Crypto wallets: 5-minute guide

In addition to whether they are hot or cold, crypto wallets can be classified according to who ultimately controls the keys.

There are two main categories here: self-custody, and third-party custody (often described as custodial wallets).
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Benefits of custodial wallets

If a user holds crypto in an exchange account or in the vault of a crypto custodian, their private keys are ultimately controlled by that third party.

For individuals and businesses new to crypto, the user-friendliness of such platforms can be an accessible way to enter the digital assets sphere.

The convenience of outsourcing key management can make this tempting as an option for longer-term storage as well, but there are downsides to this approach, as we shall see.
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Benefits of self-custody

The phrase “not your keys, not your coins” is often used in relation to third-party key management options.

Crypto is decentralized by design, so it could be argued that placing key management in the hands of third parties goes against that core philosophy.

There are also practical considerations: centralized exchanges with online interfaces are vulnerable to hackers in a way that self-custody cold storage options are not.

Exchanges have also been known to freeze access to funds for reasons related to liquidity (in the case of sudden market volatility for example), or for risk management.

Individuals and business users alike should carefully consider the balance between convenience and security when it comes to their crypto custody options.
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