BEGINNER'S GUIDE TO
CRYPTOCURRENCY WALLETS

It is important for every crypto investor to have safe and secure storage for their cryptoassets. Learn more about the basics of a crypto wallet: what it is, how it works, and how to determine the correct wallet for your investment needs.

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The concept of a crypto wallet is relatively straightforward, but there are some choices for investors to make. Between online and offline wallets, mobile and desktop wallets, and custodial and non-custodial wallets, it is important to select a wallet that suits your investment strategy.

What is a crypto wallet?

Cryptocurrency wallets are essential for securely storing cryptoassets and using them in transactions. Wallets facilitate a connection between a user and their cryptoassets, asserting ownership and providing investors with the ability to buy, sell, send or receive.

It is important to understand that unlike fiat currency, which can be stored as cash in a physical wallet, crypto wallets do not physically store crypto coins or tokens. Instead, because crypto ledgers exist as data on a blockchain, crypto wallets allow traders to connect to their crypto using keys. 

Keys prove ownership of cryptoassets, and enable interaction with the blockchain to allow users to make transactions. A crypto wallet ensures that keys remain safe and accessible to the owner specifically.

How does a cryptocurrency wallet work?

Crypto wallets provide users with an interface on which to invest in crypto and access their holdings. To do so, each wallet features a public address, a public key and a private key.

What is a public address?

A public address is a unique identifier for your wallet. It specifies the target destination for the crypto that you buy, and the opposite if you sell. Any movement between a seller’s public address to a buyer’s public address is considered a transferral of ownership, and is recorded on the blockchain ledger.

What is a public key?

A public key proves ownership of a cryptoasset by verifying that an individual is the owner of the public address to or from which assets are sent. A public key is also matched to a private key.

What is a private key?

A private key acts as the password for your crypto wallet and is issued upon creation. As the name suggests, this key should always remain private to the wallet owner because it grants users access to their crypto wallet in order to manage or transact with assets.

Public and private keys consist of a random combination of letters and numbers, both uppercase and lowercase, that are unique to your wallet. 

For example, a crypto wallet key might look like this: H3skTWn65l9P99sjU77snZ132.

Types of crypto wallets

There are many types of crypto wallets, which are generally categorised as either “hot” or “cold,” the latter, which is also known as a “hard” wallet. These two wallets are differentiated by Internet connectivity. There are positives and negatives associated with both, so it is important to understand the various characteristics of each one to determine which best suits you.

What is a hot crypto wallet?

A hot wallet is digital and arguably more accessible as a result. Typically, hot wallets are used for daily transactions due to their convenience, although they are also more vulnerable to cyberattacks than the alternatives. 

That being said, modern security features such as fingerprint or facial recognition, and two-factor authentication, are continuing to enhance safety. 

Hot wallets include:

Desktop Wallets	Software installed onto an individual device. Electrum, one of the oldest bitcoin wallets, is an example of a desktop wallet.
Online Wallets	Accessible via devices with an Internet connection. Some third parties offer online wallets with a password, rather than a private key, for easy access. The eToro Money wallet is an example of an online wallet.
Mobile Wallets	Downloadable software optimised for mobile devices, similar to regular mobile applications.

What is a cold crypto wallet?

A cold wallet (or “hard” wallet) is a physical crypto wallet. A cold wallet is more likely to be used for long-term crypto holdings or passive investments. Due to their physical nature, they are hack-resistant, but can be more vulnerable to environmental damage, loss or theft.

Cold wallets include:

Hardware Wallets	A USB drive or physical file storage solution that contains information relating to the public address and private keys.
Paper Wallets	Hard copy documents (usually QR codes) that contain public addresses and private key details.

Custodial wallets vs non-custodial wallets

When choosing a wallet, investors should select either a custodial or non-custodial option, which can be differentiated by third-party control. When choosing, always factor in your experience level, investment goals and management style.

What is a custodial wallet?

