What is a crypto wallet and what does “custody” mean?
To understand custody, we have to start with defining a cryptocurrency wallet and what seed keys are. First, wallets are digital tools that allow us to store, send, and receive digital assets. There are many different types of cryptocurrency wallets available which I have listed below. Attached to your wallet is your wallet address. Think of this as a type of routing number. You need to know your wallet address so you and others can send you digital assets. In order to access your wallet, you are given a seed key (also known as a private key). These are randomly generated words in a certain order. Never give away this information as this is the code to access your wallet. You’ll never be asked for your seed key and if you are, run! This is definitely an attempted hack.
Hardware Wallets: these are physical devices that store the users private keys. These wallets are considered to be one of the most secure types of wallets since they are offline and are not vulnerable to cyber attacks. Although, if you lose your hardware wallet, those funds are also lost. Popular hardware wallets include Ledger and Tezor.
Software Wallets: These are digital wallets that are stored on a user’s computer or mobile device. There are two types of software wallets:
Hot wallets are connected to the internet and typically used to connect to other crypto platforms exchanges or NFT marketplaces. Hot wallets are most susceptible to hack attacks and thus it is recommended to only keep a small amount of crypto balances in these types of wallets. Examples of popular hot wallets include: Coinbase, Metamask and Phantom.
Cold wallets are offline and because of this are more secure. While more secure than hot wallets, they are still susceptible to cyber and malware attacks because they are kept on a digital device. Examples of popular cold wallets include: Electrum, Armory and Copay.
Paper Wallets: It is very rare to come across paper wallets as this is an outdated form of holding cryptocurrency. For the sake of education, paper wallets are exactly what the name implies. It's a piece of paper with the public and private key printed on it. While not necessarily vulnerable to cyber attacks, if any one gets their hands on it, consider those funds long gone.
Custodial Wallets: These types of wallets are managed by third parties. They hold your seed (private) key. Software wallets can be custodial wallets and are typically found on exchanges. These are convenient for beginners because you do not have to manage your seed or private key information however, they are less secure because the third party holder technically controls your funds so you are relying on them to secure your key information and not freeze your funds.
There are many different types of cryptocurrency wallets available. Choosing the right wallet will depend on your own preference and level of experience with cryptocurrencies.
