If you’re brave enough to wade into the mysterious new world of cryptocurrencies, buying your first coin is the least scary part of the process. Parking, or “hodling” (meaning holding, and no, not a typo!) your investment is even easier, other than the persistent anxiety of price fluctuations.

But if you’re interested in doing more than just sitting on your crypto assets, the number of things you can do with your portfolio is growing every day. Engaging in purchases or investment activities, for example, is a bit more complex, and the function of the crypto wallet is to securely stage your crypto for these purposes.

A crypto wallet acts just like your traditional bi-fold leather wallet, money clip, or purse. It serves as a point-of-sale resource for disbursing your funds, like a credit card, debit card, gift card, or cash. You can fund your wallet a number of ways, but the primary source of funds is from the exchange where you purchased your crypto to begin with.
There are two primary categories of wallets: software wallets and hardware wallets. The software wallets are applications used from your smartphone or computer similar to Venmo, or Apple Pay. Hardware, or “cold storage” wallets, on the other hand, are devices that are physically isolated from the internet. This physical isolation is an additional safeguard to protect your crypto wallet from being hacked. An example of a cold storage wallet would be a USB flash drive that you can keep in your pocket, your dresser drawer, or even in a safe deposit box. The drawback is the risk of losing it, which would be just like losing cash at the laundromat, except that the finder would not be able to use it.
Before we explain the key differences between software and hardware wallets, let’s discuss the primary attributes of all crypto wallets. First, a crypto wallet doesn’t actually hold your coins, it just holds unique private “keys” that associate you with all of the transactions belonging to your public address on the coin’s internet platform. The “platform” is primarily a database of all transactions ever made for that particular currency, and the database is organized using blockchain concepts which we explain elsewhere on N2KC.

Second, wallets are designed to securely connect to other platforms where your crypto can be used. The first step that will be required when you visit a site that accepts your coins is to connect your wallet. There will be a request for a systematic “handshake” between your wallet and the targeted site so you can continue browsing or buying the site’s offerings. This is actually a very convenient feature because it prevents you from having to remember your login and password for each and every platform that can connect to your wallet. Your wallet does the work for you and is the only place where your private information is stored.
Even more helpful, once you transact with that platform, your wallet will keep track of that transaction so that you don’t have to remember where your crypto went and for what purpose. This comes in handy especially when you are depositing your coins onto another platform, like a bank account or a financial service.

Security is a big job for any wallet, and crypto wallets use cryptography to associate you to your transactions on the blockchain. The blockchain is a collection of data that is rather transparent to all users – quite like an accounting ledger, where every single transaction or transfer is logged and recorded in permanence. The integrity of the ledger is secured using cryptography and “consensus protocols,” which collectively work to prevent bad actors from manipulating the ledger – we’ll explore these topics in another post. Transactions you make using crypto assets in your wallet are posted to the blockchain using your unique public address that your wallet assigns for you, but your wallet is the only place that contains your private address and the key that connects it to your public address. While your transactions are viewable by anybody who is interested, your identity is pseudonymous, meaning somewhat anonymous, or hard to identify. This makes your private address extremely important to protect, and wallets go to great lengths to keep this information safe by assigning rather onerous levels of password security to your setup. This takes us to our last point on wallet security.

The most important distinction between using a hard or soft wallet is in the realm of security. Here’s why: A software wallet has a perpetual connection to the internet, while the hardware wallet is connected only when you need it. This distinction is important to investors who worry about being hacked, or having the rights, or private keys to their cryptocurrency stolen. While this is rare, it does happen, and you hear more about the isolated cases of stolen addresses than you do about the merits of engaging in crypto.

We will discuss the topic of safe crypto habits in another article.