HomeCrypto blogHow does a crypto wallet work? | Crypto Wallet Explained

How does a crypto wallet work? | Crypto Wallet Explained

A crypto wallet is a wallet that has specific types of software that helps create and store your cryptos of different Blockchain. In the world of crypto wallets are the most sensitive areas that can lead to great loss if not properly managed. 

So maybe you’re new to crypto and you’re wondering what a crypto wallet is because someone asked you to send your wallet address to get an airdrop or maybe you’re already in the crypto space but you just want to get an even better understanding of what a crypto wallet is than you knew before. Well never worry because we’ll cover all that in this article. 

What is a crypto wallet? How does a crypto wallet work?

From experience, the first thing that comes to mind whenever anyone mentions a crypto wallet is a wallet for crypto. Yes you are probably correct but the difference is unlike the native physical wallets that we carry, this wallet doesn’t have pockets to store stuff like our id cards credit cards, or money. They are mostly not physical or tangible. They are often online. 

A crypto wallet is a wallet that has specific types of software that helps create and store your private and public keys, communicates with the blockchain observes and reports your account balances, and enables you to receive and also sign crypto from and to other people when you want to.

How does a crypto wallet work? Crypto is just short for cryptocurrency. The crypto balance you see on your crypto wallet is not actually stored in your wallet but just a reflection of what you have on the blockchain, meaning if you broke your device the crypto wouldn’t be damaged because it wasn’t there in the first place it’s on the blockchain. I already covered a lot about blockchain if you want to get that knowledge consider checking out our crypto Blog Section

Private key 

So a private key can simply be seen as a secret password to all your funds. There are a bunch of written numbers alphabets and symbols all mingled up to form a key specific to you alone. So no two private keys are the same.

Public key

A public key is different from a private key in the sense that it’s not secret in fact you need to give it out if ever you want more crypto to get into your account. So for example, if you wanted someone to send you some Ethereum all you need to do is copy your Ethereum public key and send it to them, then the Ethereum will get into your crypto account. Wallet addresses are another name for public keys. They are interchangeably used.

Seed phrases 

How does a crypto wallet work? So if you are using or will be using apps like Metamask or just wallet you come into contact with the word seed phrases a lot. It’s just a different type of password. It does the same work as the private key. The difference is that while private keys are a bunch of mingled-up alphabets in numbers the seed phrases are actually worse than you can remember if you try hard enough. There are usually 12 or 24 words in a seed phrase. If you ever lost either your private key or seat phrases you’ll never be able to get back into your account. So let’s quickly look at a real-world example to explain some of these terms we just covered.

Example of Seed Phrases

Now the closest reference you can get is our native banking system. When you go to the bank to open an account they give you a bank account number under your name and that account number is registered to you alone. Now you can decide to download the back mobile app if you want to be able to check your account balance when money comes in or send money too. If you want without having to go to the bank every single time, this mobile bank app you downloaded to your phone needs to be protected from people, not you. So it’s compulsory to create a username and a password to keep people from stealing your funds if ever they got hold of your phone.

Bank account vs Crypto Wallet

How does a crypto wallet work? So let’s do a quick comparison with crypto. The blockchain here is your bank although you can’t actually go to this bank. Your mobile app is your crypto wallet. Your public key or address is your account number through which money can be sent into your account and your private key is your username and password. While these two separate things function the same way start off they have very key differences.

First of all, with crypto, there’s no physical back that you can visit anytime you have a problem.

Secondly with crypto if someone gains access to your account and moves your money out of your wallet there’s no customer service or manager that can help you. Sad to say it’s gone forever.

Categories of wallets 

How does a crypto wallet work? and different categories of crypto wallets explained now that your understanding of what a crypto wallet is and does is a little refined. Let’s talk about the categories of crypto wallets there are basically two. Which are the hot wallets or online wallets and the called wallets or offline wallets. 

Hot wallets 

These are wallets that create and save your private key online. The wallets can either be in the mobile form or course extensions on your browsers. Examples of these types of wallets are the Metamask wallet, trust wallet, Kepler wallet, and so on. As long as the wallet is connected to the internet is a hot wallet hence the name.

Cold Wallets

They create and save your private key offline off the grid. These are not wallets that are downloadable instead you can physically hold them. They are also called hard wallets because they are tangible to hold you can buy them and keep them. Examples of these gold wallets are Trezor and ledger amongst others. To use cold wallets you first must have a hot wallet and a computer to help connect them so that way you can check your balance, and carry out transactions without any sensitive info being saved online.

Hot wallet vs Cold Wallet

Best crypto wallet explained Amongst the two code wallets are better because they are totally disconnected from the internet and consequently far away from possible hacks. Unlike hot wallets, you can easily carry code wallets around. They are basically like thumb drives that you wear around your neck or keep in a Wallet for safekeeping. 

While cold wallets are safer to use there are downsides to using them too. If you accidentally misplace the hard wallet there is nothing that can be done about it. If you had a billion dollars in there then you’d be a billion dollar short, again if you end up buying the wrong hard wallet you can end up giving your money to hackers as some wallets are bought, hacked, and then resold to buyers. This way when crypto gets inside it’s moved instantly. My advice would be to never ever buy used hard wallets and buy only from reputable companies that send the wallet CEO sealed in its original packaging.

Hot wallets are more prone to hacks because they are online and anything online these days can be manipulated.

What happens when someone gets your seed phrases of a private key?

How does a crypto wallet work? If you were to give someone your seed phrases or private key it would be as though they now also own the account. As they can log in there at any time and do whatever they want. On the other hand with banks, if you got hacked you can change your password or do a reset, but with crypto, a private key or seed phrases cannot be changed. The only way to get the hacker out of your account is if all of a sudden their phone bursts into flames and they lost your seed phrases and didn’t save it or just forget all about it.

The area of private keys is very sensitive and so never give out your seed phrases to anyone or private key because if they get in no one can help you, unfortunately, but if you did get hacked or suspect someone knows your seat face or private key just be safe and open a new wallet account and transfer all your crypto funds there. When trying to send or receive cryptocurrency you should make sure you are sending the right type of crypto to the right blockchain address. 

Each cryptocurrency like bitcoin Ethereum and some others may have its own special wallet address. They can only accept that particular type of coin. So if you wanted to receive Ethereum you cannot copy your bitcoin wallet address for that purpose, because they are on separate blockchain networks. If you do the crypto will not arrive, because the wallet address you used to receive the Ethereum wasn’t recognized and hence you have just lost all the crypto you tried sending to the wrong address with no refunds or waste of recovery. This is how it works for crypto.

Related: What is Impermanent Loss? | Is Impermanent Loss Worth it?

With banks, the name of the person would appear and if it doesn’t match you’d realize that it’s the wrong account number banks can help assist you, but with crypto once you send it to the wrong address that’s it. It can be reversed or undone.



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