A Crypto Wallet Is The Most Important Tool For Cryptocurrency, But How Does A Crypto Wallet Work?

Samantha Avotch

Crypto wallets are the foundations on which cryptocurrency transactions depend on, whether that be for receiving or sending funds to another cryptocurrency user. Cryptocurrency wallets have been around since the beginning of the market; when Bitcoin’s creator Satoshi Nakamoto developed the Satoshi client (later worked into Bitcoin Core) in 2009. The Satoshi client allowed users to create wallets and transfer Bitcoin between them.

Despite the success of the initial wallet generator, problems were common in the beginning.

Since the explosion of popularity of cryptocurrencies in 2017, the number of generated blockchain wallets has increased substantially from 17.2 Million in the third quarter of 2017 to 47.14 Million in the first quarter of 2020. In addition to this, with the bold predictions that the blockchain technology market will rise from $3 Billion in 2020 to $39.7 Billion in 2025, the number of cryptocurrency wallets that are generated is likely to continue to increase massively.

# of blockchain wallet users worldwide
Source Statista.com

How Do Cryptocurrency Wallets Work?

One of the easiest ways to think about cryptocurrency wallets is to think of them as a safe. We use safes to store our most precious possessions and if you were to lose the key or code to your safe, you would end up losing access to those possessions.

Cryptocurrency wallets work in the same way, although the keys in this sense are digital rather than physical. These are known as private keys and they take the form hexadecimal codes.

Cryptocurrency wallets interact with various blockchains, providing the ability to send and receive cryptocurrencies.

For example, if someone was to send you some Bitcoin, they would be singing ownership of those coins over to your cryptocurrency wallet. To actually receive the funds, the private key in your wallet must match the public address that the wallet is assigned. When these keys match, the amount of cryptocurrency in your wallet will increase. The transaction is then recorded on the specific blockchain.

The hexadecimal code used by Bitcoin creator Satoshi Nakomoto’s Bitcoin wallet can be seen below.


In essence, private keys work in a similar sense to your password with your bank. If you are sending money across to another individual or are partaking in some other activity, your password will be needed. This key will be linked to your specific wallet, so if you use multiple wallets you will need to keep track of your private and public keys. The public key is akin to your bank number, which is used to identify you as a customer.

No physical product or asset is stored within this process. Transactions are completely facilitated by the blockchain, which acts as a distributed accounting ledger; also taking note of the balances of each wallet on the blockchain. This blockchain can not be retroactively changed, which reinforces the legitimacy of transactions on the blockchain.

Some cryptocurrency wallets allow the user to store a variety of different cryptocurrencies within that wallet, whereas others may offer a more limited or even singular option in terms of cryptocurrency compatibility. Generally, a large number of cryptocurrency are built on the ERC-20 token; which means that there is a greater chance of finding a cross-currency wallet built for ERC-20 tokens. It is always recommended that you research the compatibility of each wallet before using it.

Some cryptocurrency wallets come with additional security features which decrease the likelihood of an attack on your cryptocurrency holdings. For example, many wallets support two-factor-authentication usage with Google Authenticator, which means even if an attacker gained access to your private key, they wouldn’t be able to access the wallet without the code.

The success of cryptocurrency wallets as a digital storage for a valuable asset has led some to speculate that there exists a much wider application for the technology, which can be used to store the value of other assets, securities and services. This has been seen with the resurgence of digital gold.

How To Choose The Best Cryptocurrency Wallet For Your Needs?

Each type of cryptocurrency wallet that is available to the public has their own sets of advantages and disadvantages and the best wallet for your needs will depend on your transaction habits and other requirements that you may have.

Overview of Crypto wallets
Source https://www.bitpanda.com/academy/en/lessons/what-is-a-wallet-and-how-do-i-get-one/

Mobile Wallets

If you are using cryptocurrencies on a daily basis and you need fast access to your cryptocurrencies, then a mobile wallet may be the best option for you. These types of wallets work from an app on your mobile device and will allow you to pay for items or send transactions directly from your phone. Despite the convenience, you will need to do your due diligence when using a mobile wallet and choose one with a history of good security and fair practices. There are some privacy concerns over the use of the internet, however the internal security on these apps temper this.

Hardware Wallets

Hardware wallets are physical devices run electronically that will generate your public and private keys by using a random number generator. These devices are incredibly secure against online attacks, although security may be compromised if the firmware is not correctly implemented. These types of wallets are useful if you are storing your cryptocurrencies for a long time, as they are not incredibly user-friendly and the act of accessing your cryptos can be more difficult.

Paper Wallets

Paper wallets are the safest method of storing your cryptocurrencies from online attacks as your keys are simply written or printed onto a piece of paper and never interfaces with the internet. Despite this, there are still risks associated with paper cryptocurrency wallets as they can easily be destroyed or stolen if they are not stored safely and appropriately. They can also be more complicated to use than the other wallets.

Desktop Wallets

Desktop wallets are software programs that you can store onto your computer to access your cryptos. The keys for your wallets are stored on your hard drive and among offline options, they are considered to be a very reliable form of cryptocurrency wallet. Despite this, there are still security risks associated with this wallet type and they are not as convenient as other forms of crypto wallets. If your keys are not stored with an encryption, they can be stolen and your IP address can be hacked.

Web Wallets

Web wallets, also known as online wallets, are the least secure form of cryptocurrency wallet, due to the fact that they are always exposed to the internet. Despite this, web wallets are very utilitarian and convenient for storing small amounts of cryptocurrency. Additionally, these types of wallets are able to facilitate rapid transactions and can often manage a variety of different cryptocurrency types. You should always ensure that if you are choosing to use a web wallet, that you do your due diligence as the third party will be storing your cryptocurrencies for you, as opposed to you doing it.


After discussing the advent of crypto wallets and how they work, it is clear that cryptocurrency wallets are critical to the successful widespread adoption of cryptocurrencies.

In line with this, it is estimated that the number of registered blockchain wallets will explode to new heights to cope with the growth of the market. Different individuals will have various trading habits and will benefit from some blockchain wallet types over others, depending on these requirements. From the discussion in this article, you should be able to identify the blockchain wallet type most suitable to you.