Types of Wallets

There are two main types of wallets, custodial and noncustodial.

The simple difference is custodial wallets are held by third-parties that store your keys (like centralized exchanges), while you secure your own keys for noncustodial wallets.

Having a custodial wallet is like having your money in a bank account that you can access regularly but don’t have full control of, while a custodial wallet is like having your money in a wallet in your pocket - you can fully control it but it is all up to you to protect it.

The common advice here is to always use noncustodial wallets for holding your assets, while custodial wallets can sometimes be used for trading and transferring of assets when needed.

For noncustodial wallets, there are two main types - hot and cold.

A hot wallet (aka software wallet) is connected to the internet. While they can be more convenient to use as they allow for easy access and quick transactions, they are also more vulnerable to hacking and other cyber threats. Examples of hot wallets include software wallets on a computer or mobile device and web-based wallets on a cryptocurrency exchange.

On the other hand, cold wallets (aka hardware wallets) are not connected to the internet and are hence considered more secure. These wallets are offline and are not accessible to hackers or other malicious actors. Cold wallets include hardware wallets and paper wallets. Hardware wallets are physical devices that store your private keys offline, such as a USB drive or a portable device. Paper wallets are literally a printout of your public and private keys, which can be stored in a secure location.

In general, it is recommended to store the majority of your assets in a cold wallet, and only keep a small amount in a hot wallet for easy access and quick transactions. Each type of wallets has its own advantages and drawbacks, and it's best to diversify and use different types of wallets for different purposes and use cases.