April 30, 2023

Crypto Custody: Hot Wallets, Cold Wallets, & More

Crypto Custody: Hot Wallets, Cold Wallets, & More

Storage is the Most Important Aspect of Any Crypto Venture

There’s no hiding from it – cryptocurrency adoption has boomed. Every day, new investors take the plunge and start getting involved with the crypto markets.

Increased investors and more blockchain traffic mean one thing – people need to learn how to store crypto.

The importance of crypto custody cannot be underestimated. In this little-regulated industry, it’s crucialinvestors learn how to protect themselves against loss, theft, and hacks.

In this article, you’ll learn what crypto custody is, why it’s so important, and the different custody types.

What Is Crypto Custody?

Crypto custody refers to the type of cryptocurrency storage, or digital wallet, you use.

These storage options fall into two main categories – custodial and non-custodial. Then, within these twocategories, you’ll find a range of digital wallet options – hot, warm, cold, air-gapped, hardware, offline, and more.

Custodial vs. Non-Custodial Crypto Wallet

Custodial wallets are used by the vast majority of new crypto investors. Essentially, a custodial crypto wallet iswhere a middleman, such as a crypto exchange, holds your portfolio in a wallet on your behalf. They own thewallet, so they retain control, as you do not have the private keys.

On the contrary, non-custodial wallets put the power in your hands. Upon creation of the wallet, users are providedwith the private key and seed phrase. From that point on, it is their responsibility to ensure their wallet is secure.With non-custodial crypto wallets, investors retain 100% ownership of their crypto portfolio.

Crypto Wallet Options

Storing Crypto on An Exchange

As mentioned, crypto exchange accounts are custodial wallets. They are incredibly easy to create and use because you don’t have to worry about losing access or misplacing the private keys.

Often, these third-party providers have rugged security measures in place to ensure your crypto is stored safely.

However, there are examples of people losing their entire portfolios, such as the FTX collapse.

One major concern about using exchange accounts is that you don’t own the wallet. As the third party hasaccess to the private keys for the wallet, they technically own the crypto, not you.

At any point, the exchange could refuse withdrawal or completely remove the crypto you thought was yours.

Hot Crypto Wallets

The next level of crypto custody is hot crypto wallets. They’re called hot because they’re always live andpermanently connected to the blockchain network.

This live connection comes with pros and cons.

Firstly, a hot wallet often provides the best user experience. Transactions can be completed rapidly with verylittle effort, and you’re in complete control of the private keys.

The key reason for stepping away from custodial wallets is so investors can claim 100% ownership of theircrypto. However, this comes with more responsibility.

You have to ensure you enact effective security measures – mainly protecting and securely storing your private keysand seed phrases.

Additionally, hot wallets are the most vulnerable to hacks and infiltration by bad actors. As they’re stored on an internet-enabled device and always connected to a network, hot wallets are easy targets for crypto theft.

Cold Crypto Wallets

Cold wallets, or offline crypto storage, are more secure but often less user-friendly than hot wallets.

Once again, these are a type of non-custodial crypto storage, meaning you retain ownership of the crypto. However, in contrast to hot wallets, cold crypto storage is offline the vast majority of the time.

The only time you will connect your wallet to the internet and the blockchain is to complete transactions. Therefore, you’re drastically reducing the potential of being impacted by a hack.

One potential risk to note is that cold wallets usually come in the form of an external device, such as a USB-drive orhard drive. This raises the stakes a little because not only do you have to ensure you protect your private keys andseed phrase, but you also have to keep the hardware safe too.

If your hardware is lost or broken, and you haven’t got access to your private keys or recovery phrase, your crypto is gone forever.

Finally, if ease of use and transaction speed are your main concerns, then a cold wallet that you have to plugin before being able to use it might not be for you.

In Summary: The Best Crypto Storage Methods

Everyone’s requirements are different. Some people prioritize ultimate security over usability. Whereas otherinvestors need a hot wallet they can rapidly trade from daily.

Additionally, you should consider if your portfolio is an amount you can afford to lose. The threshold is different foreveryone, but if you can’t afford to lose it, then you need to secure it as best you can.

You’ll find that most experienced crypto investors use multiple wallets of different custody types.

They’ll have an exchange account and hot wallet for day-to-day trading. The volume held in here will be enough foractive trading – an amount they can afford to lose.

However, the vast majority of their portfolio will be kept in cold storage or air-gapped wallets..

Spreading their portfolio enables investors to retain ownership and secure a large portion of their portfoliowhile still having funds freely available to trade in rapidly evolving markets.

If you’re looking for non-custodial wallets that provide institutional-grade security to retail investors – check out Escrypto.

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