How Do Crypto Wallets Work?
Cryptocurrencies are not tangible, so how do crypto wallets work in practice? Think of them as actual wallets that exist either as software on a device, or as solid hardware devices that allow you to store your cryptocurrency.
At this point it’s worth reminding you that you can put your US$ physically in a bank account, but you can’t do the same with BTC, BCH, or any other cryptocurrency. Digital money is represented by pieces of coding stored on a blockchain database - crypto wallets are a way of recording that you are the legit owner of those pieces of coding, giving you the ability to store, transfer and receive funds.
It’s a bit like a virtual bank account, if you want to draw a fiat comparison. All your different crypto funds exist on their respective blockchains, but your crypto wallet centralizes the ownership by holding those funds in one place for you.
I also like to use the stocks and shares analogy to explain how crypto wallets work. You know how your broker keeps all your assets in one place so you can keep track of what you own from one exchange that acts like a hub for all your assets? The crypto wallet serves a similar function, giving you access to different currencies from one place.
In the world of crypto casinos, you’ll use your crypto wallet to make a deposit at your chosen site, or to cash out your winnings. In both cases, this is done via a unique address code. Here’s how crypto wallets work when making a casino deposit:
- Navigate to the Deposits page and choose your preferred cryptocurrency
- Copy the unique code that pops up on screen
- Access your wallet and click on ‘transfer’
- Paste the casino code and key in the amount you’d like to deposit
- Confirm the transaction and you’ll see the funds appear on your casino account instantly.
If you’d like to cash out your winnings, the process is very similar:
- Navigate to the Withdrawals page at the casino and choose your preferred cryptocurrency
- Access your wallet and click on ‘receive’
- Copy the public address code generated
- Paste it in the relevant field on the casino withdrawals page and confirm
- Wait for the money to reach your wallet.
In both cases, make sure that the cryptocurrencies match at the wallet and the casino end. For example, if you pick Bitcoin at the casino, make sure you also pick Bitcoin as a currency from your wallet. Otherwise, the transfer will be made but it won’t be recorded at either end and you’ll lose those funds.
Types Of Crypto Wallets
There are many popular crypto wallets, but the best way to understand how each of these works is by making a basic distinction between the two main categories - soft and hard.
Soft Wallets (Software Wallets)
These are applications or programs that store and manage cryptocurrency public and private keys on digital devices. These are also known as hot wallets because they are connected to the internet, and are viewed as less secure. However, they are also very easy to use and can be accessed from your mobile or desktop in a few seconds. There are many such different types of crypto wallets, and the most popular exchanges fall within this category.
Hard Crypto Wallets
Hard wallets, which are also referred to as cold crypto wallets, are physical devices specifically designed to store cryptocurrency private keys securely offline. You gain access to your funds through your private keys, which are stored on a device that is never connected to the internet. You will be the only person to have access to these keys. This is the opposite of soft, hot crypto wallets, the majority of which are described as non-custodial, which means that you won’t be given actual access to your keys. Cold wallets are extremely secure, because they are unhackable.
However, they are also more inconvenient to use as you need to connect your device to a computer or phone to access your funds. Moreover, if you lose the device you’ll need to go through a certain process to recover your funds.
How Many Crypto Wallets Are There?
There’s no point trying to understand how many crypto wallets are there, because the answer is - too many to count. According to Polaris Market Research, there were more than 84 million people holding a crypto wallet globally in 2022. Around 50% of these use a hot wallet, with 40% of these opting for an Android soft wallet.
Currently, there are literally hundreds of different crypto wallets flooding the market. This can make the choice harder for those who are just starting to have crypto wallets explained to them; however, as long as you understand the main distinction between hot and cold wallets, this should help inform your choice considerably.
How Many Crypto Wallets Should You Have?
If you only hold one type of crypto, life is considerably simpler as it’s simply a matter of finding a reputable brand that’s compatible with your currency and you’re good to go. The questions start when you hold a diversified portfolio of cryptos, as it’s no longer so obvious whether one is enough.
When is one no longer enough? And does it matter which crypto wallet you have? When managing your cryptos, there are several reasons why sometimes it may be a better idea to hold them across a range of different wallets, rather than simply picking one. Before making a decision, my advice is to keep the below factors in mind.
- Security - By spreading your funds across different wallets, you reduce the risk of losing everything should one wallet be compromised.
- Convenience Of Use - Cold wallets are less user-friendly, so if you’re making regular small deposits to crypto casinos it makes sense to keep these funds in a hot wallet.
- Investment Strategy - Your long term holdings should be stored in a cold wallet, while if you’re trading or mining, these funds should be stored separately for security and tax purposes.
Ultimately the answer to how many crypto wallets you should use is up to you. There are no hard and fast rules, but considering the above points should help steer you in the right direction.
Does It Matter Which Crypto Wallet You Have?
Now you’ve got a good handle on how crypto wallets work, it’s time to get down to the specifics. We’ve already seen why it matters to choose wisely between a hot and a cold wallet, but it’s also good to carry out due diligence before choosing your preferred brand. The short answer is that yes, it matters which crypto wallet you have as you need to make sure of the following:
- That it’s compatible with your cryptocurrencies
- That it offers security features you’re comfortable with
- That you won’t find it too complicated to operate
- That it’s self-custodial, if this is important to you.
Below, you’ll find my top selection of the most popular ones, including my reasons why they make it on my best crypto wallets list. Each of the wallets listed is compatible with a vast range of cryptos, including the most common ones like Bitcoin, Bitcoin Cash, Ether, Solana, Cardano, Doge Coin, and more. This removes the need to use multiple apps to manage your cryptos, which can be a headache if you’re still not that experienced.
