A cryptocurrency wallet contains a physical key that can authorize a crypto transaction. The wallet does not hold cryptocurrency, which lives on the blockchain. However, a crypto wallet is required to buy, spend, or trade cryptocurrency.
Wallets are also often referred to as “hot” or “cold,” relative to Internet connectivity. “Hot” wallets connect to the Internet; “cold” wallets do not.
Several popular wallet types can be used to store and access cryptocurrencies.
- Custodial wallet (hot). Stores cryptocurrency assets online with a third-party cryptocurrency exchange (e.g., Coinbase, Binance, Kraken, or BitMex), which holds the private keys in custody. Custodial wallets are centralized and don’t allow for the loss of access to funds. A deceased individual’s assets can be retrieved by presenting their death certificate.
- Hardware wallet (cold). A physical device that often resembles a USB drive, hardware wallets connect to a computer to access cryptocurrencies, but the information doesn’t live on an Internet-connected device or platform. Some hardware wallet providers offer apps that make it easier to buy, sell, or exchange cryptocurrencies but keep the private key safely hidden.
- Software wallet (hot). A program that holds the keys to store and access cryptocurrency. Software wallets can be downloaded to a mobile device or computer. Exodus, Guarda, Electrum, and Mycelium are among the most well-known software wallets.
- Paper wallet (cold). A physical piece of paper containing cryptocurrency information. Often, the information is created by a program and then printed, or a QR code is printed to be scanned later. Paper wallets can easily be damaged or lost.
When it comes to cryptocurrency wallets, private keys and recovery phrases are everything. A private key is often a randomly generated number that allows someone to send or spend cryptocurrency. A recovery phrase, sometimes referred to as a seed phrase, is a group of random words generated by the cryptocurrency wallet that allows users to access the crypto stored within.
