What Are Cryptocurrency Wallets and How Do They Work?

Any use of cryptocurrency, whether storing, sending, or receiving tokens, ultimately involves interacting with the blockchain network that records all information about cryptocurrency accounts and their transactions.

To use cryptocurrency, you need a cryptocurrency wallet. Let’s take a closer look at what a cryptocurrency wallet is, the different types available, and the mechanisms that make it work.

Address and Cryptocurrency Wallet

Let’s start with a common misconception among those new to cryptocurrency — the belief that coins are stored inside the wallet itself. The assets are not actually kept in the wallet. A wallet is simply a tool for managing cryptocurrency addresses, which provide access to assets recorded on the blockchain.

A cryptocurrency address is a string of characters that represents a specific “spot” on the blockchain where a user’s coins are stored. In some similar blockchain networks, address formats may look identical. In theory, you could even use the same address across different blockchains. However, it’s crucial to understand that tokens from one network cannot be used directly on another. For instance, you cannot send ETH to an address on the Bitcoin network. You’d need to use a wrapped version of the asset or a cross-chain solution.

A cryptocurrency wallet serves as an interface for interacting with these addresses. In other words, the wallet is software that allows the owner to manage one or multiple cryptocurrency addresses.

Types of Cryptocurrency Wallets

There are several classifications of cryptocurrency wallets. For instance, there are multicurrency wallets that allow you to manage tokens from different blockchains, and wallets created only for a specific blockchain.

Generally speaking, all cryptocurrency wallets can be divided into two types, depending on how the information is accessed:

• Hot wallets are mobile or desktop applications that require an Internet connection. Trust Wallet, MetaMask, and Exodus are the most popular examples. Browser extensions, accounts on cryptocurrency exchanges, and various platforms can also be referred to as hot wallets.
• Cold or hardware wallets are physical devices that look like thumb drives. Such a wallet only needs to be connected to the Internet for transactions. The rest of the time, the device has no access to the network. The most popular representatives of this type are Trezor and Ledger. 

Hardware wallets are considered the most secure way to store cryptocurrency. The logic is simple here — a wallet that is not connected to the internet cannot be hacked, which means the funds remain safe most of the time.

Encryption Keys

Any type of cryptocurrency wallet has special encryption keys for accessing data on the blockchain. And we’re not talking about the device or program password that a user sets. Encryption keys are randomly generated alphanumeric strings used to encrypt and decrypt information arriving on the blockchain.

There are two types of encryption keys:

• Private or closed
• Public or open

For example, let’s say you want to transfer a certain amount of coins to another wallet. To do this, you need to know a recipient’s address, i.e., their public key. Basically, the public key is an address. That’s why it’s called public. Once a transaction is created, the blockchain automatically requests a sender’s private key to sign the transaction. The network won’t approve the transaction if it doesn’t have a digital signature, meaning your consent to transfer the funds. The private key, which encrypts the transaction, is used to create this signature. After signing the transaction, the cryptocurrency is transferred to a recipient, using their private key to decrypt it. 

Without public and private keys, conducting crypto transactions would be a less secure process or would require a third party. Matching public and private keys is what ensures that all transactions on the network can be verified.

When it comes to key storage, there are two fundamentally different ways of doing this, based on the concept of custodians. A custodian in traditional finance is an intermediary who keeps a record of a customer’s assets and ensures their safety. The custodian type of key storage involves transferring the management of private keys to a third party. 

A custodian is usually a crypto exchange or other intermediary service. They allow for funds to be managed via their web interface, the password to which can be quickly and easily recovered, but they also gain access to a user’s assets since they hold the private key. Such an intermediary can have its assets blocked by a court order or lost through hacking its infrastructure. So, by choosing such a wallet, a user sacrifices security in favor of convenience.

If you’re not willing to trust a third party, then use a non-custodial method of storing encryption keys. All cold wallets are non-custodial since private keys are only stored on their devices. Some hot wallets, like Trust Wallet and MetaMask, are also non-custodial because the private keys are kept exclusively on your device, and only you control them by confirming transactions via the app. Another example of non-custodial wallets is the Full Node Wallet, which hosts a full copy of the blockchain and leaves the management of private keys to the user. However, such wallets are gradually fading into the past, as it’s becoming less and less practical to keep the entire blockchain in one’s possession.

How to Store Cryptocurrency Safely?

One of the keys to keeping cryptocurrency assets safe is a seed phrase. This is a special set of words generated when you create your wallet. Custodial wallets have no seed phrase since a third party ensures the storage and security of all personal data. However, users of non-custodial wallets are responsible for keeping passwords and private keys safe, so the seed phrase is the only way to restore access to such wallets with all your savings at any time. This applies to both cold and hot non-custodial wallets. That’s why it’s critical not to forget this phrase, not to lose it, and to keep it a secret.

But forgotten passwords aren’t the only reason assets are lost. More often, cryptocurrency is simply stolen. As the industry grows in popularity, hacker activity and cybercrime rise proportionally. Research from Global Ledger shows that in the first half of 2025 alone, hackers stole more than $3 billion worth of cryptocurrency.

Even if you can’t control the security of assets in exchange accounts or DeFi protocols, you can check all dubious links for possible phishing. Hackers skillfully create fake versions of the websites of various cryptocurrency projects, conduct free giveaways of all sorts of stuff on behalf of big brands, and offer investors the chance to participate in highly profitable projects. Mailings are sent under the name of large companies, with offers to participate in a survey or congratulations on winning a prize. 

You shouldn’t believe everything written on social networks, either. Social media platforms are considered the most vulnerable sphere of Web3. One in three Internet entrepreneurs on Instagram or Discord can turn out to be a scammer. The official accounts of major projects periodically appear to be compromised with links to phishing sites. 

Phishing aims to trick users into giving up access to their wallets. So, never share your seed phrase, wallet ID, and password on third-party resources to avoid becoming a victim. And if you need to do this on a “trusted” resource to link your wallet, don’t do it by clicking on links — only by typing the site address directly in the address bar.  

And most importantly, don’t put all your eggs in one basket. Don’t keep all your cryptocurrencies in one place. Use several different wallets. Ideally, use a cold wallet for long-term storage and several hot wallets for trading and day-to-day needs. 

To summarize, cryptocurrency is stored on a blockchain and can only be accessed via a crypto address. A crypto wallet helps to access a crypto address and manage your assets. Wallets differ in how they access data, and how private encryption keys are stored. Public and private keys are necessary for any manipulation of cryptocurrency in a wallet. Saving a seed phrase to regain access to a non-custodial wallet is a priority for any user.