As you grow more confident, if you find that you’re storing a significant amount of one crypto compared to others, then it’s worth your while getting a separate wallet for that. For example, if the majority of your holdings are Ethereum, you may want to look at storing it on a specialist wallet like MyEtherWallet.
MetaMask: Possibly the most widely used web wallet, MetaMask is excellent if you hold Ethereum and other funds on Ethereum-compatible networks. This hot wallet is self-custodial and is available as a browser extension or a mobile app. Such is its popularity that some cryptocasinos will allow you to register your account simply by connecting directly via this wallet.
Bitcoin Wallet: Another hot wallet, this one was initially created for BTC, but nowadays serves the vast majority of cryptocurrencies. It boasts more than 51 million users globally and is preferred for its highly user-friendly interface as well as the fact that it allows you to sync all crypto-related activities such as market tracking and trading while effortlessly swapping between different currencies.
Trust Wallet: This hot wallet is owned by a giant in crypto, Binance, and it supports a wide range of cryptocurrencies across different blockchains. It is self-custodial, so you’ll be gaining your private keys and 100% controlling your funds. That said, it's still very easy to operate, with an interface that’s designed like a regular web app.
Coinbase Wallet: If you’re a crypto user, then you have heard of the popular Coinbase exchange. The wallet operates separately and allows you to store ‘hundreds and thousands of coins’. Unlike the exchange, it’s a self-custodial wallet and will also allow you to store and manage your NFTs and dAPPs. It works exactly like a regular phone app, with an intuitive interface.
Blockchain.com Wallet: This wallet offers both a web interface and a mobile app, so you’ll have access to all its features across different devices. It is also very user-friendly and well-suited for beginners, while giving you custody of your keys. It’s also popular for its monthly cashbacks, so you’ll be earning even when not actively trading.
Trezor: Trezor offers a range of hardware wallets that are all self-custodial and that are highly-respected for making no compromises where security is concerned. Their lowest model comes with a very reasonable entry price point while still supporting 1,000s of coins and tokens. The fanciest one is the latest Trezor Safe 5, which has a touchscreen to make it super user-friendly. The site itself offers a comparison to guide you through which choice is best for your needs.
Ledger: Probably Trezor’s biggest competitor, this wallet also offers a range of models and prices. The biggest innovation is the Ledger Live companion, a mobile app that syncs to your hard wallet to offer you internet connectivity and allow you to manage your funds more easily than with a traditional cold wallet. However, your keys are still stored offline.
Atomic Wallet: This wallet was also created by a popular crypto exchange, Changelly. It takes user-friendliness a step further as it allows you to use fiat currencies to buy cryptos. In fact, it operates in much the same way a soft crypto exchange would, with the exception that it’s self-custodial - so it kind of combines the best of usability and control.
Edge Wallet: Although originally created for Bitcoin storage, Edge now supports all the expected currencies, 130 of them in fact. Its most recent update has also opened up its buy/sell trading features to US residents, which is a definite plus point. The wallet also supports staking, where you lock up a portion of your funds to support various network functions, such as transaction validation, security, and governance, in return for additional tokens.
Coinomi Wallet: Founded back in 2014, this was one of the first coin wallets that was widely available on the market. It’s compatible with over 125 currencies, which the company claims is the largest amount for a non-custodial wallet. Despite having access to your keys, it offers enhanced security features, including IP anonymization.
Do Crypto Wallets Report to the Internal Revenue Service?
This depends on the type of wallet you’re using. In the US, crypto exchanges have a legal obligation to report all crypto transactions under the Bank Secrecy Act. This means that every time you buy or sell cryptos, this is going to be reported back to the IRS, together with your full name, Social Security Number, and transaction details.
Thus, if you’re using an exchange like Coinbase, Binance, Kraken, or even PayPal Crypto, all the information is being relayed back to tax authorities. This includes all soft wallets owned by exchanges.
Cold crypto wallets do not collect your personal data, such as name, address or other official identificators. They are considered as simple storage facilities and don’t report to the Internal Revenue Service. However, US law treats cryptos as an asset, and if you’re trading and registering a profile you will need to report it yourself even if your wallet has no reporting obligations.
Anonymity and digital currencies go hand-in-hand, in theory, which is why so many players look for anonymity at crypto casinos. However, full anonymity is very difficult to achieve in today’s world. In reality, there’s always a track of how crypto is moving.
Let’s start with the very obvious: even if you’re on a wallet that doesn’t operate KYC processes, cryptocurrency transactions are all publicly visible on the blockchain. For example, if you buy BTC, there’s a public record of this that includes your IP address, at the minimum. The IRS, too, has access to this information. The same applies to NFTs.
Moreover, many people connect cold wallets to a credit card or bank account, which is a dead giveaway.
How To Report Your Crypto Tax?
To report your crypto tax, you will need to include the profit you made from buying and selling in Schedule D of Form 1040 during tax season, as well as Form 8949, which requires you to give more detail about the transactions.
If you’re carrying out a large volume of trading, you’ll also need to fill in Forms 1099K & B. Currently, the government is finalizing Form 1099-DA, which will be a one-form solution specific to cryptocurrencies. This is expected to be released in 2026.
Is Transferring Crypto Between Wallets Taxable?
What happens if you decide to change your crypto wallet? Is transferring crypto between wallets taxable? The answer is no. All you need to know about taxes and crypto is that you are only required to pay tax when you register a profit. Simply buying and owning crypto isn’t taxable - you will be taxed when you sell for a profit and the gains are ‘realized’.
Thus, when you’re transferring crypto to yourself, you’re simply moving around assets you already own. All you need to do is transfer over your original cost basis (how much you paid for the assets) to your new wallet, together with the date you acquired those assets and continue tracking your eventual tax dues you eventually sell.