Crypto Wallets Guide

BeckySeptember 26, 20243 Mins read5k Views

What are crypto wallets?

Crypto wallets can be thought of in a similar way to physical cash wallets. But, unlike cash wallets that contain physical money, crypto wallets do not contain cash or even crypto for that matter. They do, however, offer access to the crypto you own. Instead, crypto and all its transactions are stored on the blockchain. Personally, I feel that crypto wallets are more like bank accounts. You can see what money you have in bank accounts in various currencies such as sterling pounds, dollars and yen, this is similar to how different crypto wallets can show you the different crypto currencies you own such as Bitcoin, Ethereum and Stacks. Although you can see this money and know that you own it, you also know there is no physical money stored in your account. There is no separate safe at the bank that stores your money either. This money WAS stored at the bank in the form of gold. Nowadays no currency is backed by gold anymore and instead governments are able to print more money which in turn reduces the value of your money. This may seem off topic, however, it highlights the importance and value of crypto. There are 21 million Bitcoin, this is the maximum about that will ever be mined, no one will ever be able to make more meaning that it will retain its value. Some people ‘lose’ their crypto, either through forgetting/losing their seed phrase (the key that unlocks their wallet), or by losing the hard drive the crypto is stored on. This decreases the amount of crypto in circulation and in turn increases it value. This small tangent highlights why crypto is the future!

Now back to our analogy, so, if you pretend that the money in your bank account is actually stored in a vault at the bank this would be the blockchain. Your bank account offers you access to this ‘vault money’ in the same way a crypto wallet offers you access to the blockchain. Your wallet has a public key (like an account number) which is public and can be used to send funds into your wallet, and a private key (like a pin number) which is your seed phrase which give you access to your money and allows you to make transactions out of your account. Another small but extremely important tangent. In order to access your wallet a seed phrase is needed; a seed phrase is a random sequence of words that is assigned to your wallet like a key or a safe code. I cannot stress the importance of seed phrases enough! If someone else obtains your seed phrase they now have access to all of your crypto in that wallet. If you lose your seed phrase you lose all of your crypto permanently, there is no way to recover it.

Another key difference between a crypto wallet and a bank account is that your wallet will give you direct access to the blockchain (the vault) whereas with bank accounts you must go through a third party (your bank) who can control how you access your own money. Here it is important to note that there are third parties in crypto that can also do this, these are exchanges and they can also withhold your money if you leave it with them. Therefore, it is important that you have your own wallet with your own ‘key’ (seed phrase). So, your wallet is what gives you access to the blockchain and to your valuable crypto. You wouldn’t give your house keys to a third party to give you access to your home so why would you do it with your money? There are various types of crypto wallets such as hot wallets and cold wallets which I will explain in depth, however I think it is first important to understand how crypto transactions actually work.

How do transaction between wallets work?

So, we’ve already established that wallets don’t actually hold crypto and instead offer access to the block chain. So how do transactions between wallets (and people) work? Sticking with the bank account analogy, when you transfer money from your bank account to someone else’s the bank does not go and retrieve money from your safe and put it in theirs. The money stays in the same place, however the bank make a log of the transaction stating that you sent the money to them, and it is now theirs. This is what happens with crypto but on the decentralised blockchain. When you log onto your wallet and send crypto to someone it creates a transaction log, the technical terms for what is generated are ‘inputs’ and ‘outputs’.

Wallet functions

It is important to find the right wallet for you and different wallets have different functions. For example, if you’re interested in rare sats a wallet that automatically separates rare sats so that you don’t accidentally spend them would be a great choice. Below are some things to consider when choosing a wallet: