Do You Really Need A Crypto Wallet?

What is the most expensive thing you’ve ever lost? Most of us have that memory burned into our brains. Maybe it was a lost phone, a wallet, or perhaps even something sentimental like a family heirloom or a wedding ring. 

For James Howells, it was a small computer hard drive. In 2013, it accidentally ended up in a landfill in Newport, Wales. On it were the private keys to 8,000 Bitcoin, which is now worth more than $900 million.

After spending 12 years trying to win a court case to buy the landfill (with the help of external investors), he ultimately had to admit defeat, walking away with nothing but a £117,000 legal bill.

A proper crypto wallet with secure backups could have kept those keys safe and accessible, no matter what happened to his computer. Instead, one mistake with how he stored his coins turned into one of the costliest losses in Bitcoin history. 

It’s a pretty start reminder that if you can’t access your keys, you can’t access your coins.

What Are Your Options For Storing Cryptocurrency?

If you own (or are thinking of buying) crypto, it’s vital that you consider your storage options right from the start. In general, you have three main options. 

1. Keep it on an exchange (custodial storage)
2. Use a software wallet (hot wallet)
3. Use a hardware wallet (cold wallet)

Each one of these wallet types balances convenience, cost, and security in different ways. The right choice for you might depend on how much crypto you own, how often you trade, and how confident you are in managing your own keys. Think of it like handling cash:

• An exchange is like a bank. It’s easy to use, but you’re trusting someone else to hold your money.
  
• A software wallet is like carrying cash in your pocket. You have quick access, but more responsibility and risk.
  
• A hardware wallet is like keeping your money in a safe at home. It’s highly secure, but less convenient for daily use.

Now let’s take a closer look at each of these so you can see exactly what each option entails. 

Keeping Your Crypto on an Exchange (Custodial Storage)

This is where most beginners start. You create an account, buy your crypto with your credit card or by bank transfer, and you just let the exchange store it for you. For most people, this is the simplest option as it allows you to buy, sell, or swap coins from wherever you are. The convenience is hard to beat.

The trade-off is trust and a significant element of risk. When you hold your coins on an exchange, you don’t control your private keys. The exchange does. 

If the platform gets hacked, freezes withdrawals, or goes bankrupt, you could lose access to your funds entirely. We’ve seen this happen with high-profile collapses like FTX, so don’t think that the size of the company means you’re entirely safe. 

While large, regulated exchanges are generally safer than smaller ones, you’re still relying on a third party to keep your investment secure.

If you’re only holding a small amount or you trade frequently, leaving coins on a reputable exchange can work for the short term. But the saying “Not your keys, not your coins,” is famous for a reason. 

Software Wallet (Hot Wallet)

A software wallet is an app you install on your phone, computer, or browser. It stores your private keys locally, giving you complete control over your crypto. Transactions are quick, and you can manage your coins from anywhere with an internet connection, which is also super convenient. 

However, the main risk here comes from the fact that they are connected to the internet, which means more exposure to potential threats. Malware, phishing attacks, or device theft could put your coins at risk. That’s why most people use hot wallets for smaller amounts or crypto they plan to move regularly.

The best way to use a hot wallet safely is to keep your recovery phrase secure. A recovery phrase (sometimes called a seed phrase) is a set of 12–24 random words that your wallet generates when you first set it up. Those words are essentially the master key to your crypto (think of them like a “forgot your password” function.. If your phone or computer is lost, stolen, or broken, you can enter that phrase into a new wallet to regain access to your coins.

Because anyone with that phrase can control your funds, you should never store it in a digital file, email, or cloud account. Instead, write it down on paper, then keep it somewhere safe and offline.

Hardware Wallet (Cold Wallet)

A hardware wallet is a small device that stores your private keys completely offline. To make a transaction, you connect your cold wallet to your computer or phone, approve the transaction on the physical device, and then disconnect it. Because it’s offline most of the time, it’s immune to online hacks. You cannot make any transfers or even check your balance unless you have the device on your person. 

This makes it the most secure option for long-term storage, especially for larger amounts. There are two main downsides here. The first is that you need to pay for the physical device itself. The second is that you lose some speed and convenience for the added security. 

It’s not as quick as clicking a button on an app, but that’s the point. The security trade-off is worth it for many long-term holders. Just remember that 

If you choose this route, you still need to keep your recovery phrase safe. Losing the device isn’t a problem if you have the phrase, but losing both means the coins are gone forever.

Which Wallet Should You Choose?

There’s no correct answer for this question, as it depends on your situation. Many crypto owners actually use a mix: they might keep some coins on an exchange for active trading, hold spending money in a hot wallet, and lock away long-term holdings in a cold wallet.

Just start by thinking about your risk tolerance. If losing the amount you have in crypto would keep you up at night, it’s worth taking the extra steps to secure it in a hardware wallet. If it’s a small, speculative amount you’re happy to trade regularly, an exchange or hot wallet might be enough.