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Definition: cryptocurrency wallet


The electronic interface to a user's cryptocurrency. A cryptocurrency wallet can be software in the computer or mobile device. Although Bitcoin is the most widely known crypto, there are countless others, and any given wallet may support several digital currencies. In contrast, users can open an account with a cryptocurrency exchange and have them manage their crypto. See Bitcoin wallet, MetaMask and cryptocurrency.

A wallet does not hold the coins. It maintains the cryptographic keys to access the coins, which are stored on the blockchain. If a user's wallet is hacked, the crooks have access to the owner's currency. If the wallet is deleted, and the keys were never saved elsewhere, the coins are lost forever.

Custodial Wallets
Most crypto investors rely on a cryptocurrency exchange such as Coinbase or Binance to hold their coin balances. The exchange maintains the keys; however, if the exchange is ever hacked, users may lose their funds. See cryptocurrency exchange.

Hierarchical Deterministic (HD) Wallet
The type of non-custodial wallet in common use is the hierarchical deterministic (HD) wallet, which derives the private keys from a randomly generated "seed" created at startup. Only the seed is required to restore all the private keys if the wallet is destroyed. Rather than a complicated password, the seed is 12 to 24 everyday words that are easy to write down and save (see below). The deterministic wallet (BIP-32 standard) generates the private keys from the seed in a tree structure, and the different branches (private keys) can be used to organize payments for different purposes such as departments in a company or type of purchases. In addition, a new public key can be created for each transaction that is safely published anywhere.

Nondeterministic Wallet
In contrast, a nondeterministic wallet generates a private key for each transaction using a random number. Known as "just a bunch of keys" (JBOK), this earlier wallet type is cumbersome because multiple private keys must be backed up in order to keep track of all the user's coins in the network.






Ledger Nano S "Cold" HD Wallet
The Nano S hardware wallet supports Bitcoin, Ethereum, etc. and cannot be hacked when offline. The wallet stores the private key and works in conjunction with a compatible software wallet. At initial startup, 24 everyday words are generated as the seed (two examples at top), which must be written down in a safe place to recover the private key if the device is ever stolen or destroyed. See cold wallet.






A Paper Wallet
This is a paper wallet generated from a Bitcoin ATM, and its QR codes can be scanned to import the coins into a digital wallet app or make another ATM transaction. The Bitcoin private key is used to send coins and the public key is used to receive them. See Bitcoin ATM.