What Exactly Does a Crypto Wallet Do, and
How Do They Work?
Crypto wallets are designed to store your “private keys” securely.
There’s an article specifically about Private keys but right now, just think of them like passwords or permissions — they allow the person who holds them to not only access the crypto, but to authorize transactions (spend it).
We’ve used wallets where you had to wait months before being approved to buy crypto. We’ve also had crypto stolen. We’ve seen confusion about how to use a wallet. We’ve also seen people buy cryptocurrency and lose tons of money on the market by selling it all at the wrong time. But armed with knowledge and the right crypto wallet(s), you can avoid most of these pitfalls.
A crypto wallet is just like the wallet in your pocket. It holds and protects your bills and your credit cards. Without those bills and credit cards, you cannot move any money from your bank account to other bank accounts. The things that your crypto wallet protects are similar. Without the computer files it protects, you cannot move any money, or purchase anything.
The basic functions of a crypto wallet are storage and usage.
However, the wallet is not held by a bank with billions of dollars in their coffers. It is held by you, and only supported by the reserve assets you have. That’s unlikely to be in the billions of dollars, since there are somewhere around 4,000 billionaires.
So, your money cannot be replenished by a bank if it is stolen. Then, another function of a crypto wallet is to protect your cash through security. That can include multiple passwords, disconnection from the internet, and many other methods.
Yet, convenience (easily pulling cards out of your wallet) vs security (preventing them from being stolen) is the central dilemma of cryptocurrency. How secure should your wallet be? How easy should it be to spend money?
Cryptocurrency Wallets for the USA
Finding the best crypto currency wallet app is the place to start your quest.. If you pick the best cryptocurrency wallet (that balances safety and convenience well) from the outset, you will likely not have to find one again. The process is simple:
- Setup wallet.
- Fund exchange account.
- Store crypto in a private wallet.
Virtual wallets provide a safe, secure way of trading Bitcoin (btc) and managing your investments. Funds can be wire transferred to and from conventional bank accounts in the same way that regular bank transfers are processed.
To choose the best cryptocurrency wallet for you, consider why you are getting into bitcoin and how it fits into your financial strategy. For example, do you occasionally envisage checking your portfolio, or do you plan to become more serious? There are many crypto wallets to choose from, and each is designed for a particular use case. To pick the best crypto currency wallet for you, consider the following:
- Do you plan to only trade in bitcoin or other forms of crypto as well?
- How much bitcoin do you plan to trade and store in your wallet?
You must also discover the regulations in your part of the states. Each state tends to approach cryptocurrency differently, but in the end it’s only regulated (federally, and in many states) if it is considered a security or a money transmission. Then, you may have to pay tax on your profit. But that’s beyond the scope of this article.
Once you know what you have to keep an eye out for, then you can start choosing the right wallet to store your digital assets in.
Best Cryptocurrency Wallet Options
There are hundreds of cryptocurrency wallet apps to choose from. They can be downloaded on your computer, your smart phone, or be a website you log into. It can be a UBS stick, it can be a piece of paper, it can even be printed on duct tape. There’s nearly as much variation in crypto wallets as there is in physical wallets you hold in your pocket.
In your pocket, you can have a smart phone that holds your credit card numbers, duct tape wallets with bills in them, or you can just drop a billfold in your jeans. Each option, in the real world, or in crypto, has its own pros and cons, including price, functionality, convenience, education, or safety.
Here are some of the best cryptocurrency exchanges and wallets, and why we chose them.
Ledger Nano X
The popular Ledger Nano X is a physical wallet (a usb stick, with software on it). It has Bluetooth that can be turned off, making it more secure than your phone. It can plug into your laptop, if you want. And it looks cool, like Blade Runner. It also gives you access to more than 1,300 different cryptocurrencies that can be purchased directly via bank transfer. It is accessible from all major operating systems and works well on desktop or mobile devices. However, it can cost up to $180.
Ledger Nano X is well-suited to users that want to hold onto their crypto assets longer-term, as the security it provides is top notch. It is cold storage, as in detached from the internet, making it very secure.
It also provides an ease-of-use guide if a user loses access to their wallet, and is open to developments with third parties.
Exodus
Exodus is a popular crypto wallet for beginners because it is user friendly. It is a software that can be accessed as an app or on your desktop. It is free to access and has an easy-to-use interface as well as a built-in trading exchange. Although it only gives access to a relatively modest 100 cryptocurrencies, it demystifies crypto and makes many of them immediately accessible.
It can also be a little limited in the features department. From a security perspective, some users are concerned that Exodus’ code is closed source. But, we haven’t heard of any breaches yet, unlike many other exchanges so their authentication must be good enough.
It is available in mobile apps, like Android, and Apple.
Electrum
One of the first bitcoin wallets available, Electrum was developed in 2011. What it lacks in its user interface, it makes up for with its rich options. Its open-source software enables users to define their own security levels. On top of this, it is free to use and also allows users to trade in bitcoin or segwit.
Like Exodus, Electrum is a better choice if you plan to get a little more serious about bitcoin trading. Plus they have great customer support.
Ultimately your choice of crypto wallet will depend on where you see your crypto journey taking you. If you envisage it as more of a hobby, an option like Exodus is likely to be the best fit.
If you plan to become a more serious trader, you may outgrow Exodus’ limited features and restricted number of cryptocurrencies reasonably quickly. In that scenario, it may be better to start with a more advanced app such as Ledger Nano X to avoid changing later down the line.
But, in the end we ended up using as many as five wallets to learn about the market and trade in it. P.S. all of these wallets double as trading platforms.
