What Is a Cryptocurrency Wallet? Do You Need One to Use Bitcoin?


If you’re new to the world of cryptocurrency, it may seem strange that you need to have a wallet to hold digital assets. Like so many things in the cryptocurrency and blockchain space, it’s easy to be intimidated by a new term at first, but it’s not as strange as it seems.

This article will walk you through what a cryptocurrency wallet is, the different kinds of cryptocurrency wallets out there, and which one is right for you if you need one at all.

What Is a Cryptocurrency Wallet?

Without getting too much into how cryptocurrencies actually work, you need to understand the concept of “keys” to understand the importance of cryptocurrency wallets and the different kinds that are out there.

To send and receive cryptocurrency, you need two things: a public address and a private key. These are not (usually) physical items but rather digital identifiers, usually alphanumeric sequences or QR codes.

Bitcoin wallet as a sequence QR code or link

Your address lets other people send you cryptocurrency, and your private key lets you access your cryptocurrency holdings. Your cryptocurrency wallet is how your address and private key are maintained.

Wallets and Exchanges

If you spend much time in the cryptocurrency space, you’ll probably hear the expression “not your keys, not your coins.” This refers to cryptocurrency exchanges that let you buy and sell cryptocurrency but not send and receive cryptocurrency from other people.

So, while a wallet will store your keys and might let you buy and sell as well, some exchanges let you buy and sell but don’t provide you with a wallet or keys. This is how platforms like PayPal let you invest in cryptocurrency without your actually “owning” any.

On the topic of whether users get a private key for crypto that they buy on PayPal, the platform offers the following explanation:

You own the crypto you buy on PayPal but will not be provided with a private key. In case you’re wondering, a private key is a person’s secret code to access and manage their crypto. If lost, stolen, or even forgotten they can never get to their crypto again—pretty risky in its own right. As long as you can log into your PayPal account, your crypto will always be at your fingertips

This brings us to another idea that will come up throughout the course of the article: hot wallets vs. cold storage.

Hot Wallets and Cold Storage

When you use a “hot wallet,” your cryptocurrency is online. This makes it easier for you to buy, sell, send, and receive cryptocurrency but also makes it more susceptible to hacking. Think of hot wallets and storage as like using a cloud-based word processor: documents are easier to access for you, but it might be easier for everyone else to get in too.

When your cryptocurrency is not online but rather stored on a device, it is in “cold storage.” This makes your cryptocurrency a lot more secure, but it also makes it more difficult to use. Using the same analogy as above, this is like having a hard-copy manuscript: you can’t make edits, but you know exactly where it is and who can see it.

Soft Wallets: The Easy and Agile Way to Move Cryptocurrency

Wallets are hard or soft. The distinction is a lot like the difference between hardware and software. Soft wallets are entirely digital applications for storing and accessing your cryptocurrency.

Some mobile wallets only allow you to access soft wallets and exchanges without any hard wallet access required. However, most desktop-based wallet platforms use a soft wallet interface to buy, sell, send, and receive cryptocurrencies and allow you to move your cryptocurrency onto hard wallets for safekeeping.

Pros and Cons of Using Mobile Wallets

Image Gallery (3 Images)

Mobile wallets let you access your cryptocurrency on your mobile device, usually through a mobile app.

There’s a sort of stigma that mobile wallets are less secure than desktop wallets. This is true because your mobile device probably can’t double as or connect to a hard wallet like a desktop can. However, if you’re talking about connectivity, it gets a little more complicated.

Related: UDEX: A New Decentralized Crypto Exchange for Your Phone

Pros and Cons of Using Desktop Wallets

exodus desktop wallet app

Desktop wallets work the same as mobile wallets, but they’re accessible on larger computers. Some soft wallet platforms have some actions only accessible on the desktop interface, and some actions only available through a companion mobile app.

The biggest benefit to a desktop wallet is that most desktop wallet platforms allow the desktop app itself to double as a hard wallet. If you have more protections like a secure browser, a wired internet connection, or even a VPN or TOR that you don’t have on your mobile device, that’s a huge bonus too.

A Note on Soft Wallets and Network Security

Whether your soft wallet is accessed through desktop or mobile, it’s only as secure as your connection. If your main internet connection for your desktop wallet is a Wi-Fi connection, your smartphone’s mobile data is actually more secure. After all, you probably do conventional banking on your mobile phone at least some of the time.

Related: Wi-Fi vs. Mobile Data: Which Is More Secure?

Hard Wallets

Cryptocurrency hard wallet by Trezor

Image Credit: Jan Antonin Kolar / Unsplash

Hard wallets are physical objects with no-or-low internet connectivity. You can’t only use hard wallets because most of them can’t send and receive cryptocurrency; you can only use it to store the cryptocurrency that you move with a soft wallet.

As we’ve said, a hard wallet is any physical device (if any) that stores your keys and address. If you use a desktop wallet, your desktop computer may also function as your hard wallet. However, some companies make dedicated hard wallets.

These devices look and function similarly to a USB flash drive that plugs into your computer when you need to buy, sell, send, or receive cryptocurrency. Some include digital readouts on your various assets, but others are pretty plain.

What’s a Paper Wallet?

There’s one more kind of wallet that is arguably a kind of hard wallet, known as a paper wallet.

A paper wallet has your wallet key recorded on it and is usually laminated and kept in a super-secure location, like a fire-safe. A paper wallet is the most secure wallet there is, but it’s also the least convenient to use. The people who use them don’t use them often. In that, they’re really for very long-term storage.

What Type of Cryptocurrency Wallet Is Right for You?

The kind of wallet you should use depends on how you use cryptocurrencies and how much cryptocurrency you have.

If you regularly buy and sell small amounts of cryptocurrency for fun or try to take advantage of short-term price changes, you might not even need a dedicated wallet. You can use an exchange or other platforms in this way, making it easier to move your cryptocurrency around. Mobile wallets are good for this because you can easily respond to price changes from anywhere.

If buying and selling cryptocurrency is a bigger part of your budget and income, a desktop wallet is the way to go. You can’t take it with you, but it is more secure, gives you more options with your transactions, and gives you the option of keeping cryptocurrency on your device for safekeeping.

If you have large volumes of cryptocurrency as part of your long-term investment strategy, there’s nothing safer than a hard wallet. The less you move cryptocurrencies, the less the inflexibility of hard wallets will bother you.

As hard wallets go, you can use a paper wallet to plan for the future in the very long term, like to leave cryptocurrency for your children. Bitcoin pioneer Hal Finney stored his Bitcoin on a paper wallet in a safe deposit box for his children, for example.

Using Your Cryptocurrencies Your Way

Like all things crypto, the idea of wallets can be a bit intimidating. However, it’s really just the 21st-century version of concepts that have existed in banking for ages. All you need to know is soft wallets to move, hard wallets to hold.

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