work?

Public and private keys are the most prominent elements of a crypto wallet to serve as a tool for interaction within the blockchain network.

While every crypto wallet may contain public and private keys, the number of cryptocurrencies it supports and their user commitment may vary depending on the type of wallet.

Be that as it may, crypto wallets primarily operate using public keys, which are similar in function to a bank account number, and a private key that serves as access to crypto funds one may have.

These two components allow users to know the total value of the cryptocurrencies they own, send and receive money to their address, and purchase other digital assets such as NFTs.

However, it is necessary to note that while the public key can be shared with anyone to send and receive money, private keys, just as the name indicates, should not be shared with anyone to avoid illegal access to your funds.

There have been cases where major cryptocurrency investors/traders have lost a cryptocurrency portfolio worth a lot of money either by exposing or losing their private keys.

5 important basic things you should know

Crypto Wallet Types

Cryptocurrency wallets are of different types, just as the traditional banking system has different types of bank accounts. However, the differences in cryptocurrency wallets are not quite the same as those in the banking system.

Paper wallets, hardware wallets, and software wallets are the three basic types of crypto wallets, and both novice and experienced traders can use any of them.

The vital thing that one should note is that each type of crypto wallet one chooses depends on the primary function it will serve.

A paper wallet is essential for those who hold their digital currency for a long time and need to secure their private and public keys by making a hard copy or copy of it.

Hardware wallets are similar to paper wallets, although they are different in many ways; While hardware wallets come in device form like USB, paper wallets are just printouts. In terms of security, hardware wallets are probably the best option; One can easily keep a comprehensive crypto wallet safe from cybercriminals at a time.

On the other hand, software wallets work on mobile devices, desktop devices, and even browser extensions. Also known as hot wallets, the private keys of the software wallet are stored on the cloud 24 homes a day, and it is very easy to transact with them.

Breaking or hacking a wallet or hardware is not a walk in the park; This is not the case with software wallets. A hacker or a seasoned cybercriminal can easily hack a software wallet at the slightest opportunity.

Supported currencies

It is essential to know that every crypto wallet has cryptocurrencies that allow it to be sent and received. In other words, a hardware wallet may not support the cryptocurrency supported by a software wallet.

This does not mean that software wallets support all types of cryptocurrencies – there are still differences in the number of supported cryptocurrencies.

For example, Electrum is a crypto wallet that only allows its users to store and manage Bitcoin in the wallet. In contrast, another crypto wallet, the Trust wallet, allows its users to store multiple currencies, including Ethereum and Cardano (ADA).

It all depends on the trading and storage functions, but note that often, a wallet that supports one type of coin or a few cryptocurrencies has a lot of security and features.

However, the downside is that it can be difficult to save the raw gateway or private key of a wallet that supports a single cryptocurrency if you need to use several cryptocurrencies.

open or closed source

Cryptocurrency wallets come either as open source or closed; The choice between these two is not based on anything other than courage.

As the name states, open source cryptocurrency wallets are those means that allow wallet users and developers to see the negative part of the wallet and drop the review related to the flaw.

Unlike open source, closed source wallets do not have their own source code, and many limitations come with these wallets.

It is an expert opinion that one uses open source wallets as they are known to receive cash and improve the necessary security and compliance concerns.

guarded or unguarded

Many beginners ignore this aspect of wallets in their quest to get on the cryptocurrency bandwagon; What is the level of user commitment.

Before using any wallet, check the level of control you have when accessing a cryptocurrency wallet and making transactions.

A custodial crypto wallet is where a third party holds the private keys and other essential components of the wallet which may be a crypto exchange. In simpler terms, the only thing a custodial wallet user can control is permission to send or receive cryptocurrencies from other wallets.

This is very different from a dishonest wallet; The user is the only one who controls the storage of private and public keys, transaction functions, and determines when the wallet is active.

However, while a non-secure wallet gives users the ability to do whatever they like with their security information, custodial wallets allow users to recover their data when they lose access to it. Some custodial wallets include Binance, Bitmax, Free Wallet, and Bitgo, while custodial wallets are Electrum, Trust wallet, Exodos, Zengo, etc.


The central focus and evaluation of a crypto wallet should be on security; It doesn’t matter if they don’t have a lot of features.

It is easier to use a wallet that lacks very advanced features than to use a wallet that can easily fall under the attack of a hacker.

While talking about security, most crypto enthusiasts think of a software wallet; Without proper care, a hardware wallet can be stolen or tampered with. Therefore, the security offered by a crypto wallet should be carefully evaluated before making any decision to use it.

For those who use software wallets, note that the security offered should not just end with a password; An expert hacker can easily bypass it. Hence, one must use software that provides two-factor authentication and multi-factor authentication and a backup feature in case you forget.

Hardware wallets are not excluded in the security assessment; The hardware wallet must come with a certified CC EAL5 + Secure Element chip to ensure that hackers cannot access it. Just like a software wallet, you can create a paper wallet that includes your recovery seed to prevent losing money if your hardware wallet gets corrupted.


Many inexperienced cryptocurrency investors use some type of wallet for a purpose that it is not primarily designed to do.

It is necessary to know how the crypto wallet works, the commitment that the user is allowed in a particular wallet, the number of supported currencies, the security measure that the wallet constitutes, and many other things.

When such knowledge about digital currency wallets is absorbed, the rampant loss of cryptocurrencies in the crypto landscape due to illegal access to wallets by hackers will be reduced.

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