More people than ever before are signing up for crypto wallets as the markets become more accessible and as everyone realizes the inherent value in cryptocurrencies! You need a crypto wallet if you want to buy or sell Bitcoin or other crypto tokens, and you’ll also need one if you want to store cryptocurrencies for their long-term value as you play the market and invest wisely.
But what if you’re new to crypto tokens and don’t know what a crypto wallet is, let alone how to set one up? Today, let’s break down how to set up a crypto wallet in detail. We’ll also go over the different types of crypto wallets and their advantages and disadvantages relative to one another.
What Is A Crypto Wallet?
Put simply, a crypto wallet is a digital repository where cryptocurrencies are stored. Bitcoin, Ethereum, Litecoin, and other crypto tokens exist entirely digitally (there are no physical versions of cryptocurrencies). So crypto tokens can’t be stored in a traditional, physical bank or vault.
Instead, cryptocurrencies are stored on crypto wallets, which are secure platforms that leverage multiple cybersecurity technologies to keep the tokens safe. Crypto wallets also feature unique addresses, which are useful when sending crypto to another party or receiving crypto yourself.
Because security is paramount for crypto wallets, each wallet has at least one password (and several crypto wallet types may have multiple passwords that must all be correct to gain access). Therefore, individuals must keep their crypto wallets and their passwords safe to ensure their tokens are never stolen.
Crypto wallets are beneficial compared to traditional wallets or banks because:
- They don’t take up any physical space (in most cases)
- They can be accessed anywhere you have an Internet connection
- Only you can access your crypto wallet (provided you keep your password secure)
If you want to buy, sell, or trade cryptocurrency, you need at least one crypto wallet so you can carry your tokens. Fortunately, setting up a crypto wallet is quick and easy, though the exact process depends on which type of crypto wallet you get.
Crypto Wallet Types
Crypto wallets, while they all serve the same core functions, come in several major types. Let’s break down each crypto wallet type in detail so you know which you should choose for your cryptocurrency trading needs.
Hot Crypto Wallets
“Hot” crypto wallets are any wallets constantly connected to the Internet. These wallets are accessible and can theoretically be used from anywhere in the world provided you have a stable Internet connection.
However, hot crypto wallets are also vulnerable to theft by cybercriminals. Since they are never disconnected, any server or hardware they remain on is also vulnerable to attack. For instance, if the server your hot crypto wallet is on crashes due to a cyber-attack, you won’t be able to access your crypto funds until the server comes back online.
Hot crypto wallets come in both hosted and self-custody variants (more on those below).
Cold Crypto Wallets
“Cold” crypto wallets are the opposite: these wallets are stored on small hardware devices (usually around the size of a thumb drive). They store crypto wallet keys/passwords offline and can be disconnected from the Internet.
In order to use a cold hardware crypto wallet, you have to reconnect the cold wallet to the Internet, use specific hardware and software, and more. Furthermore, cold crypto wallets don’t allow you to use your crypto tokens at any time, and you still need a stable Internet connection to do any trading, buying, or selling.
However, cold crypto wallets are beneficial in that they are generally more secure than wallets constantly connected to the Internet. Because of their complexity and increased reliance on their users, cold crypto wallets are only ever self-custody and are not hosted by a third party.
Hosted Crypto Wallets
Hosted crypto wallets are, as their name suggests, hosted on a third-party server. For example, if you use a cryptocurrency exchange like Coinbase, you can sign up for a crypto wallet. When you make a purchase or receive crypto tokens, those coins will be held in Coinbase’s hosted crypto wallet.
In many ways, hosted crypto wallets are similar to traditional banks. The hosted crypto wallet isn’t technically owned by you. Instead, you allow the third-party host (Coinbase in the above example) to keep your coins for you and entrust the security of your digital funds to them.
The benefit of this approach is that you don’t need to worry about losing your crypto wallet or your private key/password. If you forget your private key, for instance, you can contact Coinbase and prove your identity using other means to retrieve it or gain another randomly generated key. In contrast, a self-hosted crypto wallet can be functionally “lost forever” if you lose the password or private key to the wallet.
Furthermore, hosted crypto wallets may come with additional security measures and are frequently updated with new software and other updates.
Self-Custody Crypto Wallets
Self-custody wallets are also fairly self-explanatory. These don’t rely on a third party and instead give you complete control over your crypto funds. All self-custody wallets provide you with the software for storing your crypto tokens.
It’s up to you to remember your private key and/or password. If you forget the password or lose it, there will be no way to access your crypto tokens forever. This has actually happened with Bitcoin users in the past – some early Bitcoin adopters lost their self-hosted wallet passwords, leaving them with no way to access their new fortunes as Bitcoin has skyrocketed in value.
Similarly, if someone else discovers the password to your self-custody wallet, they’ll be able to access your tokens and you won’t be able to stop them. On the plus side, a self-custody wallet gives you total control over the security measures for your funds. You can install additional firewalls or other security measures depending on your preferences.
