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The Different Types of Crypto Wallets

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Many newcomers to crypto don’t examine the various options for storing their assets. Instead, they choose to keep their funds on crypto exchanges. We’re here to tell you that more reliable, convenient, and safer storage methods are available.

Crypto is always stored in a crypto wallet, even when an exchange manages it. Wallets are the primary tool for interacting with digital assets, and by communicating with the blockchain, they allow you to send or receive funds, check your balance, and more.

They also store the private and public keys needed to manage crypto. We will return to this later, but you should remember one crucial thing: you need a private key to access your crypto. If you lose it, you’ll lose everything.

What are the different types of crypto wallets?

There are all sorts of crypto wallets out there. Some wallets were created to store specific tokens, while others are multi-currency and can hold several types of coins and tokens. And the differences don't end there.

Hot and cold wallets

First, we can separate wallets into two categories: physical devices and software.

Software wallets are called hot wallets and include applications for mobile devices and computers, browser extensions, and wallets on exchanges. The “hotness” refers to the fact that they are always connected to the internet.

Cold wallets are often hardware solutions. These autonomous devices do not go online when you perform transactions using them.

Custodial and non-custodial crypto wallets

Crypto wallets can also be divided into two subcategories: custodial and non-custodial.

Custodial wallets

These crypto wallets are managed by a third-party organization (the custodian), such as a cryptocurrency exchange. The custodian manages the assets and stores comprehensive information about you, your funds, and your private key.

On the one hand, this is convenient. To gain access to a crypto wallet, you need a seed phrase. This sequence of words allows you to recover your private key and access the wallet, and it must be written down and stored securely. In the case of a custodial wallet, you don’t need to do any of this, as the custodian holds the private key. If you forget your password, you can recover it, log in, and then continue buying, selling, or transferring cryptocurrency.

The downside is that if the exchange is hacked and the private key falls into the hands of attackers, you can say goodbye to your crypto assets. Then there are the other “inconveniences”: the exchange may shut down “for maintenance,” and you won’t have access to your crypto until service is resumed.

Non-custodial wallets 

Non-custodial or self-custodial crypto wallet give you complete control over your private keys through the seed phrase, which allows you to regenerate your private key. With this kind of wallet, you are responsible for its safety and can manage your crypto assets independently.

For example, a crypto wallet on Binance, Coinbase, or any other crypto exchange is a custodial hot wallet. This means the exchange manages your private keys rather than you, and the wallet is always “connected” to the internet.

On the other hand, MetaMask, Trust Wallet, and similar crypto wallets that function as applications are considered non-custodial hot wallets. This means you are responsible for managing the keys, but the wallet is still connected to the internet.
 

Advantages of non-custodial wallets

The primary advantage of non-custodial wallets is security and confidentiality. The keys are accessible only to the owner, which means the risk of crypto theft is lower. Additionally, you don’t need to provide personal information or undergo identity verification through Know Your Customer (KYC) checks to create a wallet and use crypto, as is the case on centralized cryptocurrency exchanges.

The main downside is that all the responsibility for the safety of your private keys lies with you. If you lose the piece of paper you’ve written the seed phrase and forget your wallet password, you won’t be able to restore access to your crypto. 

The most reliable and secure option is non-custodial cold wallets. These wallets cannot be hacked remotely; only you control the keys. In turn, this means that you alone manage crypto assets.

Conclusion

Some people believe that custodial wallets are more suitable for beginners and people who use P2P platforms, trade cryptocurrencies and carry out other transactions with cryptocurrencies regularly.

The best option is to store funds in a cold, non-custodial wallet. Tangem Wallet is one such example. Our wallet generates and stores your private key in the card’s chip, which never leaves. You can read about how this works in our previous article.

If you want to trade on a crypto exchange, there’s no avoiding hot wallets. Nevertheless, we don’t recommend storing funds on them. Keep the exact amount you need for trading on the hot wallet, and save the rest on a hardware wallet.