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How Crypto Wallets Work: 4 Important Key Things You Should Know

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By , Updated On July 20, 2022

Most people who invest in cryptocurrencies are there either because of the blockchain’s ability to change the traditional financial institution or the “goldmine narrative” it has. Either way, most crypto projects, including Bitcoin, wouldn’t be available to the public if there were no crypto wallets. 

For newbie crypto traders/investors, getting a good grasp of the function of the numerous elements that make up the crypto industry, including crypto wallets, might be overwhelming. 

With a good explanation, the operation pattern of a crypto wallet is straightforward to understand; the function of a bank account is similar to that of a crypto wallet. 

Get ready as we explore what contributes to the whole makeup of a crypto wallet, how it operates, and what safety measures to take. 

What Is a Crypto Wallet?

A crypto wallet is integral to making investments and trading cryptocurrencies; crypto can’t be sent or received without this tool. 

Those using bank services use bank accounts and ATM cards ( credit/ debit cards) while making transactions; the same applies in the crypto scene. 

A crypto wallet acts as a tool for interacting with the blockchain network; blockchain activities such as staking cryptos can’t be done without a wallet. To invest in crypto projects, one needs wallets to purchase their coin at their ICO (Initial Coin Offering), and even digital assets such as NFTs require wallets to buy. 

Just like any other financial tool, it is recommended that you keep the details relating to a wallet, including the private keys, safe to prevent the illegal use of the funds in a wallet. 

How Crypto Wallets Work?

Knowledge of the operation pattern of a wallet is one of the preliminary actions to take before using a crypto wallet; this gives a better understanding of the need to keep details safe. 

Using the banking system as a reference point, one needs to have a bank account and some security pins and details to make transactions with a bank. The same applies to a wallet; they use public and private keys for a user to send and receive cryptocurrencies. 

With the blockchain, the wallet functions in a way that enables the wallet owner to monitor and manage the cryptocurrencies reflected. The private and public key has a role in serving; while the public key serves as the wallet address to receive money, the private key acts as what signifies ownership. 

Referencing the banking system, and showing the details of a cryptocurrency wallet makes it more feasible for hackers to access a wallet and make away with the funds. 

Public VS Private Keys

Key elements contribute to a wallet’s complete functionality, including public and private keys; these two things are requisite for a crypto wallet to work. 

Simply put, a public key serves the same function as a bank account number; one can’t receive a cryptocurrency without sending a public key, also known as a wallet address, to the sender. One should note that it is very safe to send out one’s public key to anyone without any concern of compromising the security of your crypto wallet

Private keys are supposed to be kept confidential; whichever person has access to your private key has the authorization to move the cryptocurrencies in your wallet to another one. The majority of the cases of theft that occur in the crypto space are because of private key details leaked to another person. 

The public and private keys are essential in solving the problem of symmetrical algorithms; it aids communication by employing encryption and decryption. 

The public key is used by a person sending cryptocurrencies to encrypt the information that is about to be sent. Because of the uniqueness of private and public keys, the information sent between the two can only be understood by the person who owns the wallet. 

4 Important Key Things You Should Know

  • Function 

It is vital to know what purpose a wallet will be used for before choosing the type of wallet to use; each kind has its primary functions. 

A software wallet is a type of wallet whose information can be stored in the cloud; it is available for those using desktop, mobile devices, and browser extensions. 

Software wallets are mostly preferred for those using a crypto wallet for trading from time to time; it is not meant for long-term holders. With QR code scanners built into software wallets, it is much easier to make payments and transactions with it than the hardware wallet. 

Hardware wallets and paper wallets are majorly for those who are long-term crypto investors, also known as “holders”; it is a recommended wallet in terms of security for those keeping a set of crypto such as Bitcoin for a long time. 

Talking about functionality, the number of cryptocurrencies a wallet supports should also be evaluated. Often, most software wallets support different cryptocurrencies, although there are a few exceptions, such as the Electrum wallet. 

In this regard, paper wallets do not have a determined number of cryptocurrencies it supports because they are public and private keys printed out or copied on a sheet of paper. 

  • Security 

The integral focus when evaluating software and hardware wallets is security; the level of protection in a particular wallet determines how safe the cryptocurrencies are from hackers. 

In comparison, hardware and paper wallets are usually safer and more secure than software wallets because they are entirely cut off from the internet. Because software wallets have their private keys and other details stored in the cloud, a slight leakage could lead to a loss of funds. 

The basic form of security a crypto user can find in a software wallet is a password; a wallet secured only by a password is still a target for hackers. To ensure maximum security, a crypto investor or trader should look for a wallet with two-factor authentication, multi-factor authentication, and facial authorization. 

Together with the security features, another critical feature to expect from a reliable software wallet is a backup option; users should be allowed to recover their funds assuming they forget login details. 

The security features to look out for do not only apply to software wallets; hardware wallets are expected to possess certain features to guarantee the security of cryptocurrencies in a wallet. 

A hardware wallet should be expected to come with a CC EAL5+ certified Secure Element chip; this should be the minimum requirement. 

  • Transaction Fees

Before settling down on a particular crypto wallet, the transaction fee charged while staking crypto, collecting crypto loans, and sending and receiving cryptocurrencies should be appropriately reviewed; some wallets charge higher, and others charge less. 

Software wallets provided by crypto exchanges charge a transaction fee or gas fee whenever a user stakes crypto, sends, or receives crypto. However, the transaction fee amount differs between software wallets; it also depends on how fast a user wants to process a transaction. 

Apart from wallets that are stored on paper, hardware wallets are not excluded as it even costs more in maintenance compared to software wallets that are free to use. 

For hardware wallets, depending on the features and security, it can take from $100 to more than $1000 to get one; it is quite a lot, but the guarantee of security covers that amount. 

However, while operating a hardware wallet, one doesn’t need to pay transaction fees on every transaction; you have to pay for the expenses accumulated while using a particular blockchain. 

  • Open or Closed Source

This part of the evaluation in crypto wallets is often overlooked, but it is imperative to know if a wallet you are using or about to use is an open or closed source. An open-source wallet is preferable to one that does not allow you to view its source code or review the bugs and programming blunders. 

A relatively quick way to differentiate between the two is that while anyone can view the source code or an open-source wallet, the reverse is the case for closed-source wallets. 

The level of ownership or access a user has over a wallet should be noted; one can either choose a custodial wallet or a non-custodial one. 

Regarding custodial wallets, the wallet’s private keys are typically controlled by the wallet providers; the user can only contribute by permitting the number of cryptocurrencies that are sent or received. 

Non-custodial wallets are different; much like NFTs, users are given access to operate the wallet and store their private keys in whichever way they want. 


Being a crypto enthusiast is not all about the amount of money invested in a particular crypto project; having an in-depth knowledge of some crypto tools such as wallets is essential. 

Wallets operate with the combined function of public and private keys; while the private key should be kept from the public eye, public keys act as the bank number or email address. 

Some important points should be known about wallets when using or before using them; types of wallets, security level, transaction fees, and purpose should be considered to avoid lethal mistakes.