So, crypto wallets. What are they? How do they work? Which one do I want? Are they safe? Oh boy. 

What the hell is a crypto wallet? 

A crypto wallet is a place in which you “store” your cryptocurrency coins and tokens. 

The word “store” is in quotes because your assets are not actually held within the wallet; they exist on the blockchain and are connected to a wallet address; this is true regardless of what type of wallet you have. 

There are generally two important components of your wallet; 

1. The #private key# 
2. The user interface (the app part that you click on and stuff).

There are multiple types of crypto wallets; each has advantages and disadvantages. Which type of crypto-wallet you wish to use will depend on what type of crypto user you are. 

Crypto Wallets: Custodial Vs. Non-Custodial

Let’s start with the two major categories of crypto wallet. 

Custodial Wallets:

A custodial wallet is an “account” you hold with a company, rather than actually a wallet. Instead of managing your private key’s yourself, your funds are held in the company’s wallet and you have an account (similar to a bank), that tracks what portion is yours.. 

The place you will most commonly come across a custodial wallet is on a Centralized exchange or #CEX#. 

Centralized exchanges are companies that buy and sell crypto; popular examples are Coinbase, Kraken, and Binance; these are where pretty much everyone will buy their first crypto (and sell it when they want “real” money). 

Now, if you speak to any crypto enthusiast, they will happily shout at you for as many hours as you let them, about why you should never use a custodial wallet*. That said, there are cases in which a custodial wallet might be the right choice for you. 

Advantages of a custodial wallet: 

• Don’t need to worry about keeping your private keys or “#seed phrase#” safe. 
• Generally offers a user experience that is more similar to what you might expect in day to day life. 
• Strong security (when the company is legitimate).
• Customer support. 

Disadvantages of a custodial wallet:

• Trusting a third party; there have been instances in which very large companies have misused customer funds; so far at least even large #CEXs# are not regulated in the same way as banks. 
• Less flexibility; custodial wallets can generally only be used to access a limited set of services as laid out by the controlling company. If you wish to use #dApps# then you’ll likely need a non-custodial wallet. 
• Can only interact with cryptocurrency coins and tokens approved by the controlling company. 

*Note: Most experienced crypto users will use CEXs to exchange their crypto into fiat and the other way round, they just won’t store crypto on there outside of that. 

Non-Custodial Wallets:

These are wallets that you personally hold the private keys to; how these private keys are stored will depend on the exact type of wallet. There are multiple types of non-custodial wallet, which we talk about below. .  

Metamask, Phantom, and Ledger are all examples of non-custodial wallets. 

Advantages of a non-custodial wallet:

• You control your funds; unless someone gets access to your private key nobody can interact with them in any way.*
• Freedom to transact as you wish; can connect to #dApps# freely
• Can buy and sell any cryptocurrency coin or token

Disadvantages of a non-custodial wallet: 

• Sometimes less user friendly (though this is getting better). 
• You control your own security; if you suck at it you could lose funds.*
• No or limited customer support; if you lose your funds they won’t be able to help you.*

*We suggest you read our crypto security articles to help you avoid this:

Crypto Security: How to keep your funds safe

Crypto Scams: And how to avoid them

Which should I use?

Whether you should use a custodial or non-custodial wallet will largely depend on what type of crypto user you are. 

As a general example however:

• User A is just looking to dip their toe in the water. They are still learning about cryptocurrency, but want to buy a little bit of Bitcoin and Ethereum. This represents a very small investment for them. User A would likely be fine using a custodial wallet. 
• User B views crypto as a fantastic investment and has a small but significant amount of their networth in crypto. Additionally they wish to access cryptocurrencies before they hit the major #CEXs#. User B will likely want a non-custodial wallet and make sure they are following the safety tips later here. 

Crypto Wallets: Hot vs Cold

So now you know the difference between #custodial wallets# and #non-custodial wallets#. 

Non-custodial wallets are all fairly similar in design and function; the one major safety consideration with them is whether or not you trust the company that controls them. 

Within non-custodial wallets there are a further two major “types”. When we talk about types we’re talking about their major design philosophy. Within each of these categories there are dozens of “brands” for you to choose from. 

Hot Wallets/Software Wallets:

A hot wallet, alternatively called a software wallet, is a crypto wallet that stores your #private key# on your personal device (generally your PC, phone, or tablet). 

The most popular hot wallets are available as browser extensions and mobile apps. Hot wallets connect your #private key# directly to the internet; making it quick and easy to interact with #dApps# or quickly send funds. 

Exodus, Phantom, Metamask, and Rabby are all examples of hot wallets. 

Advantages of a hot wallet: 

• Usually free to set-up.
• Built in security features that help identify potentially dangerous transactions. 
• Quick and easy access to your funds; making transacting easy
• Generally more user-friendly than cold-wallets. 

Disadvantages of a hot wallet: 

• Less Secure: because your private key is on an internet connected device, it is possible for somebody to gain access to it through malicious software. This can happen to anyone and, in fact, even happened to us (you can find the news story on our main site). 

Cold Wallets/Hardware Wallets:

A “cold” or hardware wallet is a physical device (generally resembling a USB stick) that stores your #private key#. Cold wallets can also be linked to a hot wallet in order to use the hot wallets user interface – when doing this your private key still remains on the cold wallet. 

