Bitcoin wallets generate & store a user’s keys, allowing them to easily send/receive bitcoin, track their transaction history, & check their balances.
Wallets are in the form of hardware devices, software applications, & online, custodial services. In this blog, we explore the different types of wallets and their pros & cons.
Types of Bitcoin Wallets:
1) Custodial Cold Storage
The custodian keeps its users Bitcoin in a cold storage facility that is physically stored in military grade vaults (Class 5 IPS containers) with non-mechanical locks that require multi-person authentication. They also use Bitcoin’s native multi-signature system so they can identify who authorized a transaction.
2) Custodial Hot Wallet
A custodial hot wallet is managed by a third party, reducing the user’s control and requiring permission to initiate transactions. Custodial hot wallets may be easy to use. However, the connection to the internet can introduce vulnerabilities.
3) Non-Custodial Cold Wallet
A non-custodial cold wallet allows a user to manage funds and create transactions offline. Cold wallets are protected against digital threats, but not physical threats. Cold wallets require greater technical experience.
4) Non-Custodial Hot Wallet
A non-custodial hot wallet removes the counterparty risk associated with custodial wallets, but maintains the convenience and vulnerability of a hot wallet. The user is directly responsible for the security of the wallet.
As we see above, a custodial wallet is a wallet wherein the user’s private keys are held by a third party, ex. an exchange. The third party has full control over the user’s funds, while the user only has permission to send and receive bitcoin.
Source : Google
Whereas, Non-custodial wallets give the user full control over their funds and the associated private keys. By using a non-custodial wallet, a user is their own bank; they can initiate transactions, & are responsible for the security of their wallet, protection of their seed phrase.
Source : Google
A Bitcoin wallet is necessary for storing private and public keys, which are used to send/receive transactions. Different types of wallets of varying levels of security and ease-of-use:
- For the #HODLers
If security and long-term storage is a user’s primary goal, then a cold wallet is a better option than a hot wallet.
- For the traders
For users who want to make frequent and fast transactions, without being solely responsible for the security of their wallet and seed phrase, a custodial hot wallet may be their preferred option.
Although the above points specifically mention Bitcoin wallets, the concept of wallets is more or less similar to almost every other cryptocurrencies with a few alterations based on their native token rules and network related specifications.
