What are cryptocurrency wallets?

What are cryptocurrency wallets?

To be able to use cryptocurrencies, you need a crypto wallet. A wallet allows you to see your balance and send and receive funds. Most cryptocurrency wallets look similar to banking and payment apps you already use. However, they work very differently under the hood. 

In this guide, we will explore cryptocurrency wallets in 3 parts:

  • How cryptocurrency wallets work by comparing them to things you’re already familiar with.
  • What public and private keys are and how they function.
  • Which cryptocurrency wallets are available, and what their level of security is.

Why you need a cryptocurrency wallet

There’s a word we can use to describe anything that exists and moves around on a blockchain, being: crypto asset. We call them assets because they’re objects that are valuable and that belong to someone. Whenever we mention assets, we refer to any cryptocurrency or token. 

You need a wallet to store, send, and receive crypto assets. A wallet can be an app you install on your phone or computer or a service you log in to on the web. A wallet is technically a gateway to blockchain assets. 

How cryptocurrency wallets work

To understand how wallets work, we need to cover some of the underlying technology of crypto assets. In our previous guide, we already explained that crypto assets use cryptography techniques. We also mentioned that cryptography is a way to protect information and communications by using secret codes so that only those who have the codes can read or send the information. 

The cryptography used by blockchains is super secure, and it is the same cryptography that ensures online payments and the highest levels of military secrets. 

It might sound surprising that cryptography isn’t top-secret technology. Cryptography consists of really advanced math equations, though, which are free for anyone to use. Just like no one owns mathematical equations, cryptography techniques exist in the public domain and are used in all kinds of civilian, industrial, and government applications.

So, what does this have to do with crypto assets? First of all, crypto wallets don’t actually store crypto assets. The money you send and receive on your crypto wallet isn’t IN the wallet itself.

Remember that a blockchain like Bitcoin is just a list of names and account balances, and that list exists in thousands of computers, all synchronized between each other. Whenever you send digital assets, the balances on the blockchain get updated. 

A crypto wallet does 4 things:

  1. It shows your digital asset balances at any given time.
  2. It constructs a transaction that contains essential parameters like the amount and a destination (the person or external wallet you want to transfer funds to). 
  3. It signs that transaction using cryptography so it can be sent to the blockchain to the destination safely.
  4. It sends that transaction to the blockchain for all participants to see and for miners to update the balances in the ledger.

If you’ve ever sent a check, you’ll notice some similarities:

  • You write the check, which contains the details of the transaction, including your account number, the amount of money to be sent, and the name of the recipient.
  • You sign the check, verifying that you’re the account owner and can spend the funds.
  • You hand the check to someone, which hands it to a bank that updates both your account balances.

The check is simply a way to tell your bank that you authorize the transfer of money to another account. 

Similarities between cryptocurrency wallets and checks

A crypto wallet works similarly to checks, but instead of telling a bank to move funds, it tells a blockchain, like Bitcoin or Ethereum, to move funds from one account to another by updating the shared ledger of account balances. Keep in mind that there’s no bank involved with cryptocurrencies. The blockchain and a network of synchronized computers replace this. 

Just like a banking app doesn’t contain any actual money, neither does the crypto wallet. The crypto wallet is simply a way to look at your balance on a blockchain’s records and to send transactions on those ledgers.

Private and public keys

When you set up a crypto wallet for the first time, it will generate a pair of personal cryptographic keys: the private key and the public key. The private key is something you keep safe and for yourself – you never ever share it with anyone.

The public key is your blockchain address, allowing anyone to send you funds. It’s pretty self-explanatory – you keep your private keys private, and you can give your public keys to the public

The match that generates these key pairs is quite complex, but with most wallets, your private key is represented by a list of random words called a mnemonic seed phrase

Most wallets will generate a phrase of 12, 18, or 24 words. The more words, the more secure as it’s harder to guess. 

This list of words represents a big random number, and the chances of two crypto wallets generating the same number are practically zero. The wallets use random words instead of numbers because it’s harder to make mistakes when writing them down. 


You should NEVER share your private key phrase with anyone. Most cryptocurrency wallets hide it deep within their app settings and will warn you multiple times before showing it to you. 

You have probably heard stories of people who accidentally threw their hard drives away that contained their crypto private keys. Always remember that when you lose your keys, you lose your crypto. Being your own bank is a big responsibility. 

How public keys are generated

Crypto wallets take private keys and apply math to them to generate public keys. These public keys, also called blockchain addresses, can be shared freely. 

