Today, we’ll be exploring the main types of Bitcoin wallets on the market, so you can select the one that works best for you.
Bitcoin wallets, which can be either custodial (third-party-controlled) or non-custodial (self-controlled), come primarily in the form of either a software program or a physical hardware device. For those seeking maximum security, “multisig” (ie multisignature) options can also be used to disperse points of failure across multiple parties for increased security.
Custodial vs. Non-Custodial Bitcoin Wallets
All bitcoin wallets fall into one of the following categories: custodial or non-custodial.
Custodial wallet: A wallet owned and operated by a third party, which manages your keys on your behalf.
Custodial wallets are where most Bitcoin journeys begin, as exchanges fall into this category. Most serious bitcoiners remove their funds from these platforms immediately to insure self-custody, but some are willing to take on that additional third-party risk in exchange for faster trading flexibility, convenience, or interest rewards via lending services.
Any exchange or lending service such as Coinbase or Kraken are examples of a custodial wallet.
Custodial wallet benefits:
- Trading flexibility
- Ease of access to lending programs
Custodial wallet limitations:
- Counterparty risk
Non-custodial wallet: A wallet owned and operated by yourself. In other words, you hold and custody the wallet keys.
While custodial wallets contain essentially the same flavor of counterparty risks as the traditional banking system, non-custodial wallets allow you to “be your own bank,” and make the most of bitcoin’s potential as the ultimate tool for self-sovereignty.
With a non-custodial wallet, as long as you keep your private key/seed phrase safe, your wealth is fully secured by you and you only. Some examples include Samourai, BlueWallet, Ledger's Nano line or the Trezor One.
Note: digital wallets and hardware wallets are also often referred to as “hot wallets” and “cold wallets” respectively. An easy way to remember this is that when you’re on the internet, your computer is “hot.” Your hardware wallet on the other hand, will be “cold” when it’s stored offline, away from any internet connection.
Non-custodial wallet benefits:
- Maximum security
- No counterparty risk
Non-custodial wallet limitations:
- Impractical for traders
- Requires higher level of comfort with nascent technology
Since non-custodial storage is the preferred method for those looking to hold their funds for the long-term, we’ll be taking a biased lean toward these options.
Of the non-custodial options, digital/hot wallets are the best choice if you plan on transacting your Bitcoin occasionally. Most modern options have sleek interfaces that make it a breeze to facilitate payments using either manual copying/pasting of addresses, near field communication (NFC), or by scanning a QR code, while only sacrificing a small amount of security versus a hardware wallet.
Digital wallets are often mobile first, which makes them a great choice for making Bitcoin purchases on the go.
Hardware wallets are the gold standard for private key storage. As their alternate name “cold wallets” hints, they are not connected to the internet. The tradeoff for using them is fairly self-explanatory: higher security from potential hacks, but less flexibility for making transactions over the web.
Observe one of the most popular hardware wallets on the market today, the trusty Ledger Nano S:
As you can see, it’s more or less a fancy-looking USB drive, with the sole function of keeping your bitcoin private keys safe and sound from the Wild West of the interwebs.
Now, just because it isn’t connected to the internet while maintaining its storage function doesn’t mean you can’t move bitcoin to and from the device digitally.
Most hardware wallets have some form of interface where you can do this. Ledger, for example, provides a service called “Ledger Live,” where you can manage your funds from your desktop or mobile device.
The most secure of all of the non-custodial options, the almighty multisig wallet, is only for the hardiest of hodlers. Trading all transactional convenience for absolute security, this is the choice if you don’t plan on touching your stack very frequently.
With multisig wallets, you can add redundancy by requiring two or more private keys to sign (hence “multi-signature”) in order to make any outbound transactions.
Some multisig-focused providers allow you to customize a plan between yourself, acquaintances, and a company to hold onto separate keys. Alternatively, you can spread these keys out with friends, family, or even separate devices in your own possession. This makes it possible to customize the level of difficulty you want for accessing funds.
As a note, many Bitcoin wallets have multisig functions built in. BlueWallet, a common mobile wallet, has a feature which allows you to proactively add multisig functionality to the wallet.
At the end of the day, Bitcoin wallets come in all shapes and sizes, spanning the full spectrum of maximum convenience to maximum security. Every user should try out multiple types and select a few options based on convience and risk modeling.
Read: Using a Bitcoin Wallet