personal wallets – Forex Academy

Introduction

In the previous crypto guides, we have understood what a cryptocurrency wallet is, and its essential purpose. We have also understood the types of crypto wallets and ranked them in terms of security. In this article, let’s see how they are classified.

Quick Recap

As we know, storing cryptocurrencies essentially means storing the corresponding ‘Private Key’ of the crypto coin. Anyone with that key can have control over the respective cryptos. So it is vital to store the private keys in a safe and secure place. Cryptocurrency wallets serve this purpose. There are many types of wallets, and all these types are classified into Hot Wallets & Cold Wallets.

🔴 Hot Wallets

Wallets that are directly connected to the internet are known as Hot wallets. This means the private keys of a coin are stored in a computer, smartphone, or tablet with an internet connection. This kind of wallet is user-friendly and pretty seamless to use as your private keys can be easily accessible to authorize a transaction.

Having said that, hot wallets are not that secure as they are vulnerable to computer hacks. With the advent of technology, there are many hackers out there who can steal private keys despite being stored securely.

🔵 Cold Wallets

In this storage, the private keys are saved on an electronic device not connected to the internet. Even if the key is noted down on a piece of paper and stored it securely, it can be considered as cold storage. It is less convenient to use cold wallets as it is difficult to access your private keys. But these wallets are way too safer the hot wallets.

Which type of wallet is best for me?

Well, it depends on the volume and frequency of the transactions you make. Hot storage is recommended for those users who transact cryptos regularly. Even then, make sure not to store a huge amount of cryptos in hot storage. For typical investors, who are planning to hold their large sum of cryptos for long, they should consider cold storage as it is way too secure.

Personal vs. Hosted Wallets

There are different credible wallet service providers in the market. These providers will take the responsibility of storing your cryptocurrencies. Again, there are personal wallet service providers and hosted wallet service providers. The personal wallet providers are those companies that provide software to store private keys. They do not handle the private keys of their users in any way.

But hosted wallet service providers store the private keys of their users in secured servers. It is always recommended to use a personal wallet over a hosted wallet if you are handling a significant amount of cryptos. Having said that, hosted wallets are way too convenient as transactions can be processed swiftly here due to the ready availability of private keys.

It is essential to take a lot of precautions while storing your cryptos. Let us know if you have any questions in the comments below. Cheers.

If you’re crypto user, you may have heard of the expression “Not your keys, not your coins.” This phrase summarizes the debate among crypto users about which is a superior crypto wallet – personal or hosted. It originates from the idea that if your crypto is stored in a wallet whose crypto key you don’t possess, then you can’t truly claim ownership over those coins.

Difference between Personal and Hosted Wallets

A cryptocurrency wallet is necessary if you want to store, trade, or spend crypto. There are many crypto wallet providers in the market that can help you interact with crypto safely and securely. Some crypto newbies get confused about whether these providers offer personal or hosted wallets.

A personal wallet, also known as a non-custodial wallet is one that allows only one person to know and possess the private key – the owner. Also, the wallet provider does not control your crypto holdings.

By contrast, a hosted wallet, a.k.a a custodial wallet allows a third party to know your private keys without revealing them to you. The provider controls your crypto – i.e. sending, receiving, and storing it on your behalf. Thinks of a hosted wallet as akin to a bank – it stores your cash and will not give you the keys to access the vault, but it has promised to avail the money to you upon request.

The Caveat

Both wallets may look like and function the same way, but the ramifications of using either are polar opposites. For example, the question of who is responsible if crypto funds are lost or stolen falls on whoever held the keys.

However, crypto holdings that have more than one private key present the conundrum of who is liable in case of loss. (Some wallets require more than one party to hold the private keys. One key could belong to you, the other to the hosting service, and the other to a trusted third party. Such wallets are known as multi-signature wallets.) It’s important that before you commit to anyoneany one wallet provider, you clarify if it’s you, or your wallet provider, who controls the keys.

Now, both types of wallets come with their perks, but each one also comes with its cons. Let’s take a look at each’s benefits and disadvantages below.

Pros and cons of personal wallets

Pros of Personal Wallets

You have full control over your crypto funds. You won’t have to submit a request every time you wish to send or spend them

You get to choose your fees – either the default fee or a higher fee depending on how fast you want a transaction to be

Your funds are safe from hacking, phishing attacks, and other vulnerabilities associated with the internet (which is where most hosted wallets are stored)

You are not subject to any Know Your Customer (KYC) procedures. (KYC is the process of verifying the identity of a customer and assessing their suitability for services)

You can store your coins offline, which is a far safer storage option especially for large coin holdings

Cons of Personal Wallets

Losing your private key when you had not backed it up means your crypto funds are lost forever.

Your funds are at risk of being stolen if your device, e.g., mobile or computer, is compromised by a virus or other type of malware

Pros and cons of hosted wallets

Pros of Hosted Wallets

Your wallet provider can help you recover your funds if you make a mistake, e.g., sending funds to a wallet that’s no longer supported, forgetting your login details, and so on

Some wallet providers allow you to transfer funds free of charge to users of the same wallet

You can access your funds more conveniently whenever you want to send or transact in crypto

Some hosted wallets provide a backup fund, like insurance, to compensate customers if your cryptos are lost as a result of a mistake on their end.

Cons of Hosted Wallets

Some wallet providers are known to freeze/ confiscate customer funds as a result of perceived illegality on the customer’s end

You can be subjected to KYC procedures which may reveal too much of your personal information

Some wallet providers will charge you extra fees as a way for them to gain profit

Your wallet is susceptible to hacking, resulting in your KYC information and funds being compromised

Conclusion

Now that we’ve dissected the meaning behind hosted and personal wallets and the perks and shortcomings of both, it’s up to you to determine if “Not your keys, not your coins,” rings true after all. The fundamental difference between personal and hosted wallets is that in one type, you’re in full custody of your crypto, while in the other, the coins are indeed yours, but you don’t have complete control. Before you decide on a wallet, do your research and determine which type of wallet meets your needs.