The crypto space has reached a significant turning point, compared to what it was even just about a year ago. Where buying, selling, and trading of money were once considered highly risky and in some cases even a sham, the crypto industry has become more mainstream than ever. New entrants are entering the market every day, regulators’ interest is growing in the space, and both retail and institutional investors alike are getting educated about crypto.
While investing in cryptocurrencies, digital asset self custody is one of the most significant factors to be considered. Although self custody can be an intimidating aspect of digital assets, with the right know-how, it isn’t as complicated as it may seem. Thus, let’s discuss self-custody crypto wallets and the benefits of crypto self-custody.
Self-Custody Crypto Wallet: Hot and Cold Wallets
Every investor has a different need when it comes to crypto custody solutions. For instance, a retail investor might look for an easy and fairly hands-off option. An institutional investor, on the other hand, might want more sophistication and customization. Luckily, there are various self-custody options available in the market such as cold or hot wallets and third-party offline storage in a cold wallet.
For investors who seek absolute control over their digital assets, a self-custody crypto wallet might be the right option. This option will grant you absolute control of your crypto tokens via a private key.
To understand the private key, first, you have to understand a public key.
- A public key is like an email address that you give to people to get emails.
- A private key verifies the digital asset transfer, working as a password for your email.
- In other words, a private key is a well-proportioned yet random string of numbers that gives you access to your assets.
Every private key is associated with a public key or otherwise called the wallet address.
- Public keys and private keys are utilized in unison to make transactions on a blockchain.
- This duo of keys is unique and a majority of self-custody wallets are created with the help of special algorithms.
Note: You must never share access to your private key with others.
With that out of the way, let’s focus again on the self-custody crypto wallet.
There are two types of self-custody wallets: Hot wallets and cold wallets. Hot wallets are also known as software wallets available in the form of mobile, desktop, and online wallets. Cold wallets, on the other hand, store your private key in a physical piece of hardware. They are not connected to the internet and hence, the chance of getting hacked is severally low. However, controlling your own storage might run some inherent risks because there are no financial intermediaries involved. This means that if you lose your private key, your assets are lost forever.
Different Kinds of Self-Custody Crypto Wallets
Since we’ve briefly touched upon the concept of hot and cold wallets, let’s discuss these self-custody crypto wallets in detail.
These are known as hot wallets because they are always connected to the internet. You can use hot wallets either on your smartphone or your laptop. In a totally different option, you could leave the assets on your exchange’s wallet, which is also another subcategory of a hot wallet.
Hot wallets can be both non-custodial and custodial. Those accessed by using your own private keys are custodial and others keys are kept on the host exchange.
Desktop/ Mobile Wallets
A desktop wallet is either kept on your desktop or your laptop. The encouraging thing is that it is completely custodial and you have control over your keys and assets. But, as it is always connected to the internet, your coins are at risk of online hacks and malware that scan your files and look for your private keys.
One of the benefits of a crypto self-custody cold wallet is that it is never connected to the internet and stores your tokens offline. Thus, it avoids some of the main threats that your assets face. However, it comes with its own problems. Let’s discuss how hardware wallets provide security to your coins.
A hardware wallet is similar to a USB drive that holds your private key. But, they are a little more complex than that. Hardware wallets allow you to easily access your digital assets on a blockchain network.
Hardware wallets are a great blend of the convenience of a hot wallet and the security of a cold wallet. For example, if we talk about Ledger Nano, you can complete all your transactions with the device. This means that even though you can access your keys easily, they will never be exposed to an online threat or never leave your wallet.
Even if you lose the device, you don’t have to worry about anything as your digital assets are on the blockchain, not in the device. So, if you lose your device, you can restore access to everything with a recovery phrase from a new device.
The Ledger Nano device is secured with an 8-digit pin that you have to set. This means that if you lose your device, your assets won't be easily accessed if someone else finds it.
Owning digital assets is excellent but having total control over them is something else entirely. So, while investing in crypto, having a self-custody crypto wallet with remarkable security features is a must.