The Blockchain Beginners Guide — The Wallet

Everything you need to know about the Wallet. What they are, you we need them and most importantly, what is the right wallet for you?

7 min readFeb 17, 2022

Every journey starts with a first step. For most, the journey into crypto currencies starts with setting up a crypto currency wallet. But what exactly is a wallet and how does it work?

In short: A wallet is a piece of software (or hardware) that grants access to virtual assets, such as crypto currencies and smart contracts.

A wallet holds your private key and your public key and which in turn generates your public address. Your wallet is the gateway to access your crypto assets.

But in order to understand what a wallet exactly is, what it does and how we use it, we have to clarify some terms first.

What are Keys?

The private key is a string of code, usually in the form of a series of randomly generated words, that is unique to you and will allow you to identify with the assets stored on the blockchain. It is of pivotal importance that you keep the private key classified. Anyone who can access your private key will be able to access your wallet and thus all the holdings linked to it.

The public key is a string of numbers and characters that is used to generate the public address of your wallet. As the name suggests, it is public and is used to sign transactions for example to send or receive assets. Think of it as your digital postal address.

What is a Wallet?

There is an abundance of wallets available, every single one of them with its pro’s and con’s. In this article I will touch on some of the most popular of them, show how their use cases and compare them to each other.

Unlike a normal wallet, which can hold actual cash, crypto wallets technically don’t store your crypto. Your holdings live on the blockchain, but can only be accessed using a private key. Your keys prove your ownership of your digital money and allow you to make transactions. If you lose your private keys, you lose access to your money. (Coinbase)

A crypto wallet contains the private key(s) that allow you to access your crypto currency holdings on the blockchain.

Now that we know what specifies a wallet lets take a closer look at the different versions.

What kinds of Wallets are there?

In principal there are three types of wallets. Other types may exist but for now let’s focus on the most common ones.

Online Wallet (Hot)

The keys are stored online. These wallets are easy and convenient to use and offer a simple way to get started into the crypto space, but at the same time pose the risk of a malicious attack. Large wallet providers such as Coinbase, Binance and Kraken have implemented their own security protocols to secure these “hot” wallets and the security in general is good. however, keep in mind that in the past some of these protocols have been breached. Some of the larger online exchanges offer therefore wallet apps that are separated from their trading apps in an attempt to ringfence the assets from the exchange.

Software Wallet (Hot)

Some ecosystems offer their own native software (app) that allows a token holder to access the full potential of the underlying blockchain such as staking, voting and smart contracting.

Other software wallets are multi-asset wallets that come in the form of an app or standalone software. e.g. MetaMask

Hardware Wallet (Cold)

Keys are stored on a hardware component such as a thumb drive. Hardware Wallets, similar to paper wallets, are stored offline on a thumb drive or dedicated “cold” storage drive. These wallets combine the security of an offline storage with the the ease of use of a software wallet. Important reminder: you can only sign transactions on the blockchain if you have the hardware wallet readily available, i.e. no wallet, no access.

What Wallet Type Should I Use?

For your first steps into the crypto and NFT world I would recommend to use a software/online wallet. They are convenient to set up, usually offer a user friendly interface and have a reduced risk error and loss.

Online Wallets

It is important to look at a wallet providers reputation, data security and usability. As a small investor and for first steps I would recommend to go with one (or multiple) of the household names such as Kraken, Coinbase, Binance or Crypto.com. Most of these providers not only offer wallets but also the ability to trade, send and receive a variety of crypto currencies. Some even offer you cards that allow you to spend certain crypto in the real world (at least the Fiat currency counter value of it).

Mainstream software wallets are best for, but not limited to, transacting with the major crypto currencies such as Bitcoin, Ethereum, Tether, Binance Coin, etc. Make sure you look at the list of crypto currencies from each wallet provider since not every platform offers access to the same tokens, especially if you intend to invest in small or niche coins & tokens.

Most online wallet providers have KYC requirements, restrictions or specific regulations depending on your country of residence. This should not put you off but be a sign of transparency and security and it will likely prevent you from having your assets questioned or frozen by a regulator or even a hack.

Software Wallets

These wallets are specific pieces of software that can hold either a single or a multitude of crypto currencies. They offer a good alternative to store and maintain your holdings, away from a centralized provider.

These wallets are still considered “hot” due to the fact that they live online or on a piece of software, yet they are somewhat more detached.

Some of the most popular Software Wallets are;

Electrum (only BTC)
Mycelium (BTC, ETH, ERC-20)
Exodus (multi-currency)
Meta Mask (multi-currency)

Often software wallets are dedicated to a specific token and offer unique benefits tied to the ecosystem of that token. This can range from staking to smart contracts and voting rights on the blockchain.

A good example here would be Cardano’s Yoroi Wallet or NEM’s Symbol. Here the software wallet app is acting as the gateway to the ecosystem of these tokens.

By now many exchanges and wallet providers offer crypto holders pass through benefits such as staking rewards and voting rights. Thus for new entrants using a token specific software is likely to lead to more confusion rather than simplicity.

I will write a separate deep dive article about software wallets in the near future.

Do I need a Hardware Wallet?

In the beginning, no. I personally started using a hardware wallet only much later and even now only use it for larger holdings that I don’t frequently trade or move.

Hardware wallets offer a high degree of security but can be cumbersome to use. Let’s bring a use case for a hardware wallet for a better understanding;

John has opened a Coinbase account and intends to buy a large amount of Bitcoin. He therefore sends USD from his bank account to his online wallet provider and exchanges it for BTC. He does not to intend to sell those coins anytime soon and wants to keep them safely stored. However, he has heard of exchange breaches and would like to keep his BTC in a more secure way. To do so he buys a Hardware Wallet and transfers the BTC into it. (Note: Certain online wallets allow you to secure them with a hardware wallet, i.e. you can only interact with the online wallet once the hardware wallet grants permission).

Hardware wallets provide a high degree of security since without the actual piece of hardware the tokens can not be transacted. This at the same time shows the inconvenience, the hardware wallet must be readily available if you want to interact with your holdings.

Thus my personal recommendation would be to use a hardware wallet only for large amounts and/or assets which are infrequently moved.

Popular hardware wallet providers are Ledger on Trezor.

Key Takeaways

Wallets hold Private and Public Keys, not the actual assets
The three major forms of wallets are Online, Software, Hardware
Online wallets offer the highest ease of use
Dedicated Software Wallets unlock the full potential of a tokens eco-system
Hardware Wallets are highly secure but less convenient to use
Start with an Online Wallet from a trusted service provider

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