Learn about the different types of crypto wallets, how they work, and which wallet is right for you. Covers hot wallets, cold wallets, custodial vs. self-custodial, and how Borrow by Sats Terminal uses embedded Privy wallets for a seamless lending experience.
A crypto wallet is a tool that lets you store, send, and receive digital assets like Bitcoin, Ethereum, and stablecoins. Despite the name, a digital wallet does not actually hold your cryptocurrency. Instead, it manages the cryptographic keys that prove your ownership of assets recorded on a blockchain.
Every crypto wallet revolves around two components:
Understanding how these keys work — and who holds them — is the single most important concept in crypto security.
If you plan to buy, sell, hold, or borrow against cryptocurrency, you need a wallet. Exchanges like Coinbase or Kraken provide built-in wallets, but those are custodial — the exchange holds your private keys on your behalf. That convenience comes with trade-offs around control and counterparty risk.
A wallet is also essential for interacting with decentralized finance (DeFi) protocols. To borrow against your Bitcoin, provide liquidity, or swap tokens on-chain, you need a wallet that can sign transactions directly.
Crypto wallets fall along two main axes: hot vs. cold and custodial vs. self-custodial. Let us break each down.
A hot wallet is any wallet connected to the internet. This category includes:
Hot wallets are convenient for everyday transactions and DeFi activity, but because they remain connected to the internet, they carry a higher risk of being compromised if your device is infected with malware.
A cold wallet stores your private keys offline, making it far more resistant to hacking:
Cold wallets are the gold standard for long-term storage of large holdings. The trade-off is that they are slower and less convenient for frequent transactions.
A custodial wallet is managed by a third party — usually an exchange. The company holds your private keys, handles security, and provides account recovery if you forget your password. Examples include wallets on Coinbase, Binance, and Kraken.
Pros: Easy to set up, familiar login flow, built-in recovery.
Cons: You do not truly own your keys ("not your keys, not your coins"). The custodian can freeze your account, get hacked, or go bankrupt (as FTX demonstrated).
A self-custodial wallet puts you in full control of your private keys. No third party can freeze your funds or block your transactions. MetaMask, Ledger, and the embedded Privy wallets used by Borrow all fall into this category.
Pros: Full ownership, censorship resistance, no counterparty risk.
Cons: You are solely responsible for securing your keys. Lose your seed phrase and your funds are gone permanently.
For a deeper dive into why self-custody matters, see our guide on understanding self-custodial wallets.
Picking a wallet depends on your goals:
| Goal | Recommended Wallet Type |
|---|---|
| Long-term Bitcoin storage | Hardware wallet (cold) |
| Daily DeFi activity | Browser extension or embedded wallet (hot) |
| Borrowing against BTC | Embedded self-custodial wallet (hot) |
| Exchange trading | Exchange custodial wallet |
| Maximum security for large sums | Hardware wallet + metal seed backup |
Many experienced users combine multiple wallet types. For example, you might keep the majority of your Bitcoin on a Ledger for safekeeping and use an embedded wallet on Borrow to access borrowing opportunities with a smaller allocation.
When evaluating any wallet, consider:
Borrow by Sats Terminal takes a unique approach by embedding a Privy-powered self-custodial wallet directly into the platform. Here is what that means for you:
This design eliminates one of the biggest friction points in DeFi: wallet setup. If you can sign in to a website, you can start borrowing against Bitcoin on Borrow.
To learn more about the wallets Borrow supports, visit our FAQ on supported wallets.
Regardless of which wallet you use, follow these guidelines to keep your assets safe:
Your seed phrase (typically 12 or 24 words) is the master key to your wallet. If someone obtains it, they can drain your funds instantly.
Wallet technology is evolving rapidly. Account abstraction, social recovery, and passkey-based authentication are all making wallets more user-friendly without sacrificing self-custody. Embedded wallets like the Privy-powered solution used by Borrow represent the leading edge of this trend — they hide the complexity of key management while preserving the security properties of self-custody.
As more platforms adopt embedded wallet technology, the gap between Web2 convenience and Web3 ownership will continue to narrow.
Whether you are just getting started or looking to optimize your setup, understanding wallets is the foundation for everything else in crypto — from borrowing against Bitcoin to participating in DeFi protocols.
Related Guides
Basics
Learn what self-custodial wallets are, why self-custody matters in crypto, and how Borrow by Sats Terminal uses embedded Privy wallets to give you full control of your assets with no KYC required.
Basics
A step-by-step guide to borrowing stablecoins against your Bitcoin using Borrow by Sats Terminal. Learn how to set up your wallet, choose a protocol, and manage your first crypto loan.
Common Questions
Hardware wallets (cold wallets) like Ledger and Trezor are generally considered the safest because they store your private keys offline, making them immune to online hacking attempts. For maximum security, pair a hardware wallet with a metal seed phrase backup stored in a secure location.
