How to Store Cryptocurrency Safely? Hot, Cold, Custodial and Non-custodial Wallets

How to Store Cryptocurrency Safely? Hot, Cold, Custodial and Non-custodial Wallets

Like cash stored in a wallet, digital assets are held in a crypto wallet. This is a program designed to send and receive digital currencies, control their balance and interact with various blockchains.

The crypto wallet also stores the private and public keys. The public key is the address (account) to which digital money is sent, it is visible to other users. The private key is used for a digital signature, without which it is impossible to make a transfer. Having a wallet is essential to manage your crypto assets and keep them safe.


Hot and cold wallets

There are many cryptocurrency wallets, but the essential difference between them is whether they are “hot” or “cold”: The hot wallet is connected to the internet and is available at any time;

A cold wallet is not connected to the internet and allows you to store funds offline. Such a wallet is also able to receive funds at any time, but only the owner can use them. Hot wallets include all online cloud wallets, most mobile and software wallets, and exchange wallets.

Cold wallets are hardware wallets, paper wallets (a QR code and address printed on paper, as well as a private key that allow you to hold and transfer cryptocurrency), USB drives and similar data storage devices. A hardware wallet is considered the safest option for storing digital assets.

Hardware wallets store private keys on an external device, like a USB. Some hardware wallets are compatible with web interfaces and support multiple currencies, which allows you not only to store cryptocurrency, but also to make online payments. Among the disadvantages of their cost – it starts at $ 79, as well as the risk of losing or stealing your wallet. The most common wallets from the manufacturer Ledger. But there are also analogues in the form of Trezor and KeepKey. It is important to purchase a hardware wallet directly from the manufacturer. Buying elsewhere is not safe due to the risk of internal wallet changes that could lead to asset theft.


Custodial and non-custodial

Depending on the presence of a custodian (third party), which is responsible for storing personal data, wallets are divided into custodial and non-custodial.

A custodial wallet is a wallet in which personal data is stored by a third party (custodian). This has its advantages. For example, if passwords or keys are lost, the user will be able to regain access to their funds. Many crypto exchanges (Coinbase, Binance, etc.) and brokerage services have custodial wallets. Such integration simplifies the work with other tools of these platforms, it can be beneficial when making transactions (for example, due to the absence of commissions within the ecosystem).  Due to the control of keys by third parties, it is important to approach the choice of a custodial wallet with particular care, since the custodian’s access to the wallet is also a disadvantage. The user may lose access to the wallet and funds by decision of the authorities or the court, as well as as a result of a hacker attack. A striking example of this was the theft of user funds by employees of the Thodex cryptocurrency exchange in the amount of $2 billion in 2021. And in 2022, the American Coinbase announced the blocking of wallets associated with Russian citizens and companies from US sanctions lists.

Custodial wallets are the best option for speculative trading, as exchanges provide additional financial services. For example, p2p, interest deposits, futures, launch pools (platforms that allow you to earn new tokens), etc. A non-custodial wallet gives the user full control over keys and funds. Such wallets are created by decentralized exchanges and special services – for example, ZenGo, Nuri wallets. Also, non-custodial wallets can be created in special browser extensions (MetaMask). Such extensions provide an address and a private key after a simple registration procedure. A hardware wallet is also considered non-custodial.

Such wallets are suitable for long-term investments and asset storage, as they provide a high level of asset security. However, non-custodial crypto wallets also have disadvantages. If the private key and the phrase to restore it are lost, the funds will be irretrievably lost. Such wallets can also be affected by a hacker attack.

Another type of non-custodial wallets is paper wallets. They are not so popular due to their impracticality. Such a wallet is a simple sheet of paper on which public and private keys are printed. If desired, QR codes for both keys can also be placed on it. To receive funds for such a wallet, you need to transfer the public key to the sender as standard. And to send cryptocurrency, you need to enter a private key in a software wallet and create a transaction. Both of these actions are made easier by the use of QR codes.

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