A Beginner’s Guide to Crypto Wallets

It all started when Bitcoin was introduced a decade ago by Satoshi Nakamoto. Since then, cryptocurrencies have become popular and have been used by many traders, investors, and even business owners.

In recent years, cryptocurrencies have gained tremendous popularity as a digital form of money. As a beginner in the world of cryptocurrencies, one of the first things you'll need is a crypto wallet.

A crypto wallet is a software application that allows you to securely store, send, and receive digital assets. In this comprehensive guide, we will explore the fundamentals of crypto wallets, their types, the importance of using them, and the essential steps to get started with using crypto wallets.

What is a crypto wallet?

A crypto wallet is necessary if one wishes to send, receive and store cryptocurrencies. It uses encryption mechanisms to secure all transactions. This encryption mechanism involves utilizing what we call a Private and Public Key.

As above mentioned, a crypto wallet, also known as a digital wallet or cryptocurrency wallet, is a software application that enables users to securely store, manage, and transact with their digital assets, such as cryptocurrencies.

It serves as a bridge between the user and the blockchain network, allowing them to interact with their funds seamlessly.

A crypto wallet is categorized into two: hot wallets and cold wallets. Hot wallets are similar to the everyday wallets we use for everyday transactions; however, they are more user-friendly and are based online or digitally.

Cold wallets are like vaults; they often consist of hardware and offer high-level cryptocurrency storage. In addition, most hot wallets store your Private Key on Internet, while Cold wallets store the private key only on the user’s device.

What is the purpose of a crypto wallet?

The primary purpose of a crypto wallet is to provide a secure and convenient way to store and access digital currencies. In other words, the crypto wallet plays a crucial role in ensuring the security of the user's digital assets by generating and managing the cryptographic keys required to access and control the funds.

Just like a traditional and physical wallet which hold physical money and cash, a crypto wallet holds the user's digital currencies and associated information. It allows users to send and receive cryptocurrencies, monitor their balances, and track transaction history.

In the digital world of cryptocurrencies, where traditional banks and physical wallets are replaced by decentralized blockchain networks, a crypto wallet serves as a virtual container for the user's digital currencies.

By providing a user-friendly interface and seamless interaction with blockchain networks, crypto wallets empower individuals to participate in the exciting and evolving landscape of cryptocurrencies while maintaining control over their financial assets.

How crypto wallets interact with blockchains?

Crypto wallets interact with blockchains, which are decentralized and distributed ledgers that record all transactions and data related to a particular cryptocurrency. The interaction between wallets and blockchains is facilitated through the use of cryptographic keys.

When a user creates a crypto wallet, the wallet generates a pair of cryptographic keys: a public key and a private key. The public key acts as an address where others can send cryptocurrencies to the wallet, while the private key serves as a digital signature and a means to access and control the funds associated with the wallet.

When a user initiates a transaction, such as sending cryptocurrency to another wallet address, the wallet creates a transaction message that includes the necessary information, such as the recipient's address, the amount to be transferred, and the user's digital signature.

The wallet then broadcasts this transaction message to the blockchain network. Miners or validators on the blockchain network verify the transaction by confirming that the user's digital signature is valid and that they have sufficient funds to complete the transaction. Once verified, the transaction is added to a block and permanently recorded on the blockchain.

What are Public and Private Keys?

Public and private keys are crucial components of a crypto wallet's security infrastructure. These keys are mathematically related but have distinct purposes in the cryptocurrency ecosystem. The relationship between public and private keys ensures the security and integrity of cryptocurrency transactions.

The private key acts as a digital signature that proves ownership and authorization, while the public key allows others to verify the authenticity of transactions and send funds to the wallet.

In the following, we will give you more detailed explanations about these keys.

• Public Key: The public key is derived from the private key and serves as the wallet's address or identifier. It is widely shared with others to receive funds. The public key is a long alphanumeric string that is generated through complex mathematical calculations. It is safe to share the public key with others as it does not grant access to the wallet or the funds stored within it.
• Private Key: The private key is a randomly generated, secret string of characters that must be kept confidential. It is the key to accessing and controlling the funds associated with the wallet. Losing or compromising the private key can result in permanent loss of access to the funds. The private key should be stored securely and never shared with anyone.

