What is a crypto wallet?
As mentioned above, a wallet is a kind of digital wallet in which your private keys are stored securely. You need these keys to send Bitcoins, for example. In principle, it is sufficient to write your private keys on a piece of paper or save them in a Word file on your USB stick. However, this approach is not practical - and also not really secure. A wallet, on the other hand, simplifies the handling of your keys and - depending on the type of wallet - ensures that your digital assets remain protected from external interference (hackers, theft, etc.).
This is what a private key looks like:
You can send and receive digital assets via your wallet. Let's take a quick look at the terms "private keys" and "public keys". You can compare your public key with your IBAN. This is needed so that someone can transfer money to you. Without a public key you cannot receive Bitcoin. To send bitcoin to another public key (or receiving address), you need your private key. Think of it as a PIN code that you need to enter into your banking app before making a transaction.
This is what a public key looks like:
Important note: Whoever has the private key has complete control over your crypto assets. Therefore, never send your key. Online or on your computer (with internet access) they are not protected from cyber attacks or fraud.
Not your keys, not your coins
You now know the basics of crypto wallets. They contain the keys you need to move your Bitcoin back and forth. Before we get into the different types of wallets, we have an important tip for you: Basically, you should only choose wallets where you own the keys. If you do not own them, you will not have direct access to your cryptocurrencies. Some providers leave the keys to external third parties. If they are hacked, you risk losing your entire balance.
If you don't have the keys, you don't have control over the assets. For this reason, it is of utmost importance that you consider this point when choosing your crypto wallet provider. Additionally, you should secure your data with a backup key for the worst-case scenario. This is beneficial if you have lost your wallet password (or private keys). The backup key is also called a seed phrase. The seed phrase consists of up to 24 words that are randomly generated. In any case, keep it safe.
An example seed phrase might look like this (word order is mandatory):
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Different crypto wallets in comparison
Below we have briefly and concisely presented the most important wallet types. In our opinion, cold wallets (or hardware wallets) offer the greatest protection. You'll find out why in a moment.
Cold wallets are not connected to the Internet (so-called cold storage) and offer the greatest level of security from this point of view. Your private keys are held locally on a storage medium (paper, external hard drives or hardware wallet) and have no direct connection to the Internet.
Hardware wallets offer the most convenience of all cold wallets because they are easy to use.
A hot wallet allows you to send and receive cryptocurrencies with one software. In this case, the integration of third-party providers is not necessary. Examples of hot wallets are MetaMask, the Coinbase Wallet or the Edge Wallet. The device on which the wallet software is installed is usually connected to the Internet in this case. For this reason, you risk losing your access to your cryptocurrencies if the software is hacked.
Important note: Many investors divide their investments in such a way that a small part of the assets is held in a hot wallet, while the rest can be managed via a cold wallet. As with the cold wallet, the private keys of the hot wallet belong to you.
It is different with a custodial wallet.
With a custodial wallet, a third-party provider (e.g. a trading platform such as Binance or Kraken) takes over the custody of your private keys. Access to the platform is usually device-independent. Your wallet is linked to your account and is managed by the third-party provider. Especially beginners use this type of wallet because of the comparatively high comfort. The technical hurdles are virtually non-existent. We also rely on this model. We work together with the crypto custodian Tangany.
The risk with this type of wallet is that the third-party provider has full control over its customers' keys. In an emergency, access can be frozen. As a user, you have only limited influence in such cases. This dependence on the third-party provider represents a high risk. Especially investors with high investment amounts are therefore often recommended to store their keys via cold wallet.
Which wallet suits you depends on your individual requirements regarding the handling and security of the wallet concept. Those who want to access Bitcoins via their smartphone will normally use a different wallet than those who want to hold their cryptocurrencies for the long term (and without daily access).
The more active investors are, the less effort they want. This is the case with hot and custodial wallets. In any case, weigh the risks before choosing a provider.