WALLETS & SECURITY

What is a Cryptocurrency Wallet?

If you’ve spent even a few minutes learning about crypto, you’ve probably come across the word “wallet.”

At first glance, it sounds like a simple term; “A place to store your digital money”. Just like how a physical wallet holds your cash. But here’s the first thing you should know:

Crypto wallets don’t actually store cryptocurrency.

Whilst that might sound strange, we’ll break down exactly what they do instead, and which type of wallet might be best suited for your investing goals.

Where is your Cryptocurrency stored?

Every cryptocurrency; from Bitcoin to Ethereum, exists on what we call a blockchain. For a quick summary of what a blockchain is: A public ledger that records all transactions and balances across millions of addresses.

For example:

Bitcoin (BTC) is held on the Bitcoin blockchain.
Ethereum (ETH) is held on the Ethereum blockchain.

Some projects don’t have their own blockchain, and function on a pre-existing blockchain.

For example:

Shiba Inu (SHIB) is held on the Ethereum blockchain.

So if all coins live on the blockchain, what is a crypto wallet for?

The Purpose of a Crypto Wallet

Your wallet doesn’t hold coins… it holds your private keys.

Specifically, it stores your unique cryptographic codes that proves wallet ownership, giving the holder exclusive, secure access to spend or move your crypto. When you control the private key, you control the crypto tied to it. Lose the key, and you lose access to your funds forever. Or if someone else gets hold of your private key, they can spend/remove your funds instantly.

That’s why crypto wallets exist: to store and protect your private keys, and by extension, your crypto.

Types of Cryptocurrency Wallets

Now that you have an understanding of both what a crypto wallet is & does… It’s time to learn about what different types of crypto wallets there are.

There are three different variants of crypto wallet, each with different trade-offs between convenience and security.

The three broad categories are:

Hot Wallets
Warm Wallets
Cold Wallets

Let’s break those down.

Hot Wallets

Hot wallets are accessible from almost anywhere; your phone, computer, or browser, and are 100% connected to the internet at all times. Known as the most convenient wallet type, users can simply press a button and transact their funds nearly instantly. However in this case, speed & convenience comes at a trade-off to having much higher security risks.

Hot wallets are typically associated with exchange held funds, and in some cases associated application wallets funded by the exchange. When you sign up to a cryptocurrency exchange, a unique wallet is automatically created that can house your cryptocurrency coins & Stablecoins. It’s important to note that whilst you are able to smoothly buy/sell & deposit/withdraw funds to & from your wallet, the cryptocurrency exchange are the ones who hold onto your private key instead of you.

If you have ever heard the saying “Not your Keys, Not your Crypto”, this example is what that refers to.

This essentially means that if you were to lose your login to your exchange account, reaching out to the exchange and answering a few questions should give you back access to your funds. However if that exchange were to fall under any financial struggle, or fall victim to a cyber attack, your funds could potentially be lost. This is where you as an investor need to consider which is more valuable to you: safety & security, or speed & convenience.

Warm Wallets

A warm wallet sits between a hot wallet (always online) and a cold wallet (completely offline). It provides a balanced solution between investors who are looking for a more secure setup than a hot wallet, but still easier to access than cold storage. Unlike a hot wallet, you personally control your own private keys that give you exclusive access over your crypto holdings. In line with such, warm wallets are the favourite for investors who want broad access to the DeFi market that exchanges don’t quite provide, yet desires the sole-custody ownership of their assets that owning your own keys provides.

In comparison, warm wallets require a greater level of self-reliance where investors must be able to confidently navigate the DeFi space of cryptocurrency in a safe & secure manner. With no added support layer that an exchange provides, investors who fail to secure their warm wallet could lead to serious risks & financial exposure. This also means that if you were to misplace your private key for your wallet, there’s no way to recover your funds.

Cold Wallets

Cold wallets (also known as a hardware storage device) are the gold standard for securing large sums of crypto, both for long-term holders (HODLers) and institutions managing internal funds. Designed as a 2FA device that functions completely offline, cold wallets are considered by far the safest form of crypto storage method, removing the risk exposure when it comes to hacks, phishing attacks, malware, and other online threats. As the preferred choice for long-term wealth holding, cold wallets generate their own unique private keys & recovery phrase inside the physical device, never touching an internet connection.

Whilst cold wallets lead in investor security, they’re notably less convenient to use than a hot or warm wallet. As the process to successfully transact projects to/from your cold wallet requires 2FA, this process alone adds minutes to every transaction you wish to make. With this in mind, if you are an investor that requires time sensitive transactions to be made, eg: using your portfolio holdings to purchase a meal from your local restaurant, a cold wallet would most likely not be the best choice for you.

For a full breakdown of which cryptocurrency wallet is right for you, check out our lesson on “Which Cryptocurrency wallet is right for you”

Choosing a Cryptocurrency Wallet

Picking the right wallet comes down to two main questions:

What are you using it for?
What do you value more; security or convenience?

It’s common for investors to consider using multiple wallet types at once; a cold wallet for long-term holdings, and a hot/warm wallet for active trading & daily activity. Regardless of whichever setup you decide suits your lifestyle, there are two golden principles that every wallet holder should remember:

✅ Treat your seed phrase like the keys to your vault; never store them digitally, never share them, and never trust anyone who asks for them.

✅ Double-check every transaction detail; address, blockchain, and amount before confirming. If a situation feels rushed, don’t act. Scammers thrive on urgency and FOMO.

Now that you know what a Crypto wallet is, our next lesson is about figuring out which crypto wallet is right for you.