Custodial vs self-custody, hot vs cold wallets
Who holds your keys? Learn the difference between custodial and self-custody wallets, and between hot and cold (hardware) wallets.
A crypto wallet does not really hold coins. The coins live on a blockchain, which is a shared public record. What a wallet holds is the private key: a secret number that proves you are allowed to move the coins at a given address. Whoever controls the key controls the coins.
Custodial wallets
With a custodial wallet, a company holds the keys for you. When you buy crypto on an exchange and leave it there, the exchange is your custodian. You log in with an email and password, and the company moves coins on your behalf.
This is convenient. You can reset a forgotten password, and support can help with mistakes. The downside is trust. If the company is hacked, freezes withdrawals or goes bankrupt, you may not get your coins back. You own a promise from the company, not the coins themselves.
Self-custody wallets
With a self-custody (or non-custodial) wallet, you hold the keys yourself. No company can freeze your funds. But there is also no password reset. If you lose your keys and backup, nobody can recover the coins. If a thief gets them, the coins are usually gone for good.
Hot wallets
A hot wallet is any wallet whose keys sit on a device connected to the internet: a phone app, a browser extension or desktop software. Hot wallets are handy for small, everyday amounts. Because they are online, malware and phishing sites have more chances to attack them.
Cold wallets
A cold wallet keeps the keys offline. The most common type is a hardware wallet, a small device such as Ledger or Trezor. The key never leaves the device. When you send coins, the computer prepares the transaction, the device signs it inside, and you confirm the details on the device's own screen. Even if your computer has a virus, the attacker cannot copy the key.
Maya keeps the equivalent of 150 USD in a phone wallet for small purchases. Her long-term savings sit on a hardware wallet stored at home. A tiny amount sits on an exchange so she can trade. If her phone is stolen, she can lose at most the small hot balance. Her savings stay safe because they were never online.
Choosing a mix
Many people use more than one setup. A simple rule is "spending money hot, savings cold". Keep only what you need for trading on an exchange, a small amount in a hot wallet, and larger long-term amounts in cold storage you control.
Buy a hardware wallet only from the maker or an official reseller, never second-hand. A device that arrives with a seed phrase already written on a card is a scam. A real device always lets you create a new phrase yourself.
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