In this lesson
- understand the difference between a wallet on an exchange and your own wallet
- find out what hot and cold wallets are
- learn how to handle a seed phrase
A crypto wallet does not actually contain coins. Coins are recorded on the blockchain. The wallet only holds the keys that can move them. Whoever has the keys has the coins – whether it is you or not.
- Private key
5Kb8kL…x3JfThe secret that controls your coins. Never share it with anyone. - one way only
- Public key
02a1c9…7e4dCalculated from the private key. Proves your signature. - one way only
- Address
bc1qxy…0wlhShort form of the public key. Share it to receive payments.
On an exchange, or your own?#
- A wallet on an exchange (the exchange manages the keys) – convenient, a forgotten password can be reset. But the exchange holds the keys. If it goes bust like FTX, you are out of luck.
- Your own wallet (you hold the keys) – nobody can freeze or embezzle your coins. But nobody can help you either if you lose the keys.
That is why crypto people say: "Not your keys, not your coins."
Hot or cold?#
| Hot wallet | Cold wallet | |
|---|---|---|
| What it is | an app on your phone or computer | a separate device (hardware wallet) |
| Internet connection | always | keys never; it signs payments offline |
| Convenience | high | lower |
| Security | lower – an attacker can get into the device | higher |
| For | smaller amounts for everyday use | long-term savings |
The seed phrase: the master key#
When you create your own wallet, you get 12 or 24 words in an exact order – the so-called seed phrase. With it, the wallet can be restored any time, anywhere. Whoever knows it controls all your coins. Whoever loses it loses the coins forever.
How to handle a seed phrase:
- write it by hand on paper (or stamp it into metal) and store it somewhere safe, ideally in two places,
- never photograph it, copy it to a computer, email it or store it in the cloud,
- never read it out to anyone – no support team, exchange or "technician" ever needs it,
- never enter it on a website someone sent you.
What happens when you lose the keys#
In 2013, a Briton called James Howells threw out an old hard drive while tidying up. It held the key to 8,000 bitcoins. The drive ended up in a landfill in Newport. James searched for it for years, the courts dismissed his claims against the city in 2025, and he has since given up. Probably the most expensive office clean-up in history.
Nobody can help you
With your own wallet there is no "forgot password". Without the seed phrase the coins are lost forever – and with a stolen seed phrase a thief empties the wallet within minutes.
Common myths#
- "My coins are in my wallet." The coins are on the blockchain; the wallet only has the keys.
- "A photo of my seed phrase is a backup." It is an invitation for thieves.
- "A hardware wallet means I can't lose anything." You can still lose the seed phrase or sign a fraudulent payment.
Summary
- A wallet holds keys, not coins; whoever has the keys has the coins.
- An exchange is convenient but holds the keys; your own wallet gives you control and responsibility.
- A hot wallet for smaller amounts, a cold one for savings.
- Write the seed phrase by hand on paper, keep it offline and never give it to anyone.