February 1, 2022

Crypto Wallets Guide

Carla McMorris
Director of Content

Crypto Wallets Keep Crypto Earning Accessible and Safe

Crypto wallets: How cryptocurrency owners can keep their holdings safe

When you are out and shopping using cash, you likely keep your money in a wallet for safekeeping. Crypto wallets, as their name implies, are a version of that, though generally not in the same physical form as the wallet in your pocket or purse. In this guide, learn more about crypto wallets, why they are important, and why neobanks see so much value offering crypto wallets to their customers.

What are crypto wallets?

A crypto wallet enables cryptocurrency owners to store their private keys - the passwords that provide access to their cryptocurrencies. A crypto wallet doesn’t actually hold the cryptocurrency itself but instead provides access to cryptocurrency on the blockchain.

What are crypto wallets used for?

Crypto wallets allow users to send, receive and store digital money, or cryptocurrency. But what is cryptocurrency? Cryptocurrency is a collection of data that functions as a medium of exchange, and as an alternative to state-issued currencies such as the U.S. dollar. The records of who owns each individual crypto ‘coin’ are stored in a digital ledger, typically a blockchain. Because cryptocurrency is decentralized, meaning it is not issued by a central authority such as a government’s treasury, many users see the currency as working to promote greater financial democracy.

How do crypto wallets work?

Crypto wallets are designed to allow users to securely access their cryptocurrency. They come in a variety of forms, including software and hardware versions, described in greater detail below. The wallets let users keep their private keys, or the passwords that give them access to their cryptocurrencies, safe. 

So-called hot, or software, wallets are accessed by users online. Through those wallets users can send and receive cryptocurrencies securely, or use currency, such as dollars, to purchase more crypto.

How many types of crypto wallets are there?

There are a number of different crypto wallets. The biggest distinction may be between hardware and software wallets. 

  • Hardware, or ‘cold’ wallets, are physical devices that look like a USB stick and store the user’s private key for cryptocurrency on the device. Because a hardware wallet isn’t connected to the internet and is a physical object, they are considered one of the safest ways to store cryptocurrency as it cannot be hacked. Still, they carry some downsides. If you lose the device, you will need to enter a recovery seed, which is a 12 or 24-word sequence randomly generated when a user creates a wallet address. So safely ‘storing’ the seed phrase is another security risk for users of cold wallets. And hardware wallets themselves can be expensive for users to purchase. 
  • A software wallet, also sometimes known as a hot wallet, is often linked to the crypto exchange where a user buys their currency. A software wallet can also be downloaded onto a computer desktop, or onto a smartphone through an app. Because they are accessed online, software wallets are more vulnerable to hacking than hardware wallets.

Are crypto wallets secure?

Crypto wallets protect a user’s cryptocurrency holdings by letting them hold various cryptocurrencies all in one place. Hardware wallets, described below, allow users to access their private keys offline and away from hackers. 

Note that cryptocurrency holders don’t need to obtain a wallet for their holdings, as many crypto exchanges, such as Coinbase, allow owners to keep their currency on the exchange’s own wallet. Still, crypto wallets are perceived as more secure because they help prevent the loss of bitcoin due to hacking, loss of access keys, or other reasons. Keeping cryptocurrency on an exchange means the owner increases those risks. Exchanges can hold billions in cryptocurrency, making them an attractive target for hackers. Mt. Gox, once the largest bitcoin exchange, closed down in 2014 after it reported missing and likely stolen bitcoin,

For crypto wallets, some of the security protection relies on the behavior of the wallet owner. For example, the user may somehow lose the private key, and never again be able to access their bitcoin.

What is a DeFi wallet?

Most cryptocurrency wallets held by individuals are decentralized. The term decentralized refers to how the owner is the only person with access to the private keys to allow access to their cryptocurrencies. These wallets don’t rely on third parties to send or receive cryptocurrency. One of the biggest examples is MetaMask, which provides users a key vault, secure login, token wallet and token exchange so they can manage digital assets.  

By comparison, an example of a centralized wallet is Coinbase’s wallet within the exchange.

What is a custody wallet?

Both hardware and software wallets are considered self-custody wallets. Users receive a private key - a string of numbers that grants access to the cryptocurrency. 

Cryptocurrency custody wallets are third-party cryptocurrency storage providers for larger, institutional investors, such as hedge funds. They often feature a combination of hot storage and cold storage, 

The rise in the number of institutions holding cryptocurrency, and scrutiny from regulators, will likely increase demand for custody wallets. Currently, institutional investors with client assets exceeding $150,000 must store the holdings with a qualified custodian.

What are crypto exchanges?

A cryptocurrency exchange is simply an online broker where individuals can buy and sell digital currencies, or buy cryptocurrency using conventional fiat money or other digital currencies. Some popular exchanges include Coinbase, Cash App and Gemini.

Though an individual can choose to hold their cryptocurrency on exchanges instead of a wallet, industry leaders advise against that, given the higher risk of exchanges being hacked.

What are the important features of crypto wallets?

Most crypto wallets offer a similar set of features and benefits users should consider. They include:

  • Ability to hold a large variety of cryptocurrencies, and the ability to add more as they are created
  • Built-in exchange, so users can buy and sell cryptocurrencies
  • High level of security, especially for software, or hot wallet, providers
  • Open-source software with strong customer and community support for troubleshooting
  • High-level customer experience 
  • Ability to lend: Some wallets allow users to ‘lend out’ their crypto in exchange for earning interest.

What value can crypto wallets bring to fintechs who are interested in offering crypto applications to their customers?

The explosive demand in cryptocurrency is also leading to strong growth from consumers for crypto wallets. By offering crypto products, including wallets, both fintech and non-fintech companies can tap into that growing market and consumers interested in it, while collecting fees for offering the service. 

Fintechs can open crypto accounts and wallets that hold and transmit cryptocurrencies to power the earnings and investments of their customers. Using the Synapse platform, fintechs can fund crypto wallets with deposit accounts and other exchanges like Coinbase and others who are using our wallet address infrastructure.

Learn more about our Cryptocurrency Solutions, including a cryptocurrency exchange and wallet.

How do the financials of crypto wallets work, especially if they can yield returns for fintechs?

Crypto wallets can charge users various fees for holding and protecting their assets. They include fees for executing transactions, fees for supporting a new crypto asset and listing it on their wallet, and even consultation fees for guiding users on crypto investment opportunities and portfolio construction.

What are the upcoming trends and/or innovations for crypto wallets?

Along with the demand for cryptocurrency, the need for crypto wallets will continue to rise. The number of crypto wallets worldwide is estimated to be about 80 million as of January 2022, according to research firm Statista. Many companies, including Coinbase, and Binance, now let users link their debit card to their crypto wallet so they can spend their cryptocurrency using the debit card.

As noted above, the move from institutional investors into the space will likely increase demand for, and the number of, custodial wallets.

Crypto Wallets Guide

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Carla McMorris
February 1, 2022

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