Crypto Wallets Explained

A crypto wallet does not really store coins. The coins live on the blockchain. What the wallet stores is the private key that proves the coins are yours. Lose the key and the coins are gone forever, which is why this topic deserves more attention than picking which coin to buy.

Custodial versus self-custody

Custodial means someone else holds the keys, typically an exchange. It is convenient, password resets are possible, but you are trusting that company. History has repeatedly shown what happens when that trust is misplaced.

Self-custody means you hold the keys. Nobody can freeze or seize your funds, and nobody can help you if you lose your backup. The common saying is: not your keys, not your coins.

Hot versus cold wallets

• Hot wallet. Software on a phone or browser, connected to the internet. Fast and convenient, but exposed to malware and phishing. Good for spending money.
• Cold wallet. A hardware device that keeps keys offline and signs transactions internally. Costs money and takes a minute to set up, but it is the standard for holding meaningful amounts.

The seed phrase

When you create a self-custody wallet you receive twelve or twenty-four words. That phrase can regenerate your entire wallet on any device. Treat it as the single most sensitive item you own:

• Write it on paper or metal. Never a photo, screenshot, cloud note or email.
• Store it somewhere private and fireproof. Consider a second copy in a separate location.
• No legitimate support agent, exchange or wallet developer will ever ask for it. Anyone who does is stealing from you.

A sensible setup for most people

Keep a small spending balance in a hot wallet or on an exchange for convenience, and keep the bulk in cold storage. Test your backup by restoring the wallet on a spare device before you move a large amount into it. Also read our guide on avoiding crypto scams, since most losses come from social engineering rather than technical hacks.