Many people are trying to dip their toes in the water with purchasing cryptocurrency or digital assets. The first question that comes to mind for people new to the crypto space is, “Where do I store my digital assets?" After all, you can't hold Bitcoin like you can a dollar bill, right?
An important thing to note about cryptocurrency is that it is always stored in a crypto wallet. A crypto wallet allows you to hold cryptocurrency just like you hold your cash in your regular wallet while also doing transaction activity like buying and swapping coins. When you create a crypto wallet, you gain access and ownership over your assets and encrypted data. This becomes your coins and data to buy, sell, and hold as you please.
What does it mean to have a custodial wallet? Opening up a custodial wallet means that a third party keeps and manages your crypto FOR you. For instance, a centralized exchange might offer a custodial wallet service where they can facilitate trades and buying and selling of crypto for you, making the process more straightforward. The one thing to remember with a custodial wallet is the custodian does have control over access to your crypto, and while there are many trustworthy crypto custodians, some have had issues in the past, locking people from their assets. If a custodian were to go offline, during that period you would also lose access to your coins.
What does it mean to put your cryptocurrency into a Non-Custodial wallet? Non-custodial wallets restrict access to everyone but the person who holds the private key for that wallet. This private key can be stored anywhere - your computer, a USB stick, even a piece of paper if you want! However, if you lose your private key (given to you initially when opening up the non-custodial wallet) there is nothing you can do and your crypto is likely lost.
Clearly, there's upsides and downsides to both. Custodial wallets are usually simple to setup and manage, trusting that your custodian will keep your crypto safe, while non-custodial wallets might involve a couple more steps to setup, and require you to keep some important information very safe. In addition to deciding to store your cryptocurrency in a custodial or non-custodial wallet, users must decide their preferential mode of storage: hot or cold. Let’s take a deeper look at both options:
Hot Storage: Hot storage wallets are software wallets. These wallets consistently stay connected to the internet. Some users prefer hot storage wallets because users can easily sign up for one within minutes, free, and user-friendly. They make sending crypto to and from exchanges simple, with buying and selling as easy as a few clicks. Critics of hot wallets are wary because they are more prone to attack than cold wallets - as they are constantly connected to a server, if a bad actor were to access the connection, they could theoretically steal your crypto. It's been done before and it will surely continue happening.
Cold Storage: Cold storage wallets are not connected to the Internet. Oftentimes, they are in the form of hardware wallets. Hardware wallets are physical contraptions that you can purchase to keep your cryptocurrency stored safely. Cold storage wallets put the responsibility on the user to keep track of the device. Some users prefer cold storage wallets because they are secure and protected from online attacks. Critics of cold storage wallets say that oftentimes the transaction time can be hefty due to having to type in a pin and seed phrase (both for added security) in addition to connecting your cold storage device to the internet when you do want to move crypto or complete a transaction.
Example of a hardware wallet.
Wouldn’t it be nice if you could store your cryptocurrency in cold storage AND through your trusted financial institution? CryptoFi works directly with your financial institution to provide access to cryptocurrency through our vetted and trusted custodians, providing cold storage access seamlessly through your banking dashboard, keeping your crypto in safe hands and away from malicious attackers. Our custodians also promise high uptime, giving you 24/7/365 access to your coins, no hardware wallet needed. We even offer the capacity to allow you to transfer their cryptocurrency assets from hot storage wallets like exchanges to your financial institution, so that you can always keep your coins with someone you can trust: your bank or credit union.