Wallets & custody

A bitcoin wallet does not hold bitcoin. It holds keys. Every term in this section comes back to one question: who can sign a transaction that moves your coins.

Custodial is where most people start, because an exchange account is a custodial wallet whether or not it is labelled one. The company holds the keys, so it can freeze the balance, lose it, or be ordered to hand it over, and what you own is a claim against that company rather than the coins. Non custodial flips it. You hold the keys, nobody can freeze you, and nobody can help you if the backup burns.

Hot and cold describe exposure, not brand. A hot wallet's keys touch an internet connected device; a cold one's do not, which is what a hardware wallet is really selling. Air gapped goes further and never lets the signing device connect at all.

Multisig and passphrases are for holdings that have outgrown one seed phrase in a drawer. Multisig needs several keys to sign, so a single stolen key is not a loss. A passphrase adds a word only you know on top of the seed, which makes the seed alone worthless to a thief and useless to your heirs if you never tell them it exists.