How to Use a Crypto Wallet | Types of Crypto Wallets
Custodial & Non-Custodial
Custodial Wallets
A third party (usually an exchange or a wallet provider) holds and manages the private keys on your behalf. This means that while you own the cryptocurrency, the provider has control over it, and you're trusting them to secure your funds.
Pros:
Quick access to trading and exchanging within platforms.
Less technical setup, as private key management is handled by the provider.
Recovery of funds is possible through the provider in case you forget your password.
Cons:
Less control over your assets (the third party holds your private keys).
Vulnerable to hacks or bankruptcy of the custodial service.
Less privacy and subject to KYC (Know Your Customer) rules.
Non-Custodial Wallets
You have full control over your private keys, and thus, your cryptocurrency. Only you have access to the private keys, making you fully responsible for securing your funds.
Pros:
Full control over your funds and private keys.
Higher level of security (as long as you secure your keys properly).
No reliance on third parties.
Greater privacy, as some non-custodial wallets do not require KYC.
Cons:
If you lose your private keys or recovery phrase, there is no way to recover your funds.
More technical setup; requires more knowledge about managing keys.
Not as beginner-friendly as custodial wallets.
Hot & Cold
Hot Wallet
Hot wallets are cryptocurrency wallets that are connected to the internet. They can be custodial or non-custodial, but they are more convenient for day-to-day transactions since they are always online. Hot wallets come in three different forms: mobile, desktop, and web
Mobile Wallets: Wallets designed for smartphones. Easy to use and ideal for everyday transactions.
Desktop Wallets: Software installed on a computer, offering more security than mobile wallets but still connected to the internet.
Web Wallets: Accessible via a web browser, making them highly convenient but typically custodial.
Pros:
Convenient and easy to access.
Ideal for frequent trading and transactions.
Usually come with built-in features like staking, exchanging, etc.
Cons:
Vulnerable to hacks and phishing attacks due to the internet connection.
Less secure than cold wallets.
Require regular updating to remain safe from vulnerabilities.
Cold Wallet
Cold wallets are not connected to the internet, making them much more secure for long-term storage of cryptocurrency.
Pros:
Much higher security due to being offline.
Ideal for long-term storage and holding large amounts of cryptocurrency.
Immune to online hacking or malware.
Cons:
Less convenient for daily transactions.
If lost or damaged (especially paper wallets), recovery is impossible unless you have a backup of the keys.
Hardware wallets can be costly compared to hot wallets.