Simply, a wallet is where your cryptocurrency is held. More correctly, a wallet is where the private keys to your cryptocurrency are held. For example, if you buy some Bitcoin, the Bitcoin never moves from the blockchain, the only thing that happens is the private keys that identify the Bitcoin you’ve just bought go into your wallet and are now controlled by you.
For security, wallets are encrypted and protected by a password. Additionally when a wallet is first created a seed phrase is also generated that can be used to restore the wallet should access to it be lost, either by the wallet being damaged or the password being forgotten. A seed phrase is typically a 12, 18 or 24 word phrase which is linked to the unlocked wallet. You can forget or lose your wallet password many times over and still be able to restore your wallet each time by entering your seed phrase. If you lose your password and your seed phrase you’re in trouble and that’s where we come in.
The two most popular types of cryptocurrency wallet are software wallets and hardware wallets
Software (or ‘hot’) wallets are code, they are Apps that run on your computer and mobile phone. They are non-physical, always connected, very easy to use and extremely popular. We estimate that > 99.9% of all crypto transactions involve software wallets. Popular software wallets include the Trust Wallet and the Exodus wallet. Many big crypto exchanges such as Kraken and Coinomi have their own software wallets too.
Software wallets are more of a hacking risk as they are always online and connected to the internet. Modern software wallets are extremely secure but are always being attacked by hackers looking to exploit vulnerabilities in the code that run them. Many crypto wallet companies offer bug bounties to people who can hack their wallets and discover vulnerabilities in their code. These vulnerabilities are then plugged, this in turn makes their wallets more secure and trustworthy.
Software wallets are most often used by people who frequently transact in cryptocurrency as they are the easiest and quickest way to interact.
Hardware (or ‘cold’) wallets are physical devices that are separate from a computer or mobile phone. Because they aren’t connected to the internet, they are by far the safest choice when storing large amounts of cryptocurrency because they are almost impossible to hack.
The two most popular hardware wallets are the Trezor and the Ledger Nano. Additionally the Trezor is based on open source code that can be scrutinised, while the Ledger operates using proprietary code.
Both devices store the cryptocurrencies private keys in an encrypted form on a chip inside the device. Trezors and Ledgers are also password protected for added security.
Far less convenient than software wallets, hardware wallets are the wallet of choice for users who like to be in control of their private keys and store large amounts of crypto offline in safety.
Now that we’ve identified software and hardware wallets let’s come to something equally as important: non-custodial and custodial wallets.
With a non custodial wallet you are in charge of your coins as you own and control your private keys. You can move your cryptocurrency around between wallets, send it to friends and family, use it to buy stuff etc, all without needing the permission of a 3rd party like a bank or government to do it. Example non custodial wallets are Metamask and Exodus which are both software wallets, and Trezor and Ledger Nano which are both hardware wallets.
Many non custodial wallets are open source which means that the code behind them can be scrutinised regularly. This helps build trust as open source wallets can be easily verified to contain no malware or harmful code.
If you lose access to your non custodial wallet we should be able to help recover your funds as you hold the private keys. Contact us for more information.
With a custodial wallet you give control of your private keys (and therefore your coins) to a ‘trusted’ 3rd party. Two of the most popular custodial wallets are run by Coinbase and Paypal. Unless you withdraw your coins to a non custodial wallet that you control, you will never really be in control of your coins. Coinbase will let you withdraw your crypto funds to a custodial wallet, Paypal however will not. There’s a popular phrase regarding custodial wallets which is “Not your keys, not your coins”. As an example, if Coinbase (a US company) received an executive order from the US government to immediately cease trading, you would instantly loose access to your crypto.
If you lose access to your custodial wallet it’s not possible to recover your funds because your private keys are held by a third party. We are aware of an apparent issue where Coinbase users have sent funds from other wallets to their Coinbase account only for the funds not to appear. The only suggested course of action we suggest here is that you contact a solicitor who can make a legal approach to the company on your behalf.