With the market starting to take a turn to the upside over the past 2 weeks, I have had more and more people ask me about hot cryptocurrency wallets, and what the heck they are. In a previous article we touched on a few aspects about hot wallets versus cold wallets (and warm wallets), then we looked at custodial wallets as a slightly deeper dive on hot crypto wallets. To further flesh the topic out here, there are some aspects of custodial wallets that I want to cover with you.
What is a Custodial Wallet?
To reiterate the point made in the previous article, a custodial wallet is one that you don't control the private keys for. These are controlled by some other entity, such as an exchange. These are quite different from a hardware wallet, also known as a non-custodial wallet; a hardware wallet is my preference for storing my private keys.
A quick side note for any newbies, these are called wallets, but they aren't really wallets. Maybe the post 'A Simple Explanation of How Bitcoin Works' will help provide some context.
While I'm talking with our newer members of the crypto community; don't get lured in by a whole heap of shiny garbage with no substance behind it. There are a lot of scams popping up, some of which we have had an interesting time with here.
But, seriously, let's get back to the point. There are some pros and cons surrounding custodial wallets. The list below is not by any means exhaustive, but the more common pros and cons of these types of hot cryptocurrency wallets could be summed up in the following points:
| Pros | Cons |
|---|---|
| As long as you have access to the internet you can trade with your crypto any place, any time. | The custodian has quite a lot of power over your wallet and the money in it, they could easily take over full control. |
| The risk of losing your private keys is much lower than if you were relying on a printed copy. | The authorities can interfere, it only takes a court order for you to lose your crypto. |
| There's normally no need to download any software to your computer or device. | If the custodian's site or service gets hacked you can lose all of your crypto. |
Using Cryptocurrency Exchanges
When you choose to diversify your portfolio and move into a broader range of crypto you will begin to find that the requirements for hot cryptocurrency wallets tends to get more and more complicated. It is easy for many to draw some parallels here with banks, however, they are not completely appropriate in my opinion.
Are Cryptocurrency Exchanges Like a Bank?
A cryptocurrency exchange will not guarantee any funds held within it. If you want to move to a decentralized economy and have full control of your own money, it comes at a price, and that price is that you are 100% responsible for your own money.
A cryptocurrency exchange is not a bank, and for all of the imperfect mechanisms of 'guarantees' that banks may currently have in certain jurisdictions, there is nothing of this nature with a cryptocurrency exchange. This is why it is imperative that you learn how to store, protect, and transact safely with your wealth in this new economy.
Examples of exchanges that operate custodial wallets can be found on sites like KuCoin, Binance, and Huobi. They hold your crypto for you in a wallet they ultimately control. This is a bit too risky for my liking when it comes to long-term storage of crypto assets. Get them off the exchanges and into hardware wallets like a Nano Ledger, or a Trezor hardware wallet where they are not exposed to the sorts of malicious attacks that exchanges can be.
With cases such as the Bitfinex hack in 2016 that saw 120,000 BTC slip away into some hacker's account, Bithumb losing 1.2 Billion Won in a hack in 2017, Cryptsy losing more than $5 Million in LTC and BTC in 2016, and Coinckecl losing $534 Million in NEM in January of this year I think that the bold underline drawn here is emphasis enough that you need to move your money off the hot cryptocurrency wallets on exchanges sooner rather than later.
This was originally posted on my blog at Deeper Dive Into Hot Cryptocurrency Wallets and shared here to add value to the Steemit Community.
Fore more articles in the cryptocurrency space, check out the following:
Is Crypto Risking Manipulation? Goldman Sachs Offering Bitcoin
How Does Bitcoin Work?
What is a Custodial Cryptocurrency Wallet?
Is storing your private key on a physical Bitcoin the best Bitcoin wallet protection?
Hot or Cold; What is the Best Bitcoin Wallet?
Is It Possible To Hack Bitcoin?
Which are the best Cryptocurrency Exchanges?
Should I Buy Bitcoin - How to Guide for Fiat to Crypto On Ramps?
What is a Cryptocoin Exchange?
Investing In Bitcoin – Why You Should Have Multiple On Ramps
Starting with Bitcoin - Encrypted Email and 2FA
Will Bitcoin Replace FIAT Currency?