Crypto Wallets and Private Keys | How Does Crypto Work?

The most important fact about crypto wallets is that they don’t hold coins. Your coins exist only as entries on the blockchain. A wallet holds the private keys that let you move those coins. Lose the keys and the coins are stuck forever. Let someone else see them and they can take everything, instantly and irreversibly.

Keys and addresses

A wallet starts by generating a private key, a randomly chosen number so large that guessing it is practically impossible. From the private key, the wallet derives a public key, and from that, an address: the string you share so people can send you crypto.

The address is like an account number. Sharing it is safe.
The private key is like a password that can never be reset. Sharing it hands over the money.

When you send crypto, your wallet uses the private key to sign the transaction. The network checks the signature against your address without ever seeing the key itself.

Seed phrases

Most modern wallets don’t make you back up raw keys. Instead they show you a seed phrase (also called a recovery phrase): usually 12 or 24 ordinary words in a specific order. Every key the wallet will ever use is derived from that phrase. Anyone who has the phrase can recreate your whole wallet on any device.

That makes the seed phrase the single most valuable thing you own in crypto. The standard advice:

Write it on paper (or stamp it in metal). Don’t screenshot it, email it, or store it in a notes app or cloud drive.
Keep it somewhere a house fire or a curious visitor won’t reach.
Never type it into a website or give it to anyone who asks. No legitimate support team, exchange, or wallet company will ever ask for it. Anyone who does is trying to steal from you.

See the glossary entry on seed phrases.

Custodial versus self-custody

There are two fundamentally different ways to hold crypto:

Custodial (an exchange or app holds the keys). You log in with a username and password, much like online banking. It is convenient, password resets are possible, and many people start here. But the platform actually controls the coins. If it is hacked, freezes withdrawals, or goes bankrupt, you become a creditor waiting in line. This has happened repeatedly, most famously when the exchange FTX collapsed in November 2022.

Self-custody (you hold the keys). Only you control the coins, and no company can freeze or lose them. In exchange, all the responsibility is yours. There is no “forgot my password” button.

The crypto saying “not your keys, not your coins” describes the first option’s risk. The second option’s risk is the mirror image: if it is your keys, it is also your mistakes.

Hot and cold wallets

A hot wallet is software on an internet-connected device: a phone app, browser extension, or desktop program. Convenient for small, frequent amounts.
A cold wallet keeps keys offline. The most common form is a hardware wallet, a small device that signs transactions internally so the key never touches your computer. Better for larger amounts held long term.

Buy hardware wallets only directly from the manufacturer. Tampered second-hand devices are a known attack.

How wallets get emptied

Most losses aren’t clever hacks of the blockchain. They are ordinary scams and mistakes:

Phishing: fake wallet sites, fake support accounts, and fake “airdrop” pages that ask for your seed phrase or ask you to approve a malicious transaction.
Malicious approvals: on Ethereum-style networks, signing a token “approval” can give a contract permission to move your tokens later. Read what you are signing.
Address swapping: malware that replaces a copied address with the attacker’s. Always check the first and last characters before sending.
Wrong network: sending a token on one blockchain to an address that only supports another can make it unrecoverable.
Lost backups: an estimated several million bitcoins are believed to be permanently lost, much of it from early users who lost keys.

The short version

A wallet is a key ring, not a vault. Decide deliberately who holds the keys, protect the seed phrase like cash, and treat anyone who asks for it as a thief.