How a Crypto Wallet Works and How to Create One

Written by Banks Editorial Team
5 min. read
Written by Banks Editorial Team
5 min. read

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Do you want to trade or invest in crypto? Understanding crypto storage is one of the first parts of your journey. You will need to store your crypto in a wallet. This requires you to know how to create a cryptocurrency wallet and how it works.

Like regular wallets, there are many kinds of crypto wallets. But the differences between each type of crypto wallet are far more significant. So, let’s go over what crypto wallets are, how they work, and the best ways to get your first crypto wallet.

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Send, receive, and exchange Bitcoin and 200+ cryptocurrencies with ease on Exodus—the world’s leading Desktop, Mobile and Hardware crypto wallet.

What Is a Cryptocurrency Wallet?

A cryptocurrency wallet is a place where crypto coins can be securely stored. It’s a safe location for the digital storage of digital assets. All cryptocurrency wallets are used to send and receive cryptocurrencies. All cryptocurrency wallets also give their owner full ownership and control over their contents.

There are two main challenges for newcomers to the cryptocurrency world:

  • Understanding how exactly wallets work
  • Choosing the right one for their personal requirements

A crypto wallet is a software solution or a program. They can be downloaded on any device they are designed to be compatible with. Your crypto wallet can be located on your computer, on your phone, or on a crypto storage device (hardware wallet). Regardless of where you have your crypto wallet, you will use it to track balances, monitor expenses, receive new funds and make purchases.

While there are many crypto wallet types, we will focus on the most accessible and popular types.

How Does a Cryptocurrency Wallet Work?

Crypto wallets secure your crypto by providing a storage method and public and private keys to access it.

Storage

Cryptocurrency wallets function much like deposit boxes. You can place your cryptos inside them, and they are kept secure for future use. However, they also offer many online banking features, including sending and receiving funds.

Keys 

Like deposit box keys, crypto wallet keys must also be kept safe. But crypto wallet keys work differently.

Crypto wallet keys are the codes used to access the wallet. They are 256-bit numbers or hexadecimal codes. Your wallet’s key will match the public address that your crypto is assigned to.

When you first see a digital wallet’s key, it may seem confusing and overwhelming. But these keys are designed to be easy enough to record and possible to remember over time. They are meant to be written down on a piece of paper, photographed, or otherwise rendered into an image or typed into a notepad or Microsoft Word document.

One important aspect of crypto wallet key safekeeping is to keep backups. Losing all memories and recordings of your key will render you unable to access your wallet. Never share your key with anyone, and never lose it. The only exception is with hosted wallets, which do not require keys.

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Get Started With Your Crypto Wallet

Send, receive, and exchange Bitcoin and 200+ cryptocurrencies with ease on Exodus—the world’s leading Desktop, Mobile and Hardware crypto wallet.

Types of Crypto Wallets

There are three popular kinds of crypto wallets that beginners should understand.

Hosted Wallets

Hosted wallets are the easiest type to set up and start using. They are called “hosted” because they are held by a third party that holds their contents for you. This option is the most similar to a bank account. Your wallet is an account on a platform that offers you the crypto equivalent of a checking account.

Hosted wallets are offered by many crypto platforms. It’s your responsibility to vet these platforms to make sure they are secure and trustworthy.

You don’t need to worry about the key with a hosted wallet. This is one of the main benefits of hosted wallets. You will not lose your crypto if you forget your password. You just need to recover your password to re-access your account with the host.

Self-Custody Wallets

As the name suggests, self-custody wallets put the crypto holder in complete control of the wallet and its contents. They are also called “self-custody wallets” because no third parties hold your crypto. Platforms like Coinbase offer them.

These wallets provide a complete underlying software infrastructure that enables you to store your cryptocurrencies. But they don’t have a password like hosted wallets do. You hold the key to your wallet, and it’s your responsibility to care for it.

Self-custody wallets are the wallets used to engage in more advanced crypto activities, including:

  • Crypto lending
  • Yield farming
  • Staking

Hardware Wallets

Hardware wallets are physical devices that store the keys to the user’s crypto. They are used to store the private keys offline. They are essentially the same as other devices used to store data, like USBs.

Of the three major types of crypto wallets, this is the least popular. They are more complex than the other two, and they are more expensive. However, they offer an additional kind of security. Because they are stored offline, they are secure even when your computer is hacked.

The Most Common Features of a Cryptocurrency Wallet

Most crypto wallets offer some mix of the following common features:

  • Quick conversions between crypto and fiat currencies
  • Transaction histories
  • Automatic custom notifications for activities
  • Automatic logout to keep your holdings secure
  • Fast and secure methods like QR codes for convenient payments
  • Chargeback fraud denial
  • Low rates for transactions
  • Connections for real-time price updates
  • “Recent contacts” and previous contacts lists for more convenient transfers
  • Advanced authentication processes to increase security
  • Several options for authorizing a transaction
  • Desktop wallets and Mobile wallet apps, available for either iOS and Android or both

You can compare the different crypto wallets for these features before getting started. While not all of them are critically important, having the features that make your crypto activities easier and safer will always be a great benefit to you. If you find it important to manage your digital currencies on the go, also look for one that offers a mobile app.

Things to Consider When Choosing a Crypto Wallet

Several basic requirements take precedence over the list of features a crypto wallet comes with.

Set-Up Requirements

Each of the three wallet types we’ve covered has a unique setup process. Each of those processes implies different costs and different levels of complexity. For example, a hardware wallet requires a software download and the purchase of the hardware. Self-custody wallets require you to download the app, set up a new account, secure your private key, and transfer your crypto.

Safety and Security Features

Each of the three wallet types comes with safety and security strengths and risks. One of the largest safety risks is losing possession of your private keys. With a hardware wallet, your key is offline and thus safer from hackers, but if you lose the wallet, you lose the key. Hosted wallets don’t come with such problems, but your holdings are at risk if your host is successfully attacked.

Costs and Fees

Each of the wallet types comes with different:

  • Startup costs
  • Ongoing costs/fees

Some self-custody wallets come with both of these kinds of costs. Hardware wallets always require a significant initial investment. 

You can compare many different products to ensure you get the lowest cost for your needs.

Earning Interest on Crypto

Not all wallets are equal when it comes to opportunities for earning interest. You can compare different wallets for interest if earning interest on crypto is one of your goals. In general, interest rates in crypto are far higher than interest rates for traditional savings accounts.

How to Set Up a Crypto Wallet with Exodus

Exodus makes it simple to trade and store crypto. Exodus is a crypto wallet, but you can use Exodus to buy bitcoin and other cryptocurrencies and store them directly.

To use the Exodus wallet and distributed exchange, you need to download the most recent version of Exodus. You can download Exodus on desktop, mobile, or with a Trezor hardware wallet.

After Exodus is installed, it’s highly recommended you back up your wallet to keep it safe. After that, you just need to import any asset that Exodus supports. You cannot buy assets using fiat currencies, but Exodus accepts bitcoin and other cryptos.

Using the Exodus Exchange app, you can trade over 70 assets directly within your wallet.

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