2.1.1. Picking the Right Wallets
In our previous article, Module 1.1.2, mentioned a few wallet types, but we didn’t go too deep.
Now, we will explore them fully so you can choose the wallet that fits your needs, style, and risk tolerance.
a) Hot vs. Cold Wallets
When people say "hot" and "cold" wallets, they’re talking about whether the wallet is connected to the internet or not:
Hot Wallets
A hot wallet is always online.
Because it is connected to the internet, you can easily check your balance, move coins, connect to DApps and swap tokens whenever you want.
Any wallet that stays connected to the internet is considered a hot wallet.
These are typically software-based and include mobile apps, desktop programs, and browser extensions like MetaMask, Trust Wallet, or Phantom.
The biggest advantage of a hot wallet is convenience. You can access your crypto anytime and make quick transactions.
If you want to interact with decentralized applications (dApps), a hot wallet is the most practical choice.
However, this constant connection to the internet also makes hot wallets more vulnerable. If your phone or computer gets hacked, infected with malware, or tricked by a phishing attack, your private keys could be exposed, and your funds could be stolen.
Because of this, hot wallets are best suited for smaller amounts of crypto that you use regularly.
It is similar to the cash you keep in your everyday wallet.
You carry just enough for groceries, a coffee, or a night out, but you would never walk around with all your life savings in your pocket.
Instead, you keep most of your money safe at home or in the bank.
In the same way, your hot wallet is for quick access and spending, while the bulk of your crypto should stay in a more secure place until you really need it.
There are 2 main types:
i) Mobile Wallets
Mobile wallets are apps on your smartphone.
Their main advantage is portability. You can carry your crypto anywhere, pay instantly, scan QR codes, and interact easily with dApps right from your phone.
The main disadvantage is that your phone is always online and can be more easily lost, stolen, or hacked.
ii) Desktop Wallets
Desktop wallets live on your computer.
Their main advantage is a larger, more detailed interface that can offer more features and better visibility.
You might find it easier to manage bigger portfolios or run more advanced tools on a desktop compared to a small phone screen.
The main disadvantage is that computers can also get malware or be hacked, and you need to be careful with software security and backups.
Cold Wallets
A cold wallet is kept offline unless it you're using it.
This means it does not connect to the internet, which makes it much harder for hackers or malware to reach your private keys.
You only connect or access it when you need to sign a transaction or move your funds.
Think of it like this:
Imagine you have a safe at home where you keep your most important documents.
You might take a document out of the safe to show someone, but you never leave the safe itself out in the open or unlocked.
In this case, the cold wallet is your safe.
When you make a transaction with a cold wallet, it’s like taking your document out of the safe, showing it through a tiny window to verify it, then immediately locking it back up.
Your private keys stay protected inside the safe and are never left lying around on your desk where anyone could try steal them.
Cold wallets are best for long-term storage and for holding larger amounts of crypto that you don’t need to move often.
They act like a personal safe or vault, giving you strong protection and peace of mind.
The most common types of cold wallets are hardware wallets and paper wallets:
i) Hardware Wallets:
Hardware wallets are small physical devices, similar to a USB stick.
Their main advantage is strong security.
Because they stay offline, your private keys are kept away from online threats. You only connect the device when you want to sign or confirm a transaction, and even then, the keys never leave the device itself.
The main disadvantage is convenience. You need to have the device with you and physically connect it every time you want to use it.
It also costs money to buy one, and you need to be careful to keep the device and your backup phrase safe.
ii) Paper Wallets:
A paper wallet is simply a piece of paper with your private and public keys (or QR codes) printed on it. You can generate one using trusted tools like BitAddress.org and store it in a safe place.
While extremely secure from online threats, paper wallets are less practical for frequent use and can be easily lost, damaged, or stolen if not stored carefully.
b) Custodial vs. Non-Custodial Wallets
When choosing a crypto wallet, another important factor to understand is whether it is custodial or non-custodial.
This is all about who actually controls your private keys: you or a third party.
Custodial Wallets
A custodial wallet is a wallet where a third party, usually an exchange(CEX), holds and manages your private keys for you.
Popular examples include: Binance, Coinbase, Kraken, etc.
You log in with a username and password, and they take care of the security behind the scenes.
The main advantage of a custodial wallet is simplicity. You do not have to worry about managing or backing up your private keys yourself.
If you forget your password or lose access to your account, you can usually contact the service and recover it, just like with a regular bank or email account.
Custodial wallets are a common choice for beginners who want an easy way to start using crypto without the pressure of full self-custody.
However, the biggest disadvantage of a custodial wallet is that you do not fully control your crypto.
You are trusting the service to keep your keys safe, and if they get hacked, go bankrupt, or decide to freeze your account(usually KYC reasons), you could lose access to your funds.
Analogy:
A custodial wallet is like keeping your money in a bank account.
The bank holds your money for you and manages all the security behind the scenes.
You can check your balance online, make transfers, and withdraw cash whenever you need, but you have to trust the bank to keep everything safe.
If the bank freezes your account or faces problems, you might not be able to access your money right away.
Non-Custodial Wallets
A non-custodial wallet is a wallet where you hold your private keys yourself.
You are fully in charge of your crypto, and no one else can move or freeze your funds without your approval.
The main advantage of a non-custodial wallet is control. You have true ownership of your assets and can use them however you want, whenever you want.
No company or exchange can block your transactions or stop you from withdrawing.
The main disadvantage is responsibility. If you lose your private key or recovery phrase, there is no customer support to help you get your funds back. You must keep your backups secure and know how to protect yourself from scams and attacks.
Less responsibility = Less risk
More responsibility = More freedom
Non-custodial wallets come in many forms, including mobile apps, desktop programs, and hardware wallets.
They are the choice for anyone who wants to experience true self-sovereignty and the original spirit of crypto: being your own bank.
Analogy:
A non-custodial wallet is like keeping cash in a safe at home.
You have full control and can take it out or use it anytime without asking anyone. No one else can touch it or lock you out.
But it also means you are fully responsible for keeping it safe.
If you lose the key to the safe or someone steals it, there is no one to help you recover your money.
Picking the right wallet and knowing how to pick it is very important.
It is mainly about choosing how much control and responsibility you want to have.
You now know the difference between hot and cold wallets, and you understand what it means to choose custodial or non-custodial.
You have seen how each type has its own strengths and trade-offs.
The most important thing is to choose a setup that matches your goals and comfort level.
You do not need to rush into buying crypto or locking in a permanent choice right now.
Start slow, experiment safely, and get familiar with the tools first.
In the next module, we will take these ideas further. You will learn key wallet security practices and understand the most common threats to your wallet, so you can protect your assets with confidence.
Take your time, explore, and build confidence as you go.
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This article is for absolute beginners, so judge the content based on how well you think your parents would understand it.
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