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April 27, 2022

An introduction to different types of crypto wallets

When you’re new to crypto, there are a lot of new concepts and terminology to wrap your head around. Things might feel confusing, but don’t fret, we’re here to help!

Through a series of informative articles, we will guide and help you get started. In this article, we’ll discuss crypto wallets, one of the most essential topics to understand.

MetaMask

What is a crypto wallet?

A wallet is used to access your cryptocurrencies in order to send or receive them. Unlike a wallet filled with cash, a crypto wallet doesn't technically "store" your crypto, as crypto is stored on the blockchain. `
The wallet, however, lets you access and interact with the crypto you own securely via passwords and private keys.

There are various types of wallets

The first distinction is based on how your “private keys” are stored, with two distinct types of wallets: 

  • Self-Custody, also called non-Custodial Wallets; and
  • Custodial Wallets

The second distinction is around whether the wallet is connected to the internet, with there being:

  • Hot Wallets, also referred to as online wallets or browser wallets
  • Cold Wallets, also known as  hardware wallets

We will explain all these concepts below.

Custodial wallet on an exchange

When you use a custodial wallet, a third party holds your private key; you can think of your private key as a type of password. It’s similar to traditional finance, where a bank stores your private key. When you get started with crypto, you’d typically hold most of your funds in this type of custodial wallet hosted by an exchange like Binance or Kraken. These companies, of course, go to great lengths to keep your funds secure, but if there is ever a security breach, your funds could be in danger. For example, if someone steals your password and you don’t have two factor-authentication enabled, hackers could get access to your funds held on an exchange. 

A significant advantage to holding funds with an exchange is convenience. If you ever lose access to your password, you can typically reset your password in order to regain access to your funds.

Non-custodial wallet on your phone or browser

With a non-custodial wallet, you are responsible for your crypto assets and private keys. In this case, the private keys are stored on your device, making it more secure than a wallet on an exchange that has a single point of failure. 

The biggest company in the non-custodial wallet space is MetaMask, which offers a browser wallet and mobile app to store your crypto funds. You can add funds to these types of wallets from most exchanges. For example, if you’ve bought cryptocurrencies on Kraken, you can send it to your MetaMask wallet address from the Kraken app.

If you lose access to your device and you’re already logged into MetaMask on your browser, hackers could get access to your funds, so make sure to protect all your devices with a password. The other thing that’s important to note, is that if you lose access to your device, you will still be able to import your wallet to a new device. You can do so by inputting the seed phrase, which is shown to you the first time you set up your wallet. Because the seed phrase allows you to import a wallet into a new device, it’s crucial to never share it with anyone (see more security tips here). 

If you lose your seed phrase, there will be no way to regain access to your funds, as your private key is only stored with you. That means if you lose access to your device or forget your password and have not stored your seed phrase somewhere safe, then there will be no way of getting your money back, it could be lost forever.

At Koia, we allow you to link wallets such as MetaMask to purchase our Fractions, or if you don’t yet have a wallet set-up, we let you create a new wallet simply with your email address using our partner, Magic. The wallet we create is a non-custodial wallet, and the private key is stored on your device tied to your email address.  

Non-custodial hardware wallet

Both two options discussed above, the custodial wallets on an exchange and non-custodial wallets on a browser, are referred to as “hot wallets”, pointing to the fact they are always connected to the internet. A non-custodial “cold wallet” or hardware wallet is an even safer option. 

Like a non-custodial browser wallet, you are the one holding the private key. The difference, in this case, is that the private key is stored on a USB-like physical device. Some of the biggest companies in the hardware wallet space include Ledger and Trezor. Since the private key is stored offline in this case, there is less chance of a virus or malware, which can affect a wallet connected to the internet. 

If you lose access to the wallet, you can regain access by buying a new physical wallet and using the seed phrase to unlock your new wallet and import your funds. Moreover, if a thief steals your wallet, they cannot simply access your funds as a password protects the hardware device. 

Summary

Pros and cons of non-custodial and custodial crypto wallets

You should now have a good understanding of different types of crypto wallets. When making your first foray into the crypto world, getting started with a user-friendly crypto exchange makes a lot of sense.  However, once you start accumulating significant amounts of funds or want to start going deeper and using applications such as NFT marketplaces, you often need a crypto wallet to connect and add an extra layer of security.  And while at first glance things might sound technical or complicated, we can assure you that if you’re able to set up a social media account, you’re able to set up a crypto wallet!

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At Koia, we allow you to buy, trade and collect fractions of iconic assets, starting from $60. Our experts make sure to source and buy the best assets, and we take care of authentication, storage and insurance. All of the benefits, with none of the hassle.

The articles and information made available on Koia are provided for information and educational purposes only and do not constitute financial advice. You are advised to consult with an independent financial advisor for advice on your specific circumstances.