The crypto community was once again reminded this month of its most central maxim: “Not your keys, not your crypto.” As bitcoin and the broader crypto market have experienced severe drawdowns, Celsius, a large, custodial crypto lender, has halted customer withdrawals citing “extreme market conditions.” Meanwhile, Binance temporarily halted BTC withdrawals due to a “stuck transaction causing a backlog.”
So now seems like a particularly good time to take a step back and re-access how to HODL crypto. While “Not your keys, not your crypto” is technically correct, this approach is likely not the best strategy for everyone. In contrast, most high net-worth individuals and institutions have security needs beyond what’s offered from battle-tested, cold-storage wallets.
The point is individuals must think for themselves when determining the best crypto wallet(s) for their unique needs. So, let’s consider the basic wallet types and considerations:
Crypto Wallet Types & Considerations
Hot Wallets vs. Cold Wallets
- Hot Wallet: Always connected to the internet. Takes the form of a software wallet on a computer or smartphone (e.g. Guarda, MetaMask, etc).
- Cold Wallet: Exists offline. Takes the form of an external USB or Bluetooth device (e.g. Ledger Nano X).
Custodial Wallets vs. Non-Custodial Wallets
- Custodial Wallets: Third-party has possession of users’ private keys; and therefore has ultimate control over the assets (e.g. Coinbase).
- Non-Custodial Wallets: Users have possession of their private keys; and therefore users have ultimate control over their assets (e.g. Bitgo, Ledger Nano X, etc).
Crypto Wallet Considerations
- Control – Ability to access, transfer, and trade assets at any time.
- Convenience – Ease to access, transfer, and trade assets.
- Security – Degree of protection against mistakes, losses, hacks, and theft.
The 4 Quadrant Crypto Wallet Spectrum
These wallet types and considerations overlap and relate with each other. Thus, we can perceive everything in a 4 quadrant spectrum:
Let’s analyze each quadrant.
Quadrant 1 – Custodial Hot Wallets
Custodial hot wallets maximize convenience over all else.
- Convenience – Anyone who has a smartphone and wants to buy crypto (but just doesn’t know how) probably already has an app ready to go. Cash App, Venmo, and PayPal come to mind. These apps make crypto very easy to purchase and extremely liquid. Users can (generally) trade between cash and crypto twenty-four-seven.
- Control – Because corporate third-parties have possession of private keys, users are spared from making fatal mistakes and forever losing all their assets. Something never obtained (private keys) can never be lost. Users can always call customer support if they lock themselves out of their accounts.
- Downside – Third-parties having possession of private keys is they can ultimately do whatever they need with users’ assets. Those who dismiss this risk should see the links at the top of this article, and Coinbase’s SEC disclosure stating its right to withhold users’ assets in a bankruptcy event, thereby regarding users as general unsecured creditors. Companies will take extreme measures to survive when faced with a liquidity crisis.
- Security – Although 2FA has substantially helped, custodial hot wallets are still less secure than…
David learned about bitcoin in 2015 and has closely followed the crypto industry since then. His professional interests center around bitcoin, layer-one blockchain protocols, decentralized finance, and clean energy. An attorney by trade, David has held licenses to practice law in the State of Hawaii and in US federal courts.