Ledger and Trezor are examples of hardware/cold wallets. 

When you wish to execute a transaction with your cold wallet it roughly works like this:

1. Cold wallet connected to your computer – you sign into the wallet by entering a pin-code on the device itself. 
2. Trigger the transaction you wish to make using whatever user-interface you have set-up. 
3. The transaction request is “bridged” to the cold wallet. 
4. You sign the transaction on the device itself – using physical buttons on the device. 
5. The signed transaction is then bridged back off the device – your private key never leaves the device. 

Advantages of a hardware wallet:

• Extra Security: because your private key is never connected to your computer or the internet it cannot be stolen through someone gaining remote access to your computer.
• Getting to shame other people for not using a hardware wallet. 

Disadvantages of a hardware wallet:

• Costs money: depending which hardware wallet you settle on you are looking at spending between $60 and a few hundred dollars (the lower end is fine for most people).
• Less convenient; every transaction you wish to execute requires the steps mentioned above.
• Less user friendly; setting up a hardware wallet requires more technical know-how. We are working on a step-by-step how-to guide on this subject so keep an eye out for that. 

PLEASE NOTE: a cold wallet is only as safe as your seed phrase. If you lose your seed phrase you will not be able to recover funds if you lose your cold wallet. If someone finds your seed phrase they will be able to steal your funds even if they don’t have your physical cold wallet. 

Which Should I choose?

Once again this will largely depend on what type of crypto user you are. Here are some examples of what might be right for a couple different users:

As an example:

• User C is involved in cryptocurrency “for the culture”. They enjoy trading memecoins on a daily basis and view cryptocurrency as more of a hobby than a serious investment. They would be annoyed but not ruined if they were to lose their funds. User C could probably use a hot wallet. 
• User D views cryptocurrency as a great long term investment, they regularly add to their funds through #DCA# and plan to hold it for many years. User D would likely want a cold wallet. 

Using multiple wallets:

Many crypto users use multiple wallets; this can be for all sorts of reasons but doing so is a great way to take advantage of what each wallet-type has to offer. 

This can take many forms but a basic two wallet setup might look something like this:

Wallet A is a hot-wallet that acts as your everyday wallet. You use it to trade with, play around on new #dApps#, mint #NFTs# etc. You hold only a small amount of funds in this wallet for any prolonged period of time. 

Wallet B is a hardware or “cold” wallet that acts as your vault. This wallet holds the bulk of your funds and only ever interacts with wallet A. This keeps it safe from being drained by any kind of maliscious contract. Make sure to send smaller test transactions before moving large amounts of funds. 

Advantages of multiple wallets:

The above system gives you more peace of mind in your day to day crypto dealings and leaves a lot more room for you to make a mistake without risking the bulk of your funds. Note that wallet B could also be a hot-wallet and this would still add an extra layer of security; you would have less risk of losing your funds through something like connecting to a malicious contract, but would remain at risk to something like a hacker gaining access to your computer. 

Many crypto uses will have many wallets; some will assign a wallet per #dApp# they wish to interact with; this means that if it turns out to be malicious in some way they only lose the funds they assigned to it. 

Multi-sig Wallets:

Multi-sig (multiple signature) wallets are crypto-addresses that require a signature from multiple wallets in order for a transaction to be sent. They are primarily used by crypto-projects in order to ensure that no one individual can make off with the project funds; this gives investors additional peace of mind. 

Multi-sig wallets will have approved signatories and a minimum threshold set up. 

An example of how this might work could be a project that has three project leads might set all three up as signatories and then have the threshold set to two. 

For the wallet to approve a transaction it would require signatures from any two of the three wallets. 

This means that even if one of the project leaders had their wallet compromised, the hacker would not be able to remove the project funds. 

Using a multi-sig wallet as an individual:

If you are looking for the ultimate secure solution you could consider using a multi-sig wallet as an individual. 

This might look something like this:

• You control wallet’s A, B, and C. 
• All three wallets are set as signatories for your multisig, and the threshold is 2. 
• Wallet A is a hot wallet on your computer. 
• Wallet B is a cold wallet you keep in your desk drawer. 
• Wallet C is a cold wallet you keep in a safe in a different building. 

This would mean that day to day you have access to your funds (albeit with a fair amount of hassle when wanting to send a transaction). If either wallet A or B was lost or compromised in any way you could still access your funds by using the remaining wallet in addition to wallet C. 

If you were utilising this system you would want to ensure you kept each wallet #seed phrase# in a different location. 

This option might be used by someone with a very large amount of cryptocurrency. 

Conclusion

Crypto wallets are an essential part of holding and transacting with cryptocurrency. The main takeaways are:

• “Crypto wallets” refer to a user interface and storage of your private key. 
• The main categories of crypto wallet are hot, cold, custodial, and multi-sig.
• Which wallet(s) you use will depend on what type of crypto user you are, what kind of convenience you’re looking for, and how much you are investing. 

We should reiterate; if you’re just getting started in crypto and want to poke around with some money that you’re okay with losing – then some of the less secure options are okay for that. 

Just don’t put off securing your funds indefinitely.