When you see a blockchain address, it usually looks like a long series of letters and numbers, like 0x739bdf7d7b8, for example. 

The address is usually the first thing you see when opening your crypto wallet. To make it easier to share with others, crypto wallets display QR codes you can share so that others can quickly scan them. This way, you don’t have to read this long string of letters and numbers out loud. 

A simple analogy is your email address and its corresponding password. You can share your email address with anyone who wants to send you an email, but you need the password to send a message from it and to read any email received. 

You can share your blockchain address with the world to receive digital assets. However, the private key functions as the secret password you must use to sign transactions and tell the blockchain you have the right to send funds held by the address. The blockchain verifies these signatures. If a signature is correct, the transaction goes through. 

Keeping your private keys safe

Keep in mind that in the cryptocurrency world, there is no undo button or customer service you can call when things go wrong. There is no reset password function either. If you lose your keys or if someone gets a hold of them, you lose access to your funds. 

Forget about trying to generate the same phrase twice. This is nearly impossible to guess, even when using the most powerful computers in the world. 

Another thing to remember is that if someone sends funds to your address and just a single number or character is wrong, the funds won’t arrive. This is why QR codes are the best way to share your address. 

‘’Not your keys, not your crypto’’

There’s a popular saying in the cryptocurrency space: ‘’Not your keys, not your crypto.’’ This means that if you’re not in possession of the keys which control access to your crypto assets, they might as well not be yours. 

Most cryptocurrency exchanges – companies that allow you to buy and sell cryptocurrencies, allow you to store digital assets in their wallets. These are what we call ‘’custody’’ wallets. Someone else, in this case, the exchange, has custody over your funds. 

Although most cryptocurrency exchanges are reputable and have amazing security, it is not always the safest move to store your digital assets with them. There are countless examples of crypto exchanges that got hacked or where customers’ funds vanished. 

Be sure to always work with reputable crypto exchanges only and know the risks when choosing to store your crypto with them. Also, know that exchanges will apply their own rules and restrictions to funds in your wallet, similar to banks. They may limit your transactions or increase their withdrawal fees simply because they control the funds you store with them. 

Non custodial crypto wallets

Crypto wallets that you install on your phone or on your computer that generate seed phrases are non-custody. This means the funds in these wallets are not in the custody of someone else. 

Non-custody wallets ensure that you are the only person that can control the funds as long as your seed phrase is safe and sound.

Storing your seed phrases

However, there are limits to non-custody wallets, especially if you’re not a technical person. Storing a seed phrase isn’t 100% free of failure, either. For example, if you keep your seed phrase in your house, what will you do if your house burns down or is burglarized? If you keep your crypto assets in a bank vault, are you guaranteed that no bank employee will ever open the vault? What if the bank burns down?

All these questions provide food for thought, and you should consider them before deciding how to store your crypto assets. The answer on correctly storing your seed phrase also differs when more money is involved. Would you still feel comfortable storing keys the same way if they provided access to millions instead of hundreds?

There are, luckily, some options that lie somewhere in the middle. Advances in cryptography have made it possible to have wallets that are both secure and easy to use. Smart contract wallets and multi-signature wallets, for example, allow you to do things like restore your wallet if your phone is lost or stolen, set spending limits, and, most importantly, don’t require you to write down a seed phrase that can get lost or destroyed.

The Zengo Crypto Wallet App

Zengo is one example of a crypto wallet that is both secure and easy to use. It uses a new form of cryptocurrency called Secured Multi-Party Computation, where no private key is ever generated and, therefore, can never be lost or stolen. 

It is a keyless wallet, and with the serious advancement in authentication, you can secure access to your wallet with advanced biometrics without ever needing a password. A security kit is stored on your Google Drive or iCloud that can only be recovered with your face. If your mobile device gets stolen, you can simply restore your kit from your cloud account and use your face to decrypt it.

Why choosing a secure wallet matters

Choosing a secure crypto wallet is an essential part of your crypto journey. You can choose the full non-custody route, which includes being mindful of the security of your private keys, or the custody route, which means trusting someone else with your crypto. 

You can also choose to go for something in between, where you have some trust in a third party but still have the final say about how your funds are spent. Alternatively, you can choose to go for a combination of these options.

It boils down to the fact that the main difference between wallets lies in how your keys are stored. The right solution will depend on the amount of crypto you own, your technical abilities, and your comfort level when storing your private keys. It is important to know that in crypto, you always have the ability to move your funds from one type of wallet to another.