Furthermore, self-custody wallets allow you to practice advanced crypto trading and similar activities. These activities include lending, borrowing, staking, yield farming, and more. That said, self-custody wallets may not be the best choice if you are just interested in basic cryptocurrency activities, like buying or selling crypto.
As you can see, there’s a crypto wallet for you no matter your experience with crypto or your preferences regarding control over your tokens. Now let’s break down how you can set up each type of crypto wallet step-by-step.
Setting Up a Hosted Wallet
To set up a hosted wallet with a third-party provider:
- First, find a wallet hosting platform that you trust. As mentioned above, many top-tier cryptocurrency exchanges, like Coinbase, offer wallets as well. If you plan to do most of your trading on a given exchange, simply using their wallet may be a wise idea for accessibility and convenience reasons. A provider should have a tutorial available to make setting the wallet up easier, as well.
- Check to make sure that a third-party wallet provider is compliant with any governmental financial regulations (which may vary depending on your country of origin).
- Next, create an account with a third-party wallet provider. The provider will require some personal information, like your Social Security number or date of birth, before verifying your identity and account. We heavily recommend you choose a provider that requires two-step verification or two-factor authentication for security purposes.
Once your account has been created, you should be able to access your wallet from the provider’s dashboard. There, you’ll be able to see all the crypto tokens you currently have, as well as place orders to buy or sell tokens depending on your needs.
If you already own some crypto tokens, you can transfer those tokens to your new hosted wallet immediately.
Setting Up a Self-Custody Wallet
Setting up a self-custody crypto wallet is a little more intensive since you’re responsible for ensuring everything works properly. To set up a self-custody wallet:
- Choose a self-custody wallet app, which should be accessible from a regular computer and a mobile device such as an iPhone. Some of the most popular self-custody wallets include MetaMask and Coinbase Wallet (which is a self-custody version of their primary, hosted wallet offering).
- Next, make an account with the self-custody wallet provider. In contrast to hosted wallet providers, you don’t have to share any personal information to create a self-custody wallet. You just have to come up with a username so the app can identify you.
- The app will provide you with a private key or password. Most self-custody wallets use 12-word phrases (all randomized). Write the password down in a place that can’t be accessed by people easily, such as a spot hidden in your home or apartment. Remember – if you forget the 12-word private key for your self-custody wallet, you’ll lose access to your cryptocurrencies forever!
- Fiddle with the settings for your self-custody crypto wallet, then transfer any crypto you already have inside (if applicable).
Depending on the wallet you choose, you may be able to use additional security features, change the settings are features of the wallet, and even download additional attachments or applications.
Setting Up a “Cold” or Hardware Wallet
A cold or hardware cryptocurrency wallet is the absolutely most secure means of storing your crypto tokens, although it also requires a lengthier setup process. To set up a cold crypto wallet:
- Purchase the hardware on which the wallet software will be stored. You can find hardware crypto wallets from online retailers like Amazon or specific manufacturers. For example, popular hardware manufacturers include Trezor and Ledger. The hardware wallets may include small displays or windows that show you what cryptocurrencies you currently have, though they will not give access to the tokens unless they are properly connected to a terminal (i.e. a computer or phone).
- Next, install the proprietary software that comes with your chosen hardware wallet. Each brand has its own software platform for storing crypto tokens, so you can’t mix and match between brands. Follow the instructions for the software to make sure it is installed correctly and your wallet is set up properly.
- Like a self-custody wallet, a cold crypto wallet will give you a random password or passphrase of varying lengths. You should write this down and store it in a safe location in case you ever forget the passphrase and need to retrieve it. Once more, if you lose the passphrase, you may also lose access to your crypto tokens forever.
- If you have any cryptocurrencies in another wallet, you can then connect your hardware wallet to the Internet. The software for the hardware wallet will automatically connect and feature an address. You can send your existing cryptocurrencies to this hardware wallet address. Once the transfer is complete, you can disconnect the hardware wallet from your terminal and keep your cryptocurrencies safe and secure.
Keep in mind that setting up a crypto wallet, connecting it to the Internet, and making a transfer takes a little longer than making a transfer with other crypto wallet types. Still, this added security could be very attractive for individuals who are most concerned with theft or hacking.
So long as your hardware crypto wallet is disconnected from the Internet, cybercriminals will never be able to access the tokens contained within.
Ultimately, any type of crypto wallet can help you buy, sell, and trade cryptocurrencies like Bitcoin and more. However, the ideal crypto wallet will depend on your security preferences, how much control you want over your funds, and how accessible you want your tokens to be at any given moment.
Consider your wallet choices carefully, then set up the wallet that seems to best suit your needs. Remember, you don’t have to stick with one wallet forever! You can always change your wallet to another type entirely, or you can maintain multiple crypto wallets if you’re willing to pay the wallet providers’ fees.
Now you know everything you need to start buying, selling, or trading crypto with a wallet of your very own. Good luck!
John S. Logan has been working with cryptocurrency for nearly as long as it has been available on the market. With a professional background in the finance industry, he believes that blockchain technology, cryptocurrency, and decentralized finance play an important role in the future of the world.