Cryptocurrency wallets are a place where you keep your crypto assets. They are software, systems, or programs that enable the storage of public and private keys. These public and private keys allow you to send or receive your crypto. It can even allow you to view and monitor your assets.
The public key in your wallet can be sent to your friends and other people so they can pay and send their crypto to you. Think of it like your address where people can send you money. Anyone with your public key will be able to send his or her crypto to you. The private key in your wallet, on the other hand, should never be shared with anyone. It is like the password to your email and when anyone else has it, they can have complete access to your crypto. The public key is used to receive transactions and the private key can be used to send them. Crypto wallets have both. Keys look like random numbers and letters but they are actually derived from hashing functions.
There are different types of crypto wallets and one of the most common ones is the custodial wallets, sometimes called hosted wallets. These are software wallets that are online-based. A third party keeps your keys for you on their servers, including your private key. They let you access them through your account. Therefore, if you lose your key, you do not necessarily lose your crypto, too. Something important to note though is that they can have the ability to spend and access your crypto since your keys are, again, stored in their servers.
Then we have non-custodial wallets or self-custody wallets. These are wallets that don’t rely on a third party. Your crypto is kept safe by having only you keep your private keys. However, if you lose or forget your private key, there is no other way to access your crypto. They just provide the software necessary to store your crypto but the responsibility of keeping your private key safe is all up to you. Non-Custodial wallets also give you access to more advanced crypto activities.
There are also hardware wallets. These are usually USB sticks or thumb drive-sized physical devices that keep your public and private keys for you offline. You use them if you do not trust a third party with your information or being online in of itself. You unplug it, and nobody can get access to your crypto even if your computer is hacked. These devices can get expensive and it might be inconvenient especially for forgetful people since it is easy to lose them. If you lose your device, your crypto is also lost forever.
In terms of security, crypto wallets are categorized into hot or cold wallets. Anything connected to the internet through another company or your own computer that is accessed online or through an application falls in the hot category. Online wallets, including custodial and non-custodial, are hot wallets. Cold wallets, on the other hand, which include the hardware wallet, are those that have to be connected to a computer or written down on paper. Hot wallets will always be vulnerable because hackers are always on the lookout for new ways to access a system through online attacks. In the case of cold wallets, the biggest problem would be losing it and forgetting the private key.
If all you want to do is buy, sell, send, and receive crypto, a custodial wallet is the easiest solution. If you want full control of your crypto activities then you can use a non-custodial wallet. If you want security and take extra precautions, use a hardware wallet.