When you buy cryptocurrency tokens on an exchange it will be deposited into a wallet on the exchange by default. While you now own the cryptocurrency, did you know that physical control of this wallet is still held by the exchange? While many exchanges now have extensive security and insurance, it is widely believed that exchanges present a target for hackers and are one of the less secure places to store your cryptocurrency.
Given this information, you may wish to move your cryptocurrency tokens elsewhere. There are countless wallets available depending on the currency you have purchased, the security and convenience you might want, and a variety of other factors. Although I will leave you to research the wallet that is right for you, this article will introduce the three types of wallets you are likely to have to encounter. Non-custodial wallets, custodial wallets, and hard wallets.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a unique address where cryptocurrency can be stored on a blockchain. With any cryptocurrency wallet, your assets will be stored directly on the blockchain. How wallets differ is who has access to your cryptocurrency. Access is controlled by using a passphrase, which can be used to recover a wallet, and passwords to access them for day-to-day transactions. The three types of wallets you are likely to encounter are custodial wallets, non-custodial wallets, and hard wallets.
A non-custodial wallet is the most basic form of cryptocurrency wallet. Non-custodial wallets provide the interface for you to interact with the blockchain directly. You will be given secret codes to access your wallet address. These codes can be used to access your wallet through any wallet service. You will be responsible for keeping these secret codes safe. If somebody steals these codes, they can steal your cryptocurrency. If you lose these codes, you may lose your cryptocurrency. While this responsibility may sound intimidating, many people appreciate the security and trustless nature of being in complete control of their assets.
If you do not want to be responsible for your own passwords, you might want to consider a custodial wallet. Custodial wallets are the same as non-custodial wallets in every sense, with one key difference: You are not in control. While your cryptocurrencies are still stored on the blockchain, your wallet is controlled by a third party custodian who manages access to your currencies. The third party is responsible for keeping your complex codes safe while they may ask you to set up more user-friendly ways to verify your identity to them. Many users consider this less secure because this third party presents a weak link for hackers to attack. While this threat was significant in the past, most custodial wallets you will encounter today have advanced security and comprehensive insurance against theft and hacking. When you store your cryptocurrency on an exchange, this is a type of custodial wallet where you interact with the exchange, and they will interact with the blockchain on your behalf.
The most secure place to store your cryptocurrency is a hard wallet. A hard wallet is a physical device resembling a USB drive. When you use a hard wallet, the software to interact with the blockchain runs on the physical hard wallet instead of running on your computer or smartphone. Your secret passphrase is generated directly onto the wallet and at no point are available on your phone or computer where they might be hacked and stolen. You can unplug this wallet and store it in a safe or anywhere you might like. Physical possession of the hard wallet and any passwords or pin numbers set up on the hard wallet control access to both your secret codes and your cryptocurrency.