What Is a Cryptocurrency Wallet?

January 30, 2023

What Is a Cryptocurrency Wallet?

Although the crypto market is constantly introducing new financial and blockchain-based products, it’s challenging to fully participate in DeFi, NFT, or Web3 without a secure and trustworthy cryptocurrency wallet. You might have come across the terms “cold wallet” and “hot wallet”, but do you truly understand the distinctions between them? And which one is a better fit for you? Today’s TRON 101 will give you a deep dive into crypto wallets.

Unlike the wallet we use in our day-to-day life, crypto wallets store the private key for us. Losing your crypto wallet means losing control of all your wealth, as you are no longer the owner of the private key to all the crypto assets in that wallet address. Crypto wallets can be classified into custodial and non-custodial types, with the latter further divided into hot and cold wallets. To gain a deeper understanding of these concepts, keep reading.

Custodial vs. Non-Custodial Wallet

As the name suggests, the private key of a custodial wallet is held by the wallet service provider rather than the user. In other words, you do not have full control over your wallet. Most of the exchange wallets out there in the market are custodial wallets. Though large exchanges with good reputations are often the preferred choice for storing crypto assets, they are still not the perfect option due to the potential risks posed by centralized control.

On the contrary, non-custodial wallets transfer the ownership of private keys to users. For most crypto users, their funds will stay safe and sound so long as they keep their private key and recovery phrase private. Depending on whether it is connected to the Internet, a non-custodial wallet can be classified as a hot or cold wallet.

Hot Wallet

The hot wallet is the most prevalent type of wallet among regular users, and the widely-known MetaMask is in this family. Hot wallets are typically connected to the Internet, offering a seamless trading experience and smooth on-chain interaction. But they do not come without risks. The public and private keys of hot wallets are kept online and can be accessed by users with passwords. To improve security, it is also a good idea to enable two-factor authentication (2FA). As with other Internet services that use passwords, hot wallets can be targeted by cyberattacks and phishing attempts. Depending on the usage, hot wallets can be classified into web-based, desktop, and mobile-based.

Cold Wallet

A cold wallet uses specialized hardware to store private keys offline, making it the most secure method of storing crypto assets. However, cold wallets might not suit you if you are a trade enthusiast or DApp user. 

You may also have heard of paper wallets. As a subcategory of a cold wallet, a paper wallet is a method of securely storing cryptocurrency offline by printing out or writing down the public and private keys on a physical document, such as a piece of paper. Usually, a safe is needed to store the paper slip. To print the keys, you’ll need a brand new computer and a printer that are both offline.

For most individuals who hold cryptocurrency, a cold wallet and a hardware wallet are interchangeable terms. These physical devices, which resemble USB drives, are designed to be disconnected from the Internet unless they are plugged into a computer. Unlike software wallets such as MetaMask, these “portable vaults” provide enhanced security for both cryptocurrency and non-fungible token (NFT) assets by reducing their vulnerability to cyberattacks.

Hardware wallets provide a higher level of security, which may come at the cost of convenience. Losing the physical device means you will need to purchase a replacement and use the recovery phrase to restore the wallet.

Or, you could follow James Howells, who is determined to search the dump for his lost bitcoins. This bitcoin miner made a costly mistake in 2013 when he accidentally threw away a laptop hard drive on which he was storing 7,500 bitcoins.