When discussing Bitcoin wallets, it's important to understand the distinctions between "hot" and "cold" wallets and between "custodial" and "self-custodial" wallets.
Key Terms:
- Hot Wallet: Connected to the internet.
- Cold Wallet: Offline.
- Self-Custodial: User controls the private keys.
- Custodial: Third party controls the private keys (e.g., institutional cold storage services).
Hot Wallets
Self-Custodial Hot Wallet: The user holds and controls the private keys. Examples include software wallets like Kevlar, which provides an extra layer of security by requiring multiple signatures. This means that a hacker would need to breach multiple points of failure rather than just one.
Custodial Hot Wallet: A third party, such as an exchange, holds and controls the private keys. Examples include wallets provided by exchanges like Coinbase or Binance.
Cold Wallets
Self-Custodial Cold Wallet: The user holds and controls the private keys, and the wallet is kept offline. Examples include hardware wallets like Ledger or Trezor, and paper wallets.
Custodial Cold Wallet: This is less common but possible. It involves a third party holding and controlling the private keys while keeping the wallet offline. Examples include custody services provided by institutions like BitGo or Coinbase Custody, which store assets in offline (cold) storage on behalf of clients.
Summary
In practice, most cold wallets used by individual users are self-custodial, while custodial cold wallets are typically used by institutional investors and large holders who prefer to delegate security management to professional custodians.