Explore Crypto Wallets

Learning Objectives

After completing this unit, you’ll be able to:

Describe the different types of crypto wallets.
Explain the use cases for each crypto wallet type.

Learn About Public and Private Keys

Keys surrounding a lock, with one key highlighted as the same color as the lock

Crypto currency—crypto anything—is simply a form of value, and it exists on a blockchain. When you own cryptocurrency, it is hosted on a blockchain network. And within this network, the thing that ties you to your specific, owned crypto is a private key. This private key corresponds to your address within the blockchain and gives you control of that address and the value stored there. You can store, spend, or exchange your assets whenever you want as long as you have your private key.

Conversely, other network users can send you crypto by using the corresponding public key for your address. In either case, users don’t need to reveal any personal details or documents to interact within this system—they simply need a blockchain address, with private and public cryptographic keys.

Since the private key is what gives you access to a given blockchain address, and whatever is stored there, it is an extremely sensitive piece of information. You can think of it like the secret key to a safe. For obvious reasons, it needs to be kept secure and never shared with anyone. This is where a crypto wallet comes in.

Secure Your Keys

Despite the name, a crypto wallet does not contain coins or tokens—those are always on the blockchain. Rather, its purpose is to secure your all-important private keys that enable you to access your blockchain address and everything stored there. The wallet also acts as a control panel, showing you exactly what assets you have, and enabling you to communicate with the blockchain to send or interact with that value. You might say that your crypto wallet is the bridge between you and your crypto funds on the blockchain.

Primarily, there are two types of wallets: hot wallets and cold wallets.

Hot Wallets

Hot wallets, or online wallets, are a type of software that exists digitally, and secures your private keys within its interface. Since they are software-based, they are automatically connected to both the internet and the blockchain at all times. This makes them very convenient, because you simply log in and you can easily begin interacting with online applications via the wallet interface on your computer.

But there’s also a downside. Your private keys are stored on an internet-connected application, vulnerable to the same risks as any online software. So having a hot wallet might be easy, but you put a lot of trust in the software to keep your assets safe.

Exchange Wallets—a Hot Wallet Subcategory
If you acquired your crypto on an exchange and you’re currently keeping it there, you might be surprised to realize how little control you really have. Exchange wallets are custodial, which means that instead of trusting you with your own private key, the exchange itself holds onto it on your behalf. Instead, you get login credentials for the platform, and this is how you access your wallet.

Storing your cryptocurrencies in a custodial crypto wallet is like parking your car in someone else’s garage. Even though you own the car, the key to the garage is with the garage owner.

Cold Wallets

Illustration of multiple hardware wallets, as small as a thumb drive with a rotating metal protector

While hot wallets help you instantly transact using your cryptocurrencies, it’s not necessary nor recommended to keep all your assets connected to the internet.

Cold wallets, or hardware wallets, prevent this by doing something simple—they keep your private key offline.

A hardware wallet is a device that stores the private keys away from the internet. Even if you make transactions from it, the wallet confirms the transactions in an offline environment. This process helps keep your private keys away from the risks of the internet at all times.

All hardware wallets are noncustodial wallets; you are the only one who owns access to your private keys.

Find the Safest Crypto Wallet

If you’re an active DeFi or dApp user, you may be seeking a balance between security and ease of use. It’s important to note that some hardware wallets can be connected with digital wallets, allowing them to be used as a bridge between the hardware device and the dApps you interact with.

Doing this enables you to benefit from the Web3 compatibility of a hot wallet interface, while your keys remain securely offline in the device as you transact. You simply need to confirm each transaction on your hardware, adding an extra dimension of security to your transactions.

No matter how you’re using your crypto, if you plan on holding one or more assets for the long-term, offline storage for your private keys is the most secure management solution.

But having a cold wallet isn’t the end of crypto safety best practices. In the next unit, Ledger dives into the things you can do to ensure you’re keeping your keys safe offline.

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