Everything You Need to Know About Crypto Wallets

Michiel Mulders
October 24, 2020
coins filling up a crypto wallet

Let’s answer all your questions related to crypto wallets and crypto wallet security.

  1. What is a crypto wallet?
  2. How does a crypto wallet work?
  3. What is the point of a crypto wallet?
  4. Do I need a crypto wallet?
  5. Is a crypto wallet safe?
  6. What is the most secure cryptocurrency wallet?
  7. Do you need a wallet for each cryptocurrency?

Let’s learn more about crypto wallets.

1. What is a crypto wallet?

A crypto wallet is a piece of software that you can use to access your wallet and send transactions. However, you should know that different crypto wallet types exist. To sum up, we have paper wallets, hardware wallets, and software wallets. Below you see an example of a paper wallet.

(Source: Lisk Desktop paper wallet)

Most users who have just entered the crypto space will use a software wallet. A software wallet allows them to store cryptocurrencies with the convenience of being able to access their funds anywhere. You can run the software on any device and enter your private key to access your wallet.

When choosing a hardware wallet, you always need this device to access your funds. However, it’s the safest storage option for cryptocurrencies as a hardware wallet isn’t connected to the internet. This means that attackers can’t steal your cryptocurrencies unless they gain physical access - which is very unlikely. 

Software wallets are most popular as you can quickly install them and access them via your laptop. Besides that, they often provide a rich user interface with information such as spending or total balance graphs. Furthermore, they offer functionality such as bookmarking addresses or exporting your trading data to file your crypto taxes.

So, how does such a crypto wallet work?

2. How does a crypto wallet work?

Most importantly, a crypto wallet allows users to send transactions. However, you need to format the transaction data according to a specification defined by the blockchain platform. A software wallet creates the correct transaction format and signs the payload with your private key. 

Next, the wallet sends the transaction to a blockchain node in this particular blockchain network. Not every node in a blockchain network needs to accept transactions. They can often decide to expose an API for receiving transactions or not. For example, each node in the Lisk network has the ability to switch off its public API. 

Therefore, crypto wallets hold a list of IP addresses of active nodes that accept transactions. In the worst-case scenario where all IP addresses are unresponsive, a crypto wallet can send a request to a different server that keeps track of public IP addresses or can scan for IPs themselves. This way, it can discover new nodes and continue operating. It’s a natural process that some nodes disappear where simultaneously new nodes enter the blockchain platform.

3. What is the point of a crypto wallet?

First of all, without crypto wallets, the user experience of blockchains would be terrible. Each blockchain platform requires you to submit transaction data according to their specified transaction format. Doing this manually would be almost impossible. A crypto wallet takes care of creating the signed transaction data and sends this to the blockchain network. 

Second of all, crypto wallets provide you with a lot of interesting data about your assets, especially for DeFi services such as yield farming.

4. Do I need a crypto wallet?

This is a tricky question to answer. Yes, for convenience reasons you should consider using a crypto wallet. As mentioned in the previous question, a crypto wallet or software wallet improves the user experience.

However, some exchanges don’t provide you with access to your wallet as they store your funds in their hot wallet. This means you trust the exchange to store and secure your funds. This allows you to quickly trade cryptocurrencies or even use a crypto trading bot to execute your crypto arbitrage strategy.

In this case, you don’t need a crypto wallet. However, you could argue that the exchange offers similar crypto wallet services without providing users with full access. In short, you don’t have access to the private key of the hot wallet.

5. Is a crypto wallet safe?

It’s fair to say that a crypto wallet is a safe storage mechanism for any cryptocurrency you own. Make sure to pick a wallet that gives you access to the private key. This means you are in full control of your crypto funds. Thus, using an exchange’s hot wallet is less secure as you don’t have access to the private key. 

Actually, the safety of your crypto wallet mostly depends on your behavior. Let’s say you use an unsecured open network to access your wallet, this can expose details about your private key to malicious users monitoring this network. Therefore, make sure to safely access your funds. Some quick tips to improve your crypto wallet security:

  • Use a secured network
  • Store a backup of your private key in a vault or similar secure location
  • Avoid sharing your key using an online service
  • Take care of computer safety by installing antivirus software and enabling your firewall

You can always add extra security layers by enabling 2-factor authentication if your wallet supports this. If not, you can take a look at the concept of “distributed wallet backups”. This method hands out segments of your private key as a backup to friends.

How does a distributed wallet backup work?

A distributed wallet backup acts as a backup for your private key which you can distribute among your friends or family. In case you lose access to your wallet, you can still recover access via your friends or family who hold segments of your private key.

As a private key consists of a mnemonic seed containing 12 to 24 words, you can create three cards and on each card, you write down 2/3rds of your mnemonic seed. Of course, you don’t want to write down the same 2/3rds of your mnemonic seed for each card. Therefore, if you seed contains 12 words, write down your backup according to this configuration:

  1. Card 1: Words 4 - 12
  2. Card 2: Words 8 -12 and 1 - 4
  3. Card 3: Words 1 - 8

This allows you to distribute the three cards among different friends or family. In case you lose your private key, you need the seed cards from two out of three persons to complete your mnemonic seed and restore access to your wallet. It’s a straightforward and simple solution to secure your wallet. Note that you can make variations such as distributing only two cards to friends and keeping one card yourself in a vault.

(Source: Lisk Desktop 12-word passphrase)

6. What is the most secure cryptocurrency wallet?

First of all, a hardware wallet is the most secure option as it’s not connected to the internet. However, many software crypto wallets offer various security features that increase security. 

When selecting a crypto wallet, look for the following security features.

  1. 2-factor or multi-factor authentication
  2. Authentication notifications - This allows you to receive a notification on your phone when someone logs in to your crypto wallet.
  3. Transaction confirmation via email to confirm each transaction. 
  4. Session logging so you can audit who has accessed your account.
  5. Device list - This allows you to authorize your devices to access your account.
  6. Address whitelisting - Allow only certain withdrawal addresses you trust. In the case attackers gain access to your account, they can’t add a new withdrawal address to steal your funds.

In summary, if you decide to use an exchange crypto wallet or software wallet, look for the above security features to protect your funds.

7. Do you need a wallet for each cryptocurrency?

No, you don’t need a wallet for each cryptocurrency. Just take a look at YouHodler’s wallet which supports many different cryptocurrencies, such as BTC, XRP, USDT, USDC, EOS, XLM, BNB, LINK, ETH, and many more.

It’s worth mentioning that you’ll often find an Ethereum wallet that only supports Ethereum-based tokens. However, many other wallets exist that support a wide range of tokens just as Youhodler’s wallet. We call this a multi-currency wallet. 

For convenience reasons, it’s much easier to access your crypto funds via one wallet than multiple wallets. In other words, you need to secure only one wallet.

For sure, check out the YouHodler wallet that allows you to earn interest on your crypto funds. For example, storing USDT or USDC earns you an interest of 12% APY. On top of that, YouHodler adds an extra security layer by integrating with Ledger Vault which ensures insurance of your funds up to $150 million.

Why not earn interest while safely storing your crypto funds? Sign up now!

About the Author

Michiel Mulders is a blockchain developer with a passion for the crypto space. His interests include blockchain, entrepreneurship, marketing, and carefully crafted beers. Cheers!

Share this post


Get YouHodler Crypto Wallet App

Store, exchange, and spend fiat, stablecoins and crypto. Rewards, staking and loans integrated.

youhodler crypto wallet