What is a crypto wallet?

If you understand email, you already get the gist of crypto wallets. Just as you can send, receive, and manage messages in your email, a crypto wallet acts like the headquarters for your crypto assets.

You can open up your crypto wallet anytime — not only to view your assets, but also to send, receive, use, deploy, stake, and manage your holdings. Through your wallet, you might exchange crypto with friends, family, or businesses who have a crypto wallet. A crypto wallet also allows you to access decentralized apps and connect to web3 marketplaces and games.

In a word: control. When you receive crypto, typically, an entry is recorded on the blockchain stating that you now own a certain number of units of that particular coin. A wallet is what allows you to access and manage your crypto.

Wallets generally fall into two categories: custodial and non-custodial wallets.

A custodial wallet is one where your private key (aka the password to your wallet) is maintained by someone else. That usually means you’re storing your crypto through an exchange or trading platform, like Robinhood, which are often subject to legal and regulatory requirements to protect those assets. You can then access the coins in your wallet by logging on to the exchange or platform. (It might seem similar to logging on to an online bank account.) With a custodial wallet, there's less risk of losing your private key, and there’s less of a need for you to maintain a backup. The other major benefit is, if you ever lose or forget your password, you won’t necessarily lose your crypto. However, you can only access the crypto features and assets available within the platform you are using.

A non-custodial wallet (also referred to as a web3 or DeFi wallet) is one where you personally hold and maintain the private key. With a non-custodial wallet, you have full control over your crypto, but you also have more responsibility. You alone know the private key that unlocks your wallet.

In addition to having complete control of your assets, there are other benefits to a non-custodial wallet, including access to the web3 economy. Refresher: web1 was static and read-only (think GeoCities pages) and web2 is the interactive web you use today (dynamic, user-generated social sites like Facebook, wikis, etc.). Web3 is the next phase: decentralized and owned by the public or its users, instead of by a Big Tech intermediary or a centralized party or platform.

With a non-custodial wallet, you could access the world of decentralized applications (or “dapps”) that enable and power things like:

• DeFi (decentralized-finance apps): Instead of using a third party like a bank to make financial transactions, you can digitally exchange money with people and businesses directly.
• Staking: Staking allows crypto holders to monetize certain types of crypto in their wallet. In exchange for allowing your crypto to be used to help validate transactions, you receive rewards.
• NFTs (non-fungible tokens): These uniquely identified units of data can come in the form of digital art, gaming avatars, and other collectibles from online marketplaces. You can store and trade them directly within a non-custodial wallet.
• Web3 gaming: In web3 games, which are built with blockchain technology, players can earn cryptocurrency, NFTs, and other game assets, and also trade their assets directly with other players in virtual markets.

Deciding between custodial and web3 wallets is sort of like choosing between riding in a spin class and riding your bike outside. As in a spin class, when you have a custodial wallet, someone else is in control. While riding your bike outside gives you more freedom and access to more spaces, you have a responsibility to be cautious and safe, and never, ever forget your bike lock.

Your non-custodial wallet will typically also come with a seed phrase, or recovery phrase (note: other security and access methods may be offered). This phrase consists of 12 to 24 randomly generated words that allow you to access your wallet if you lose your private key. Your seed phrase is typically generated when you’re setting up your wallet, and it’s just as important to safeguard as your private key, because anyone with your seed phrase could access your wallet.

On the plus side, a non-custodial wallet is a good option for access to web3 applications. And unlike some custodial wallets, which may have fees, you have complete freedom with your funds.

But you don’t necessarily have to choose: it’s possible to have both types of wallets.

Hot wallets are online, meaning they connect to the internet, and you can typically run them on your computer or mobile phone. With hot wallets, it’s generally more convenient to access and trade cryptocurrencies. But these wallets are also more vulnerable to cyberattacks or fraud by people who want to steal crypto assets.

Cold wallets are offline, meaning they’re not connected to the internet. They’re typically held in some sort of physical device, like a flash drive or even a piece of paper that contains your private key, so your private key is never online. Provided you store your device somewhere safe, there is less of a chance of theft, because someone would physically need to possess your cold wallet to steal your funds. Though they might be less convenient than hot wallets, cold wallets are generally more secure.

Here are a few tips on wallet security:

Custodial wallets

• Keep your passwords safe.
• Look into whether a password manager and multi-factor authentication (MFA) are available and right for you.
• Protect your phone number from SIM-swapping scams.
• If you think your password has been compromised, change it immediately and contact the platform you’re using.

Non-custodial wallets

• Keep your seed phrase secret — sharing your key or seed phrase with someone else gives them access to all the crypto in your wallet.
• Store a few backup copies of both your private key and your seed phrase in different, secure locations.
• If you think your wallet has been compromised, move your funds to a new wallet immediately.

Security best practices

• Be cautious of anyone who asks you to download screen-recording software.
• Beware of “coaching” scams, where you’re asked to send crypto to a third party to set up mining or staking operations.
• Be suspicious of any unknown NFTs or other assets airdropped to your non-custodial wallet.
• Before signing a transaction with your wallet, be sure to check the transaction details. It’s possible for hackers to access your funds if you sign a transaction, so only approve transactions if you trust the sender.
• Above all, if you ever receive an offer that sounds too good to be true, it probably is.