Increasingly more people are getting into crypto, and one of the questions is what’s the best way to store it, and what are things to take into consideration when making this decision.
Crypto wallets are no different than our normal fiat currency wallet: it’s basically a place where you can safely store your assets.
Now there are a few concepts that you should get familiar with. Let’s take a look!
Public & Private Key
All wallets are composed of 2 keys:
Public Key is like an address, or you can think of it as your bank account number. It’s the piece of information you will share with people if you are expecting them to transfer money to you. Similarly, in crypto, you share your public key for the same purpose.
Example of a public key: 1DSsgJdB2AnWaFNgSbv4MZC2m71116JafGPrivate Key, if we continue with the bank analogy, is like the password to access your account to manage your money, and the security pin number required when you are going to make a payment or move money around.
Example of a private key: E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
Depending on the type of wallets, the actual keys might look a bit different. Sometimes, instead of a long string of combined numbers and letters, the private key can be a combination of random words in a specific order.
As their name suggests, the Public Key by its nature is the one you should be completely ok sharing with people, whereas the Private Key, you should be the only one that knows about it.
Access vs Ownership
Imagine you are going on vacation, so you give your friend a key to your house in case of any emergency. Your friend now has access to your house, and he/she can throw a party in it while you are gone, without your consent.
Sharing access to your assets with other people means that they can make use of them if they choose to. Therefore, if someone else has access to your crypto wallet’s private key, you should pretty much consider it compromised.
Ownership, on the other hand, is when you are the only one that has access to your crypto, no one else.
The main difference here is the Trust factor.
If you have ownership of your own crypto funds, then you don’t need to worry about other people’s behavior. However, if you are giving away access, then you will need to trust them.
Now, the whole point of blockchain and decentralization is to eliminate the trust factor the traditional financial system requires us to put in companies and intermediaries, and ensure the power and sole ownership of your own assets remain with you.
Following this train of thoughts, if you really value what crypto stands for, you should be aware of these distinctions when choosing wallets.
Custodial vs Non-Custodial
Most of the time, we simply don’t know that we are sharing our access. A good way to determine this factor is to check if the wallet where you are holding it is Custodial or Non-Custodial.
Custodial means there is a third party that takes “custody” of your assets. By definition, if a wallet is custodial, you are sharing that access with the company that is providing such wallet. Typically, your public and private keys are being hosted in this company’s server, so if one day they wanted to, or if their network is attacked, then your crypto might be at risk .
If a wallet is Non-Custodial, then it means that you are the only person that has complete ownership of what’s stored there. By putting you in control of 100% of your crypto, also means that your responsibility is proportionally higher, as you need to ensure you don’t lose your private keys, or don’t save it in places that other people might be able to get to it.
Software vs Hardware Wallets
There are mainly 2 types of Wallets:
1. Software wallet
Because crypto is only purchased online, by default, everytime you buy crypto, it will first be stored in a Software Wallet, such as the exchange platform you used, be it Coinbase, Binance, crypto.com, etc.
Now, software wallets can be custodial or non-custodial.
Exchange platforms usually are custodial, which means they keep your crypto for you, just like a bank keeps your money for you. It’s easier and more convenient for beginners, but again, it will somewhat continue to represent similar centralization problems crypto is trying to solve.
On the contrary, software wallets like Metamask, for example, are non-custodial. It’s actually a google plugin and you can easily install it and create one. With sole ownership and increased responsibility, you will also be able to access more advanced crypto activities, such as Yield Farming, lending, borrowing, etc.
However, you would need to be more aware of potential security risks.
2. Hardware wallet
A hardware wallet, such as Ledger, will normally be non-custodial, and highly secured. They look like a USB, and will require a complex password to access. You can hold it just like you hold your physical wallets or credit cards.
Some of the challenges though are:
there is always the concern of you losing it, just like you can lose your credit card,
hardware wallets can get quite pricy (normally around $100),
even though new features are being built and included, there are more limiting options with what you can do with your crypto in terms of putting it to work for some passive income such as staking.
Final Thoughts
Choosing where to store your crypto is a very personal decision. Depending on your goals and what you’d like to use your crypto for, or which features you’d like to access, it can sometimes be a trade-off among different factors, including ease of use, user responsibility, security, and ownership.
It can even be a combination, and you can have different crypto wallets as well.
Whichever one you go for though, just be aware of the concepts shared in this article, so you can understand the benefits and risks of each option and make an informed and educated decision that you feel comfortable with.
Leave a comment below with what you would like me to break down and explain in the coming issues!