How do I set up a crypto wallet?

How to get a crypto wallet

If you decide to purchase cryptocurrency, you’ll need to get a crypto wallet first; but what is a crypto wallet? Just as regular bank accounts keep your cash safe, crypto wallets keep your digital currency secure. In addition, each crypto wallet contains a public and private cryptographic key pair, similar in function to a bank account number and PIN. The public key generates an address that lets you receive crypto, while the private key allows you to spend crypto from the same address. However, the main difference between a typical bank account and a crypto wallet is that not all crypto wallets are custodial.

For example, in the case of traditional cash accounts, banks are always the intermediary and fulfill a custodial role. However, when you store crypto in a web wallet, the exchange platform holds your private keys. For this reason, the exchange acts as custodian and is responsible for securing your crypto. In contrast, when using a hardware wallet, only you have access to the private keys. In this case, there’s no central server holding your private keys, meaning your wallet is non-custodial.

While choosing between a custodial and non-custodial wallet is an important decision, you should also consider what type of crypto wallet best suits your personal goals and comfort level. Although this answer will be different for each person, understanding how to set up a crypto wallet is helpful during the decision-making process. Below, we break down the setup process for both software and hardware wallets to help guide you through.

How to set up a software wallet

Software wallets are web, desktop, mobile, or browser-based applications that connect to the web. However, because these crypto wallets exist on internet-connected devices, they’re known as “hot” wallets. Unlike hardware wallets, software wallets can be custodial or non-custodial, depending on which one you use.

1. Set up account: If you opt to use a web wallet, like those offered by crypto exchanges, you’ll need to enter your personal information first. After this step, you’ll complete Know-Your-Customer (KYC) and Anti Money Laundering (AML) requirements. In the final step, you’ll select a password and activate two-factor authentication (2FA), if applicable.

2. Install app: If you want to use a mobile, desktop, or browser-based wallet, you’ll need to install the application on your device before you can begin setting up an account. However, if you select a non-custodial wallet option, the application may not require that you complete KYC and AML protocols. Instead, you’ll only need to provide a username or email and set a password.

3. Record recovery phrase: If you select a non-custodial wallet, you’ll receive a recovery phrase, also known as a key phrase. This unique sequence of up to 24 words allows you to access your wallet if you lose your password. It’s crucial that you record this phrase and keep it somewhere safe as it’s only provided once during wallet setup. In addition, the order of the recovery phrase matters, so make sure you record it as it appears.

4. Fund wallet: In some cases, you’ll need to fund your crypto wallet using a credit or debit card before you can purchase crypto. However, some wallets also allow you to make direct crypto purchases, meaning you can skip an extra step.

5. Transfer crypto: If you already hold crypto in another wallet, you can transfer it to your new wallet using the appropriate wallet address.

It’s important to note that every cryptocurrency in your wallet has a unique address, regardless of the wallet type. This address is generated from your public key using a hashing function, reducing it from 256 to 160 bits for usability. This means that your wallet has one public key, but you can generate as many addresses as you want, even for the same cryptocurrency. As such, you’ll want to make sure you send and receive crypto to the correct address. For example, if you send bitcoin (BTC) to an ether (ETH) wallet address, you could lose that crypto forever.

Types of software wallets

To help you decide which software wallet might be the best for you, we’ve outlined each subcategory below.

Web wallets

Before selecting a web wallet, you should consider each platform’s security, ease of use, and regulatory compliance. This process is crucial as nearly all web wallets are custodial, meaning an intermediary holds your private keys. For example, if you’re using a centralized crypto exchange (CEX), the exchange holds your private keys. Although less common today, hackers have stolen billions from CEXs, which is why it’s essential to do your research.

Mobile wallets

Unlike web wallets, mobile wallet private keys are held on your device, not a central server, making them non-custodial. While this is technically more secure than custodial options, using a mobile wallet can be risky if you download a fraudulent app. However, you can reduce this risk by downloading mobile apps from official, vetted marketplaces. For example, Google Play and the Apple App Store are safer than downloading an app off the open internet.

Desktop wallets

Like mobile wallets, desktop wallets store private keys on your local computer, making them non-custodial. You might prefer desktop wallets because they can be used without an internet connection and offer more features. These added features usually integrate enhanced security or enable more flexible private key transaction signing. However, like mobile wallets, there’s a chance you’ll download a fraudulent version of a desktop wallet.

Browser extension wallets

Like other non-custodial software wallets, extension wallets don’t store your private keys on a central server. Instead, you install the extension on your browser, facilitating direct interaction with the web pages you visit, such as decentralized finance (DeFi) protocols. While this integration is convenient, there may also be fake extensions that emulate the original, similar to mobile and desktop wallets. In addition, browser extensions can be more intensive on a device central processing unit (CPU) as they run continuously in the background.

How to set up a hardware wallet

Of all crypto wallets, hardware wallets are the most secure option, but that doesn’t mean they’re the best option for everyone. Hardware wallets are so safe because private keys remain offline when the device isn’t in use. Unlike many software wallets, hardware wallets are purpose-built to store cryptocurrency. As such, they don’t support gaming, texting, or social media applications, which prevents hackers from exploiting potential software vulnerabilities.

For example, even if you plug a hardware wallet into a computer full of malware, the hardware wallet should be safe because external applications can’t communicate with it. Beyond this, hardware wallets communicate with secure, proprietary desktop applications, making them easy to manage. However, as external devices, hardware wallets can be damaged, lost, or stolen more easily. There’s no way to recover the crypto assets they hold in any of these scenarios, beyond buying a new hardware wallet and using the seed phrase that was generated with your original hardware wallet to restore. Note that with hardware wallets, no third party can help you recover funds.

Choosing your crypto wallet

Once you know how to set up different crypto wallets, it’s easier to decide which one works best for you. For example, while web wallets are the most popular and easy to use, they are also considered the least secure. However, if you don’t plan on holding a lot of crypto, selecting a web wallet with a good reputation might be the best choice. Alternatively, if you’d prefer to retain your private keys, desktop, mobile, and browser-based wallets all offer non-custodial options. Regardless of which one you choose, it’s crucial to keep your private keys safe or risk losing your crypto entirely.

You’ll also need to consider the risk of losing your private keys if you opt to use a hardware wallet. In addition, If you plan on trading your crypto often, a hardware wallet might be inconvenient since you’ll need to connect it to a desktop application for each transaction. However, with so many factors to consider, knowing how to set up a crypto wallet can help you enter the world of digital currency with confidence.

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