It is essential for wallet users to understand the significance of their private keys and to take adequate measures to protect them. Wallets offer methods for securely generating, storing, and backing up private keys, such as mnemonic phrases, hardware devices, or encrypted files.

By safeguarding the private key, users can maintain control over their digital assets and mitigate the risk of unauthorized access or loss.

There are various types of crypto wallets available, including software wallets (desktop, mobile, and web-based), hardware wallets, and paper wallets, each offering different levels of convenience and security for managing digital assets.

What is software wallet?

Software wallets, which are also known as hot wallets, are digital wallets that exist as software applications on devices such as computers, smartphones, or through web browsers.

With software wallets, users have control over their private keys, allowing them to securely store and transfer their funds.

Software wallets pros and cons

Pros

1. Accessibility: Software wallets are widely available and can be easily installed on desktop computers, laptops, or smartphones. They provide users with convenient access to their digital assets anytime, anywhere, as long as they have internet connectivity.
2. User-Friendly Interface: Most software wallets are designed with a user-friendly interface, making them accessible even to individuals with limited technical knowledge. They often offer intuitive features, transaction history tracking, and easy-to-understand controls, enhancing the user experience.
3. Flexibility: Software wallets are versatile and support multiple cryptocurrencies. They can accommodate a wide range of digital assets, allowing users to manage different cryptocurrencies within a single application.
4. Additional Features: Software wallets often provide extra functionalities beyond basic storage and transactions. These features may include integration with decentralized applications (DApps), token swapping capabilities, staking services, and portfolio tracking, offering users additional options to engage with the cryptocurrency ecosystem.

Cons

1. Security Risks: Software wallets, especially online wallets, can be vulnerable to security risks. If the device or software is compromised by malware or phishing attacks, the private keys could be exposed, leading to potential theft of funds. Users must take precautions to secure their devices and employ best security practices.
2. Dependency on Technology: Software wallets rely on technology and can be susceptible to technical glitches, software bugs, or compatibility issues. Users may face inconvenience or potential loss if they encounter software failures or if their devices are lost, stolen, or damaged without proper backup measures.
3. Human Error: Users must handle their private keys responsibly. Human error, such as forgetting passwords or mishandling private key backups, can result in irreversible loss of access to funds. Proper education and adherence to security protocols are crucial when using software wallets.
4. Lack of Physical Protection: Software wallets are susceptible to digital threats, including hacking, phishing attacks, or malware. Unlike hardware wallets, which provide an added layer of physical security by keeping private keys offline, software wallets are exposed to online vulnerabilities.

Some of the most important and efficient software wallets are:

• MetaMask
• Trust Wallet
• Exodus Wallet
• Atomic Wallet
• MyEtherWallet
• Hippo Wallet

Hippo Wallet is a highly efficient and secure software wallet that provides users with a seamless experience for managing their cryptocurrencies. With its user-friendly interface and robust features, Hippo Wallet offers a comprehensive solution for securely storing, sending, and receiving various digital assets.

It supports a wide range of cryptocurrencies and tokens, allowing users to diversify their holdings within a single platform. Hippo Wallet prioritizes the privacy and security of its users and offers unique and helpful features like multisig, connect to custom node, multi-currency, utility token (HPO). Overall, Hippo Wallet stands as a reliable and efficient software wallet that empowers users to manage their cryptocurrencies with ease while maintaining the highest level of security.

Different types of software wallets are categorized as desktop wallets, mobile wallets, and web-based or online wallets, which will be more explained accordingly.

- Desktop Wallets

Desktop wallets are a kind of software wallets installed on desktop or laptop computers. They provide a high level of security as they are typically stored locally on the user's device. Examples of popular desktop wallets include Exodus, Electrum, and Atomic Wallet.

- Mobile Wallets

Mobile wallets are designed for smartphones and offer the flexibility of managing cryptocurrencies on the go. They are user-friendly and often provide additional features like QR code scanning for easy transactions. Well-known mobile wallets include Trust Wallet, Coinbase Wallet, and Mycelium.

- Web-based or online Wallets

Online wallets, also known as web wallets or cloud wallets, operate on the cloud and can be accessed through web browsers. They offer convenience as users can access their funds from any device with an internet connection.

