A crypto wallet cannot store the cryptocurrencies, such as Bitcoin, but rather contains the necessary information to access the funds stored on the blockchain. Namely, the wallet holds or manages the private key that allows signing and authorizing the transfer of funds from a certain blockchain address.
The private keys are created using cryptographic algorithms and must be kept secret, as the person having it can manage the funds belonging to the respective address.
There are software-based wallets that hold the private-key data on their phones, computers, or web browser. Encryption or password protection can be applied for securing the private key in software wallets.
Hardware wallets operate in an alternative manner – they are built in a way to keep the private key isolated from internet-connected devices. In case of transaction, the hardware wallet signs it and then transfers the signature to the connected device, leaving the private key secure within the wallet.
The above solution might decrease the possibility of exposure of the key to malware.
Also essential for securing the wallet is the recovery phrase. Some wallets make use of 12 or 24-word phrases which could regenerate the wallet's keys should the user lose or damage his original device. Standards like BIP-39 have been established which dictate how these phrases could represent the wallet's entropy.
This recovery phrase should be kept safe since anyone in possession of this information can use it to restore the wallet and take full control of its assets. It should never be disclosed to any website, stranger, or so-called wallet support.
Multisig wallets are also employed by some users, which require more than one private key to authorize any transactions.
Nevertheless, the technology behind wallet security cannot completely remove any threats. For instance, phishing, malware, fraud applications, and bad backups could all lead to theft.
In simple terms, wallet security entails protection of the secret which generates the transaction signature. While blockchain checks the authenticity of the signature, the wallet takes care of the secret behind it.
