A crypto wallet is a piece of software that enables you to communicate with Blockchain networks in order to send and receive cryptocurrencies. At its core, a wallet consists of a public key, which is your personal identifier, and a private key, which allows you to sign transactions and authenticate yourself to the network.

Both non-custodial and custodial wallets can be “hacked” although it’s unlikely to happen. A non-custodial wallet can be breached if a hacker gets access to your secret phrase, either the encrypted version on your computer or the physical paper backup you have stored somewhere. A custodial wallet provider can be hacked if a hacker manages to get access to the internal security systems and transfer funds out of their centrally managed wallet.

There is no clear cut answer to what is safer. Both carry different trust assumptions. With a custodial wallet you trust a company to be honest, diligent and take the security of your funds seriously. With a non-custodial wallet you trust yourself and your ability to backup your seed phrase safely without other people having access to it.

A common misconception is that crypto transitions are anonymous and that there is no way for governments to find out whose identity is behind a wallet. This is wrong. A blockchain is a public ledger where every transaction can be traced back to its origin. In most cases the funds originated from a centralized exchange in which case there will be know identity since users have to verify themselves.

A hardware wallet is a device you use in combination with a non-custodial wallet app. Instead of storing the private keys on your device (mobile or computer) the private keys are stored in a small highly secured USB-shaped stick which you need to connect to your app in order to sign transactions. Some people like the security it gives you as a computer or phone can be hacked but a hardware wallet can’t.