When it comes to onchain assets like ETH, BTC, other cryptocurrencies, stablecoins, and NFTs, the tokens are on the blockchain and their ownership is verified by the ledger of transactions between addresses.
Crypto wallets are ways of accessing the blockchain to manage and move the tokens, like doorways to the ledger. But not all ways of blockchain access are the same. Holding crypto in a self custody wallet like MEW is very different from holding crypto on an exchange.
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If you use an exchange like Coinbase, Binance, Gemini, or Kraken, you create an account using your name, email, and phone number, and provide your ID, much like with a bank. The exchange holds and manages all the assets. They have their own account on the blockchain with all their and their customers’ funds in it. Then you have a username / password with them, on their servers, and they keep track of how much crypto they “owe” you.
This allows you to have the more traditional username/password account dynamic and do things like reset your password if you forget it, change your password if your password is compromised, and turn on 2FA. However, it also means that if the exchange fails or freezes your account, you may not be able to move your funds out.
If you use a client-side tool like MyEtherWallet, MEW Mobile wallet, or Enkrypt browser extension, you don't provide any personal information when creating the wallet and you get a recovery phrase which is the key that controls all access to your crypto. Nobody else, including MEW, can access your wallet.
The upside is that you, and only you, control your keys. An exchange getting hacked won’t affect you. The downside is that you, and only you, control your keys. No one else has them, nor can they recover them, should they be lost.
If you do lose your private key or wallet file and password, you cannot prove ownership of an account, and you permanently lose access to your funds.
If you choose to move from an exchange to a wallet where you control your keys, you need to make sure that you have multiple backups, stored in separate locations, of your private key, keystore file or recovery phrase. This will prevent loss in case your computer crashes, you lose your phone, or anything else happens to your device.
You also need to ensure you keep these keys secure. This means:
Don’t enter it on random websites.
Always ensure you are on the correct site or downloading from the legitimate repo/website.
Don’t email your key, send it to anyone, or post it online.
Don’t save it to cloud storage.
Don’t have Team Viewer or other remote access software on your computer.
Consider getting a hardware wallet like Ledger or Trezor for larger amounts of crypto.
To learn more about self custody wallets and best practices for the security of your crypto wallet, take a look at the following articles:
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