Crypto is all about being your own bank, so “self-custody” is a phrase you will hear often and it means safeguarding your own assets and utilizing crypto wallets. There are many great resources regarding crypto wallets, but being this is a site for Dummies, we are going to keep it basic. Once you know the difference between the types of wallets, head on over here to choose a wallet.
A couple of terms to know in this are private keys and recovery seed phrase, both of which you want to keep safe and not give out to anyone. They are how you prove that you are the owner of your wallet.
- Private keys are your wallet’s password, like your password to your online bank account. If someone has this password, they have access to your funds. They are difficult to remember or write down because it is a long string of numbers and letters. It is best to use a copy and paste function when it is an option.
- Recovery phrase, or seed phrase, is a string of 12 or 24 randomly generated words that also allows you to obtain access to your wallet.
Hot wallets vs. cold wallets
- Hot wallet (software wallet)
- Hot wallets are connected to the internet, along with your private keys or secret recovery phrase (again, think password) and thus the term “hot” in terms of the wallet being online.
- When you create your wallet, your private key or recovery phrase (12 or 24 words) are generated online, so you truly never know if anyone had access to it.
- They are the more convenient of the two options as it allows for quick access via an app or browser extension.
- Easy to use and set up.
- Generally free to use.
- The more popular examples include Trust Wallet, Coinbase Wallet, and MetaMask.
- Cold wallet (hardware wallet)
- Cold wallets are kept offline, making it far less susceptible to hacking attempts.
- Used for long-term storage of crypto because of the security benefits.
- Can still be connected to exchanges or NFT marketplaces to trade assets, but need to connect the hardware device to do so.
- They are often hardware wallets that store your “keys” (again, think password) offline.
- A cold wallet can also be a paper wallet, where all you need is a 12 or 24 word phrase to access your funds.
- Don’t worry if you lose the hardware wallet, you can still access your funds by using your recovery phrase.
- Private keys are generated offline during device set up.
- Need to purchase a hardware device.
- The more popular hardware cold wallets are Ledger and Trezor.
- Exchange wallets
- If you use an exchange like Coinbase, Gemini, Binance, or Kraken, you are using an exchange wallet.
- These assets are not technically in your possession. You may have seen the term “not your keys, not your coin.” In this case, your “keys” are your private keys as mentioned above. This means that the assets held on an exchange act more of as IOU, and as we have seen from the blow ups of several exchanges (FTX, Celsius, Voyager), you could lose all of your assets if your exchange goes under.
- Paper wallets (form of cold wallet)
- This is where your digital assets are quite literally stored on a piece of paper paper that contains your private keys.
- One of the most secure ways to hold crypto as your private keys are not stored digitally.
Key Differences
- Security–cold wallets are the more secure option due not constantly being online. You will see there are quite a few more steps to transacting with a hardware wallet due to the security of this storage option.
- Accessibility–hot wallets are more accessible for quick transacting and trading since they are always online. Cold wallets require you to have your hardware device or your private keys to access your funds.
- Use cases–if you prioritize security, cold wallets are for you. Hot wallets are suitable if you are on the go trading and/or spending.
Best Practices
- Don’t keep all of your assets on a hot wallet. Keep only what is required for an upcoming transaction, such as the purchase of a NFT or new crypto that was just released that you want to buy.
- With the available Decentralized Exchanges, you are now able to get the best of both worlds of keeping your assets in cold storage for safe keeping as well as swapping them for other assets without moving them back to an exchange, such as Coinbase or Gemini.
- Don’t click on links that you aren’t absolutely 100% sure are legit.
- If you see someone airdropped a NFT to your wallet that looks too good to be true, it’s because it is. Do NOT go to any website that they say to go to in order to claim a reward.
- Do NOT put your 12 or 24 word private key online in any password keeper, Photos app, on the cloud, etc. Write it down or print it offline and store it in a safe space, or a couple different places just in case something happens.
- DO NOT give your passphrase out to anyone under any circumstances!!!! If someone asks for it, they are trying to scam you.
- If you are a long-time holder, keep your assets off of exchanges.