Custodial wallets are provided by a third-party service, such as a crypto exchange, and are managed on behalf of the investor. They are designed to be user-friendly, making them a popular choice for beginners. 

What is a non-custodial wallet

Non-custodial wallets provide users with complete control over their cryptoassets, including the security and management of their private keys. Non-custodial wallets generally offer users a higher level of anonymity, as there is no third-party data collection.

Popular crypto wallets

Let us consider some popular wallets:

Popular hot wallets:	Popular cold wallets:
eToro Money: This wallet supports everyday transactions, including sending and receiving cryptoassets to and from external wallets.	Electrum: This wallet only supports bitcoin, providing cold storage for BTC alongside a desktop application.
MetaMask: This wallet supports assets on the Ethereum network and integrates well with Ethereum-based decentralised applications (dApps).	Ledger: A popular cold wallet supported by many software wallets.
Exodus: This wallet offers a complete software solution and integrates with the Trezor cold wallet.	Trezor: A hardware wallet with supporting software, integrated with Exodus.

How to create a crypto wallet

For investors new to crypto, a hot wallet on a trusted exchange is a great starting place. For example, eToro offers a custodial wallet within the eToro Money app, designed for simple set-up and use. Investors can access their assets using eToro credentials, removing the need to memorise a private key.

The setup process for every wallet is different, but providers should offer clear instructions and customer support. For most hot wallets, the installation process involves registering with a crypto exchange or installing software. Most cold wallets provide physical instructions upon purchase.

When creating your wallet, enable all of the available security features to keep your assets as safe as possible.

Tips for keeping your cryptocurrency wallet secure

It is important to understand how to best keep your crypto wallet, and cryptoassets, secure.

• Keep your private key private: Treat your private key as you would any financial details and do not share it publicly.
• Avoid public Wi-Fi: Using a public or unsecure Internet network to access your wallet can be dangerous.
• Be aware of phishing: Beware of suspicious communications prompting you to act quickly or share private information as these may be scams.
• Diversification: As is the case with any investment, diversification is a great way to protect your assets. Diversify your crypto across wallets to minimise risk. 
• Regularly back up your wallet: The decentralisation of crypto means that “account recovery” is not available for non-custodial wallets.

While hard wallets are less accessible to hackers, they are at greater risk of environmental damages, whereas hot wallets are more vulnerable to malicious attacks, but often possess additional security features. Consider potential security concerns when choosing a wallet that is right for you.

Final thoughts

Crypto wallets are an integral part of investing in cryptoassets. Although cryptocurrency exchanges have built-in security features, the very nature of decentralisation means that many investors prefer to take the storage and security of their cryptoassets into their own hands. 

Consider how you are going to use your cryptoassets, when you are likely to sell your holdings, and how much time you are willing to spend learning about how to best utilise your crypto wallet.

Visit the eToro Academy to learn more about investing in crypto and other asset classes.

Quiz

FAQs

How can I send crypto from one wallet to another?

Sending crypto from one wallet to another is usually straightforward. Your wallet will likely have an option to “Send” crypto, and will ask you for the address of the wallet you intend to send it to.

Select the coin or token to send, and the amount. It is important to ensure the crypto you send is compatible with the address you are sending it to, or else your crypto may be lost. Check the details are correct and follow the on-screen instructions to complete the transaction.

Are wallets free to use?

Cold wallets require an initial hardware purchase, whereas hot wallets are usually free to install. All wallets will charge a network fee to process a transaction, and the price will fluctuate depending on the value of the asset at the time of exchange. Some fees will also differ depending on the network in question. For example, sending bitcoin and Ethereum is often more expensive than sending other assets such as Solana.

What is the best crypto wallet?

No wallet is fundamentally better than another. Hot wallets are great for the quick and active management of cryptoassets, while cold wallets offer greater long-term security. Non-custodial wallets benefit from enhanced user-control, whereas custodial wallets are more beginner-friendly. The best wallet will depend on the individual in question and their priorities within the crypto arena.