October 13, 2022 | Updated on October 13, 2022
To start collecting NFTs, you must set up a crypto wallet. Crypto wallets store cryptocurrencies and enable blockchain transactions. They are also where you store your NFT art collection.
This article will explain the different types of wallets–hot vs. cold, custodial vs. non-custodial—and guide you in choosing the right wallet for your NFTs.
Hot vs. cold wallets
First, let’s start with the basics. 'Hot' wallets are wallets that connect to the internet. Web-based wallets like mobile wallet apps or browser extension wallets are all examples of hot wallets. 'Cold' wallets, however, are wallets that do not connect to the internet. Cold wallets are almost like traditional wallets that you can physically hold in your hand and are not connected to the internet at all times.
Hot wallets are easier to access and faster to set up, but as they connect to the internet, they are also more susceptible to hacks. Cold wallets, on the other hand, might not be as convenient, but they are more secure from online attacks.
Custodial and non-custodial wallets explained
Custodial crypto wallets, just as the name suggests, are wallets in which your funds are in the possession of a custodian (i.e., the company that made the wallet). This is equivalent to keeping your money with a bank. The bank will keep all your deposits secure so you don't need to store them yourself.
When using a custodial wallet, (and usually a custodial wallet is a hot wallet), the custodian, rather than the wallet owner, will have access to the seed phrase and private keys. Many popular cryptocurrency exchanges like Binance and Coinbase offer custodial wallet solutions. Unfortunately, these wallets generally do not support carrying NFTs in addition to cryptocurrency.
Non-custodial crypto wallets, as you might’ve guessed, are wallets managed and secured solely by you. If you apply the bank analogy here, then you are your own bank and you are responsible for the security of your funds.
When using a non-custodial wallet (which can come in both a hot and cold storage format), the wallet holder needs to shoulder all the risk that comes with securing the funds alone. Contrary to a custodial wallet, as the wallet holder you will have access to a seed phrase and the private keys to your non-custodial wallet. MetaMask and Coinbase Wallet, being the most popular choices for new NFT collectors, are great non-custodial options to get you started.
A good rule of thumb when determining what type of wallet you have is to simply look for the seed phrase (or the recovery phrase). If you don't have one, then you have a custodial wallet.
Pros and Cons
While preferences may vary, custodial and non-custodial wallets all have their respective pros and cons.
For custodial wallets:
- Less risky because you are outsourcing wallet security measures to a third party.
- Never have to worry about losing your seed phrase and your private keys.
- Risk of freezing by the custodian (just like with a traditional bank).
- Trusting the custodian to stay operational. You fail when they fail.
For non-custodial wallets:
- Self-autonomy: you get total control over the contents of your wallet.
- Easy access.
- Risk of losing or forgetting your wallet information (seed phrase and private keys) locking yourself out of your own wallet and account.
Deciding the right crypto wallet for your NFTs
If you're a first-time collector looking to purchase your first NFT, we recommend using popular non-custodial wallets like MetaMask and Coinbase Wallet. They are hot wallets and are easy to set up for beginners. If you want to physically store your wallet somewhere safe, you should consider non-custodial hardware wallets like Ledger and Trezor.
At the end of the day, it all comes down to how you want to store your NFTs and the level of risk you're willing to take on. Even with a safe wallet solution, you still need to stay vigilant and follow common ground rules to better protect your NFTs.
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