A couple other wallets you might want to consider are:
- Coinbase pro
- Etoro
Register Your Account
When you choose the best cryptocurrency wallet app for you, the next step is to register your account. There are some legal requirements and risks to take into account when doing so.
To be legitimate, some crypto wallets that connect with the user’s bank account have to adhere to Know Your Customer (KYC) requirements. This ensures that customers’ identities are formally verified against prohibited lists to reduce financial crime and money laundering. For this, you will be asked to provide various IDs and proof of address documentation.
Ledger needs a bank transfer to add money to your account. Exodus only accepts Apple Pay, and Electrum requires you to get bitcoin elsewhere and transfer it in. We strongly recommend exodus, as it is so easy to use. The programmers really care about the customer experience.
Consider too that there is some risk of having your information connected to a crypto wallet. Even some of the best crypto wallets can be hacked. For example, Ledger was hacked in July 2020, which resulted in phishing attempts on many of its users. Thus, even with the most secure financial platforms, staying cyber vigilant when trading currency of any kind online is essential.
New crypto traders should also be aware that crypto wallets can be audited, although private wallets often fall outside the US IRS jurisdiction. Earnings from cryptocurrency are taxable and need to be declared. The IRS can request audits due to suspicions of under-reporting of taxes or carry out compliance spot checks at random via a third party.
Funding Your Crypto Wallet
The next step is to fund your wallet. This is done by setting up a transfer between your “real” money and your crypto account. Once this transfer is set up, you will transfer real dollars to fund your crypto wallet.
Ledger requires a bank transfer which can be expensive and take time. Exodus requires an Apple pay account. The Apple Pay account on your iphone can be set up with gift cards, debit cards, or credit cards, making the process inexpensive and fast. Transferring in crypto from another exchange can be quick and easy too, if you’ve done it before – that’s why we like Electrum.
Transaction fees vary depending on your bank and your crypto wallet provider. These can be flat fees or percentage-based, such as up to 1.5% of any transaction and a minimum fee of $0.55. Check your chosen wallet’s terms and conditions so you can plan the most cost-efficient way to fund your bitcoin account. Coinbase is known as one of the cheapest wallets for fees.
Exchange Dollars For Cryptocurrency
Once your account is funded, you are ready to buy your first digital currency. The simplest way to do this is to do a little research on the crypto you want to buy. This can be carried out manually or automatically using a few automation hacks.
You can set up ‘limit orders’ on the cryptocurrency exchange your wallet is attached to. These will apply your pre-defined limits for buying or selling. These limits can be applied to any crypto you want, whether that’s Bitcoin, Ethereum, Dogecoin, Kraken, Ripple, or Litecoin. It can be applied in many currencies, like the USD, the Euro, and even the Kwanza. With the 180 fiat currencies, and the thousands of cryptocurrencies, the combinations can get dizzying fast.
Then, if your selected crypto reaches your designated limit price, the buy or sell order is automatically executed. This is an effective way of planning your investments and putting your wallet to work for you.
‘Recurring buys’ can also be set up. This means you can automate your crypto management to buy your chosen coin in the amounts and frequencies you define.
However, defining which exchange has the cheapest fees on a given day can be challenging, as most exchanges do not publish their fees. Most use a varying percentage of the purchase price which can vary from 2 to 5 percent. What that depends on, or even if there is a formula for the fees of specific exchanges, we don’t know.
Coinbase and Binance apparently have the lowest fees, but we do not know if this is easily verified.
Do Not Leave Crypto In An Exchange
Actually do leave some crypto in a hot wallet, on an exchange, or just connected to the internet. Just don’t leave 100,000 dollars in it. Just a grand or two of your crypto portfolio is safe enough, right? We know that Exodus has never been hacked, so we think that 2 grand is safe enough in it.
But there are stories of multiple Exodus wallets being hacked, and tens of thousands of dollars being stolen from individuals. Get a second wallet, that isn’t on your computer, and put the vast majority of your bitcoin on it, like upwards of 90%.
So for your second bitcoin wallet in the U.S.A we suggest Ledger. Small, powerful, secure, and convenient too. But not for the beginner.
Making The Most Of Your Crypto
Now you have crypto, you have several options for how to use it.
First, if you have a crypto wallet on your phone, you can spend it at physical stores. All you need is a crypto app, a phone with a camera, and a QR code. As it is also becoming more common for brick and mortar and online merchants to accept crypto as a form of payment, which helps you avoid the Visa fees. It’s easy too – most crypto apps, including Exodus, can use QR codes to transfer your money in real time.
Key Takeaways
You have made a wise decision to get into cryptocurrency. Although it was invented in 2009, bitcoin has come into the mainstream in the last few years. So now you are on board with crypto, make sure you factor in these main takeaways:
- Choose the best cryptocurrency wallet for your use case.
- For beginners we think Exodus is the best crypto exchange.
- Plan your crypto investment strategy and consider what you are looking to get from it.
- Ensure you declare interest in your tax returns.
- Do not leave crypto in an exchange.
- Use crypto in creative ways to save on forex fees and other banking charges.
- See our Exodus Wallet Review for more information on the Exodus Wallet.
FAQ’s
What if I do not want to use a crypto wallet?
That’s easy. Most major institutions now offer ETF’s (exchange traded funds) for trading Cryptocurrencies. These funds should have low trading fees, They should also allow margin trading, if you are comfortable with that level of risk. The pricing will move much more quickly than in the stock market, so be careful.
Can I invest in cryptocurrencies just like the stock market?
Yes, you can. You can sell cryptocurrencies and trade cryptocurrencies by just the exact same strategies you do on the stock market. There are even trading apps that specialize in this, like Coinbase Pro. Plus the markets are open 24/7, and still have high trading volume in the dead of night, with the blockchain computers never shutting down.