What is the difference between custodial and non-custodial wallets?
Before you choose a wallet, it is important to understand the difference between custodial and non-custodial options.
Some wallets will give you control of your private keys, while others will not. Wallets that keep control to themselves are called custodial, meaning they essentially retain the full control of your funds.
As such, such wallet providers pose a risk as they can potentially block access to your assets or intervene if regulators insist on it. And, in case such a service provider would suddenly cease to exist or get hacked, you are likely to lose access to your funds forever.
However, not all crypto holders are comfortable with being responsible for their own security. If so, custodial wallet providers might be a better option for some. The bright side is, custodial wallet options usually provide means for recovering access to the funds, which would not be possible on non-custodial wallets.
On the other hand, non-custodial wallets are the exact opposite – a user is in full control of their funds as they are the sole owner of private keys.
Non-custodial wallets are considered a vastly safer option than trusting custodial wallet providers.
What is a cryptocurrency hardware wallet (cold storage)?
Hardware wallets are a piece of hardware that usually looks similar to a USB stick, which is encrypted and secured with your own PIN code. Your private keys are generated and kept inside the device, never leaving it, so it protects your cryptocurrency from theft even if your computer is compromised.
But not all cold storages are hardware devices. Cold storage can also be considered a private key or backup seed phrase simply written down on a piece of paper, as long as that key or seed was generated on a device which was never connected to the internet during or after the generation.
So, as long as your private keys never touched anywhere online or an internet-connected device, it is cold storage.
Some of the popular choices for hardware wallet makers on the market are Trezor and Ledger.
What is a hot cryptocurrency wallet?
In simplest words, all wallets that are connected to the internet in any way are considered hot.
A hot wallet is easily accessible software that is very convenient for everyday use, for example, when buying goods and services, transferring small amounts to friends or family, or trading.
There are numerous wallets that offer different functionalities, but all of them can be segmented into three different types: online, mobile and desktop wallets.
Online wallets run on cloud servers and are accessible on any device that can use a web browser. Mobile wallets are the same but in the form of iOS or Android applications, whereas desktop wallets run as computer programs.
No matter which one you choose, all hot wallets have one thing in common – you need an internet-connected device to use them, which means they have more vulnerabilities.
That said, if your device gets hacked, there is a high chance that your cryptocurrencies will be gone. However, taking certain precautions would minimize the risks of using an online wallet.