Sascha I am confused with all the terms non-custodia, custodial, hot wallet, cold wallet, software wallet, hardware wallet and how they all interlink. Couls you ecplain the dependencies?
indiecryptocoach Thanks for the great question! Your question involves several layers, so let's first look at one layer at a time and then discuss cross combinations: Custodial vs. Non-Custodial Wallets: Custodial Wallets: Someone else e.g. an exchange or other provider holds your cryptocurrency for you. They manage the private keys for you which makes transacting very convenient. All you need to remember is the login and password to that service provider. Non-Custodial Wallets: You are in complete control of your cryptocurrency because you hold the private keys yourself. No third party can access your funds. However, non-custodial wallets can be hot or cold wallets. Hot vs. Cold Wallets: Hot Wallets: These are connected to the internet. They are easier to use for day-to-day transactions but are more vulnerable to hacking. Cold Wallets: These are offline and not connected to the internet. They are much safer from hackers but less convenient for frequent transactions. Software vs. Hardware Wallets: Software Wallets: These are apps or programs that run on your phone or computer. They can be hot if connected to the internet or cold if stored offline. Hardware Wallets: These are physical devices (like USB drives) that store your private keys. They are cold wallets because they store the private key inside the device firewalled from any internet connection. Even you connect these devices via USB to your computer, no one can physically access your private keys from a compromised computer and the internet. Some hardware wallets even avoid any cable connection and only use QR codes via camera. Putting it all together: Non-custodial wallets can be software (hot) or hardware (cold), but you control the keys. The disadvantage of using a hot wallet is the fact that your keys are exposed to the internet and can easily be stolen. Storing your keys on a hardware wallet makes them very secure because the internet is separated from your keys. Custodial wallets are usually hot wallets controlled by someone else (like an exchange). I would not recommend to not store more than pocket money on any custodial wallet. There have been many instances in the past where exchanges were hacked and user funds stolen. Hot wallets are great for quick access, while cold wallets (like hardware) are best for security. One reason many people use hot wallets is for convenience. A hardware wallet adds another layer of security, but is sometimes unflexible and slow if you do many transactions.
