We analyze the alternatives to store Bitcoin on private hardware, software, and wallets compared to exchanges.
Also, you can use non-custodial exchanges to never give up your private keys.
No Financial Advice, Information only. Do your own research
Crypto Wallets - Different purposes
There are different purposes for different types of crypto wallets.
- Hardware wallets – Here, you probably want to store your crypto on a long-term basis. The downside is that you can’t earn interest or stake to receive APY yield.
- Software wallets – This is a hybrid between hardware wallets and exchange wallets. With non-custodial software wallets, you are still in control of the private keys, but there are many limitations on how you can use your cryptocurrencies. For example, you can’t lend them to earn interest.
- Exchange wallets – There are two reasons to use custodial exchange wallets. Either you want to store most of your funds in non-custodial software wallets and hardware wallets and deposit them into exchanges to make trades and swaps. Or you want to store your cryptocurrencies on sale because you think it’s just more convenient if someone else keeps them for you, and also,o in many cases, you can earn an APY yield on them.
- Non-custodial exchanges with no wallet – Exchanges are operating in a non-custodial manner. They give you a deposit address where you are supposed to send the crypto you want to sell, and they request a deposit address where you wish to receive the crypto you want to buy. After you have sent your crypto, the exchange searches for the best exchange rest among their liquidity pools, andmakese the sale, and sends you the desired cryptocurrency. This usually comes with a higher fee and is preferable for instant crypto transactions with no KYC, signup, or verification process.
Private Hardware Crypto Wallets
Crypto hardware wallets let you keep control over the private keys of your cryptocurrencies.
A private key is a secret number used in cryptography, similar to a password and a solid password.
For Bitcoin, for example, the private key consists of a 256-bit string displayed as a combination of letters and numbers (64 characters).
In cryptocurrency, private keys are also used to sign transactions and prove ownership of a blockchain address.
When you deposit your cryptocurrencies to a non-custodial exchange, you give up the private keys for the exchange company. Instead, you now put trust in the company to store the cryptocurrencies for you and send them back whenever you request to do so.
Private Software Crypto Wallets
Many people prefer private software crypto wallets since they are free and you don’t have to store the hardware. Also, you don’t have to bring the hardware around if you want to use your Bitcoins or cryptocurrencies at multiple locations.
Many of the software wallets are connected to exchanges, and you will be able to make swaps within the application.
Exchange Crypto Wallets
Exchange crypto wallets are the most controversial crypto wallets.
- Some people think the only use case for crypto exchange wallets is to make an exchange or trade.
- Others think that exchange wallets are the best since they are much more convenient and there is customer support and someone who can recover your password.
Non-Custodial Crypto Exchanges
Non-custodial crypto exchanges are the place for people who want to stay anonymous or don’t want to use centralized crypto exchanges for any other reason.
They don’t request signup and some of them don’t require KYC and verification, especially if your transaction is not highlighted as high-risk for AML or terror financing or similar.
Crypto Exchanges Risks
There are certain risks associated with non-custodial and custodial wallets. We will list all the risks we can come up with here, but they might not be limited to these.
- There is no way to recover a lost password to a non-custodial wallet.
- There are many ways in how you can lose your cryptocurrencies in a custodial exchange wallet (The exchange can run bad business, can go bankrupt, can be a scam or Ponzi scheme, can be hacked )
One way to minimize the risks is to diversify your portfolio. For example, don’t hold all your crypto in a single wallet or exchange.
Risks VS Rewards
As for all capital investments, storage, and management, you should always weigh your risks vs. your potential rewards.
- The risks with a custodial exchange are listed above, and the rewards are the possibility of earning a yield on your deposit with Binance Earn, Kucoin Earn, or similar.
- The risk with a non-custodial wallet is that there is no way to recover a lost password. The rewards are that you avoid all the risks associated with a 3rd party wallet provider.
Summary - How to store your Crypto Safe?
We have tried to sort out the pros and cons
- Private non-custodial hardware wallets
- Private non-custodial software wallets
- Custodial Exchange wallets
- Non-custodial exchanges with no wallet
Based on the information in this article you should be able to decide which one works best for you. There will probably not be a single answer since you can hold some of your crypto wealth in one wallet while you hold another part of your cryptocurrencies in another wallet.
Read more about crypto risk management strategies and diversification.