What Are Crypto Wallets and How Do They Work?

Anyone who wants to buy, sell or hold cryptocurrency tokens needs a crypto wallet. It’s like a physical wallet, but instead of holding paper money and credit cards, it stores the digital passkeys needed to send, receive and store crypto tokens you own. Users who don’t want to manage their own passkeys can use wallets hosted by a crypto trading platform or another third party. The collapse of the FTX exchange last year highlighted the risk of those hosted wallets as billions of dollars in tokens became inaccessible. Financial technology firms are racing to offer self-custody solutions, including some that keep assets in “deep cold storage,” off the network and out of reach of hackers.

There’s no central authority for tokens as there usually is for traditional, government-issued money. Tokens reside on decentralized, distributed ledgers called blockchains. Users gain access to their tokens using the digital credentials stored in these crypto wallets. Wallets also keep track of token balances, and some of them allow users to exchange cryptocurrency for regular money and vice versa.