However, online wallets are more vulnerable to security risks as the private keys are stored on third-party servers. Notable online wallets include MetaMask, MyEtherWallet (MEW), and Blockchain.com.

What is hardware wallet?

A hardware wallet, also known as cold wallet, is a physical device designed to securely store and manage cryptocurrency private keys. It provides an offline and isolated environment for storing private keys, ensuring that they are protected from online threats such as hackers and malware.

Hardware wallets typically resemble a USB stick or a small device with a screen and buttons for navigation. They generate and store private keys offline, allowing users to securely sign transactions without exposing their keys to potential vulnerabilities.

These wallets often employ encryption and multi-factor authentication, providing an additional layer of security. By keeping the private keys offline, hardware wallets offer a robust solution for protecting digital assets, making them a preferred choice for individuals seeking enhanced security for their cryptocurrencies.

Hardware wallets pros and cons

Pros

1. Enhanced Security: Hardware wallets offer a higher level of security compared to software wallets. Private keys are stored on the device itself and are isolated from the internet, reducing the risk of exposure to online threats like hacking or malware.
2. Offline Transaction Signing: Hardware wallets enable users to sign transactions offline. The private keys never leave the device, ensuring that even if the computer or device used for the transaction is compromised, the private keys remain secure.
3. User-Friendly Interface: Most hardware wallets come with user-friendly interfaces, making them easy to navigate and use. They typically have small screens and buttons that allow users to verify transaction details and approve transactions securely.
4. Backup and Recovery: Hardware wallets offer backup and recovery options, usually in the form of a recovery seed or mnemonic phrase. This enables users to restore their wallets and access their funds even if the device is lost, stolen, or damaged. The ability to securely backup and to recover funds is a valuable feature for long-term asset management.

Cons

1. Cost: Hardware wallets are typically more expensive than software wallets or online wallets. The additional cost is attributed to the specialized hardware and security features incorporated into the device.
2. Limited Cryptocurrency Support: While hardware wallets support a wide range of cryptocurrencies, they may have limitations in terms of the number of supported cryptocurrencies compared to software wallets.
3. Physical Vulnerability: While hardware wallets provide excellent protection against digital threats, they are not immune to physical vulnerabilities. Physical damage or loss of the device without proper backup measures can result in the permanent loss of funds.

some of the most popular hardware wallets are listed as:

• Ledger Nano S and Ledger Nano X
• Trezor Model T and Trezor One
• KeepKey
• BitBox
• Coldcard

What is paper wallet?

The third type of crypto wallets is paper wallet, a physical printout or handwritten record of the private and public keys associated with a cryptocurrency address. It is a form of offline storage for cryptocurrencies and is considered one of the most secure methods for long-term storage.

It's important to note that while paper wallets provide offline security, they are not immune to risks associated with physical storage. Therefore, it's crucial to keep paper wallets in a secure and accessible location.

In addition to the aforementioned wallet types, there is a further classification for crypto wallets as: custodial and non-custodial wallets.

Creating a paper wallet involves generating a pair of public and private keys, printing them on a physical medium such as paper, and securely storing the paper wallet. Here are a few examples of paper wallet creation tools:

• Bitaddress.org
• WalletGenerator.net
• MyEtherWallet (MEW)
• Card Wallet

Paper wallets pros and cons

Pros

1. High Security: Paper wallets are considered one of the most secure ways to store cryptocurrencies. Since the keys are printed on paper and kept offline, they are not susceptible to online threats such as hacking or malware.
2. Independence from Technology: Paper wallets do not rely on any software or hardware devices. They are offline and can be stored physically, reducing the risk of technological failures or compatibility issues.
3. Cost-Effective: Paper wallets are a cost-effective storage option as they can be generated and printed for free. Users can create paper wallets using various online tools or by generating them offline.
4. Ease of Creation: Generating a paper wallet is relatively simple and does not require advanced technical skills. Users can follow step-by-step instructions or use online tools to create their paper wallets. This ease of creation makes paper wallets accessible to a wide range of users.

