Note: This is a basic example for our blogs
Key takeaways
- Cryptocurrency wallets are classified into custodial (third-party managed) and non-custodial (user-controlled), with non-custodial wallets offering enhanced security.
- Hot wallets are internet-connected and convenient for transactions, while cold wallets are offline, providing better security for long-term storage.
- Use multi-factor authentication, hardware wallets, and secure storage for private keys to protect your crypto assets from theft and loss.
- Following the principle "Not Your Keys, Not Your Crypto," managing your own funds is crucial to avoid risks associated with third-party custodians.
The 2022 crypto winter is still all too fresh in our memories, thanks to the spectacle of the FTX collapse. The mishap underscored quite a few critical lessons about safeguarding your crypto and navigating finance in web3 with crypto wallets. Not Your Keys, Not Your Crypto is one of the key lessons learned, which basically means you and only you are responsible for your crypto assets, and no one else can be expected to give them safety and bring them back if lost.
The concept of crypto wallets is crucial to understand if you want to give your crypto the maximum possible security. Let’s find out all about what a cryptocurrency wallet is, as well as the idea of hot and cold wallets.
What are crypto wallets?
What’s important to know about crypto is that it has no physical existence, and so crypto wallets are not tangible things either. A cryptocurrency wallet is essentially an address that gives you a private and a public key - the private key as basically a password to put in when you want to store and access your crypto and initiate a transaction, and the public key as a public address to share with people when you want to receive cryptocurrencies in your wallet.
There are different types of crypto wallets - some centralised or overwatched by entities who take the responsibility to keep your crypto safe, and some decentralised, where you are responsible for keeping your crypto safe.
The former can be understood through the example of a crypto exchange. Say you bought some crypto from a centralised crypto exchange and left your crypto with them; in this case, the exchange takes the responsibility to watch your crypto for you. You can log in and make transactions with this crypto. But do remember that in case the exchange gets compromised in any way, you stand to lose your crypto.
Types of crypto wallets: hot and cold wallets
What are hot wallets?
Out of hot and cold wallets, hot wallets are connected to the internet and can be accessed through your smartphone and desktop. Their internet connectivity and easy accessibility are what earn them the ‘hot’ title.
What are cold wallets?
On the other hand, cold wallets are offline, and store crypto away from the online world. They often have a tangible presence, though it is not in the way of your regular wallet that stores cash.
Exchange-provided wallets
You don’t have to remember any public or private keys for such wallets- you can simply log into your exchange account and use your funds. One unique advantage of these wallets is that you can use them to receive airdrops and stake within the exchange itself with the greatest ease. Further, if you frequently move crypto to use dApps (decentralised apps) like decentralised exchanges, NFT marketplaces, and web3 games, you would want to use such a wallet that lets you make transactions quickly. However, do remember that such wallets are more vulnerable to the authorities locking you out of using your own assets in case of insolvency or bankruptcy.
Example: When you open an account on any crypto exchange, you’re given such a wallet.
Exchange-provided wallets
These hot wallets are software applications that you can install on a computer, as the name suggests. Here, you have more control over your assets than an exchange-based wallet, but remember that you have to still manage your private key by backing it up in secure digital lockers. However, there are malware attacks to consider, as well as a third-party getting access to your private keys. Further, if you lose access to your device, you stand to lose your crypto if a cloud backup of private keys and seed phrase is not made.
Example: Exodus and Bitcoin Core are well-known desktop wallets.
Differences between hot and cold wallets
