A cryptocurrency wallet is a special software program that allows users to store, send, and receive digital currencies or other tokens. In other words, a cryptocurrency wallet is a secure digital wallet where your public and private keys are stored describing your balance as well as allowing transactions to occur.
To create a cryptocurrency wallet, the owner must download a software program which is available for free online. There are several different types of wallets out there with various programs that are optimized for different devices, however, they all share some basic functionality.
What does a crypto wallet do?
Every wallet generates your private address and public key (address) through what's known as a seed phrase, usually 12 random words. Many wallets have a backup function that will automatically replicate your data on another device which is something that can be saved in case your current device becomes damaged or lost.
The wallet stores the information of the balance and transactions of a given currency along with a record of all past transactions without any central server. Most wallets are free but there are some that have an optional transaction fee for adding more priority to the transaction.
In order to send a cryptocurrency you must authorize the transaction by signing it with your private key, which also allows others to verify who sent the coins and how many coins were sent. All transactions can be viewed through a public ledger known as the blockchain.
Does a crypto wallet track my information?
While the information of your balance and previous transactions are stored on your wallet, if you lose access to your wallet or damage it somehow then you'll lose all of your coins associated with that wallet. The private key is what allows for money to be spent so protecting this piece of data is extremely important!
If you want to sell or exchange your coins for another currency then you will need to provide the person/exchange with your public key address. Once they have this information they can send coins to that wallet just like any other transaction.
Most larger exchanges require you to verify your identity when signing up in order to prevent money laundering and hacking.
Storing cryptocurrency on an exchange or any third party site is referred to as "hot storage" since they require internet access to send and receive coins. Offline storage is known as "cold storage" which is any type of storage that does not require an internet connection, presumably kept away from electromagnetic interference.