Cons

1. Vulnerability to Physical Damage: Paper wallets are vulnerable to physical damage, such as fire, water, or theft. If a paper wallet is lost, destroyed, or stolen without a backup copy, it can lead to permanent loss of access to the stored funds.
2. Lack of Convenience: Paper wallets can be less convenient compared to software or hardware wallets. To transact or access funds, users need to manually enter the private key into a software or online wallet.
3. Limited Usability: Paper wallets are typically designed to hold a specific cryptocurrency. If a user holds multiple cryptocurrencies, they would need to create separate paper wallets for each one, which can become impractical and inconvenient to manage.

Aside from all these types of wallets, you need to know the crypto wallets are totally either custodial or non-custodial, depending on who controls or has access to private keys. But what else differentiates these two wallet types and how can one determine which is most suitable for their needs?

Below we will provide you with all the information you need to make an educated decision about the wallet type that's best for you.

Custodial Wallets

Custodial wallets, also known as hosted wallets, are a type of cryptocurrency wallet where a third party holds and manages users' private keys on their behalf. In custodial wallets, users entrust the security and control of their digital assets to the wallet provider or custodian.

These wallets often offer user-friendly interfaces and convenience, as the custodian takes care of tasks such as key management and transaction processing. However, using a custodial wallet means relying on the trustworthiness and security practices of the custodian, which introduces a level of counterparty risk.

Non-Custodial Wallets

Non-custodial wallets, also known as self-custody wallets or client-side wallets, are a type of cryptocurrency wallet where the user has full control and responsibility for their private keys. Unlike custodial wallets, the user is the sole custodian of their digital assets, ensuring a higher level of security and autonomy.

With non-custodial wallets, the private keys are generated and stored locally on the user's device, whether it's a computer, smartphone, or hardware device. The wallet software encrypts and protects the private keys, ensuring that only the user has access to them.

This puts the user in full control of their funds and eliminates the need to trust a third-party custodian. Non-custodial wallets prioritize security and privacy, allowing users to have complete ownership and authority over their digital assets.

Hippo Wallet stands as a prime example of a non-custodial wallet, offering users an exceptional experience coupled with user-friendliness. As one of Blockchain Commodities' products, this decentralized, multi-chain crypto wallet ensures privacy and security while enabling individuals to store and manage their cryptocurrencies seamlessly.

Notable features like multi-signature support, multi-currency compatibility, node connectivity, fiat-to-crypto purchasing capability, the native token (HPO), and a rewarding HPO staking system further enhance Hippo Wallet's versatility and appeal to cryptocurrency enthusiasts.

With these robust features, Hippo Wallet provides users with a user-friendly and comprehensive platform for their digital asset management needs.

How cryptocurrency wallets work

Cryptocurrency wallets work by securely storing and managing the private keys that grant access to the user's digital assets on the blockchain. Here is a simplified explanation of how cryptocurrency wallets work:

1. Key Generation: When a user creates a cryptocurrency wallet, a pair of cryptographic keys is generated: a public key and a private key. The public key is derived from the private key using complex mathematical algorithms.
2. Public Key as Wallet Address: The public key acts as the wallet address, which is a unique identifier used to receive funds. Users can share their public key with others to receive cryptocurrencies.
3. Private Key Security: The private key is kept secret and must be securely stored. It is used to sign transactions and prove ownership of the associated digital assets. Losing or compromising the private key can result in permanent loss of access to the funds.
4. Transaction Creation: When a user wants to send cryptocurrency, they create a transaction using their wallet software. The transaction includes the recipient's wallet address, the amount to be sent, and the user's digital signature, which is created using the private key.
5. Transaction Broadcasting and Verification: The transaction is then broadcasted to the blockchain network, where miners or validators confirm its validity. They verify that the user's digital signature is genuine and that the user has sufficient funds to complete the transaction.
6. Transaction Recording on the Blockchain: Once the transaction is validated, it becomes a part of a block in the blockchain. The block is then added to the chain, creating a permanent and transparent record of the transaction.

In conclusion, crypto wallets are indispensable tools for securely managing and transacting with digital assets in the world of cryptocurrencies. Whether it's software wallets offering convenience and accessibility, hardware wallets providing enhanced security, or paper wallets serving as offline storage options, choosing the right type of wallet and adopting proper security practices is crucial.

By understanding the purpose, functionality, and various types of crypto wallets, individuals can confidently navigate the crypto landscape and protect their valuable digital assets.