Cryptocurrency Basics--Wallets, Bitcoin, Ethereum | Jim Ferraioli

Added: 2026-05-13

[00:00:01][music] >> Hey everyone, welcome to Schwab Coaching. I'm Jim Ferryoli, the director of crypto research and strategy at the Schwab Center for Financial Research.

[00:00:22]Today we're going to talk some more about cryptocurrency basics, specifically wallets, Bitcoin, and Ethereum.

[00:00:28]Before we get in, just a bit about myself. I've been working on Wall Street for over a decade. I've been publishing crypto research since 2020, and last summer I joined Schwab to build out the crypto research effort here, help educate investors how to invest in cryptocurrencies, and then provide perspectives about what's going on in the crypto market. So let's get started.

[00:00:51]Before we do that, just some important information. First and foremost, past performance is no guarantee of future results. Also, nothing here should be perceived as a recommendation or an endorsement of any product or cryptocurrency we may talk about.

[00:01:10]So starting out, what are cryptocurrency wallets? One of the things that makes crypto different than other assets is it's not stored in traditional bank accounts or brokerage accounts. You keep it in a wallet. And so understanding the basics of different crypto wallets and pros and cons of the different types is an important first step to investing in cryptocurrencies.

[00:01:31]So there's different types of wallets.

[00:01:32]There's cold wallets, there's warm wallets, and then there's custodial versus self-custody wallets. And so just big picture before we go into the details, a cold wallet is a wallet that's not connected to the internet.

[00:01:46]And so a lot of the times these are stored in USB-like devices. When you want to use them, you plug them into your computer. Your cryptocurrency stored in that wallet can then access the block, the underlying blockchain network, and then you can transact.

[00:02:02]A warm or hot wallet is a wallet that's always connected to the internet. So, this is something that's either stored at a centralized or decentralized cryptocurrency exchange or a firm like Charles Schwab.

[00:02:16]And then there's custodial and self-custody wallets. A self-custody wallet is a wallet that you are managing yourself.

[00:02:23]A custodial wallet, which is popular by institutional investors, is custodied by a third party.

[00:02:30]So, going through the different wallet types, there's benefits to each, but you need to maybe comfortable with the security that comes with that wallet versus the convenience that comes with the wallet. And it's always a balance. So, as an example, a hot wallet has the lowest level of security, but it's the most convenient.

[00:02:49]So, this might be popular for frequent traders. The caveat by having your hot wallet on an exchange or anywhere connected to the internet, it does leave it vulnerable to potential hackers.

[00:03:03]On the flip side, a cold wallet has a higher security, but it's less convenient. It's maybe good for a long-term holders who have large amounts of cryptocurrencies, but it's inconvenient and demanding.

[00:03:16]You know, there's risks that you could lose it. There's risks that you could lose access to it due to maybe a software upgrade on the wallet itself.

[00:03:23]And so, you there's things to think about from that perspective. A warm wallet blends both features of hot and cold wallets together. And so, again, it balances security and accessibility.

[00:03:36]Going to cust- uh custody, so a custodial wallet has lower uh security, but it's very convenient.

[00:03:43]This is typically held and secured by another party, usually an exchange. The caveat is it comes with third-party risk. Is the person that's custodying it or the entity that's custodying it for you, are they trustworthy?

[00:03:59]And then a self-custody wallet is the highest security, but it's less convenient. It offers more security than a custodial wallet, but you're ultimately responsible for the wallet, where it is, and access to it.

[00:04:14]Some of the things that you should know about protecting your crypto wallets is, you know, you should have a strong password, two-factor authentication is recommended. Uh there's different internet protection software is available. And if for a cold wallet, it might make sense to keep it in a secure location such as a safety deposit box.

[00:04:35]Going through the two different uh the different measures, first, uh if you think about having a strong password and an SMS or two-factor authorization, it's relatively low complex. Almost every single uh product requires that now.

[00:04:50]That banking product requires that. Um it's the most uh uh basic, but it it really covers the essentials of security.

[00:04:59]Biometric authorization, also not very complex.

[00:05:04]Many smartphones, just to access them, you know, they they provide face You can do facial recognition. It's a unique layer of access control and and it's relatively easy to implement.

[00:05:14]Getting a bit more complex, there are different methods. Uh these include hardware two-factor authorization, a seed phrase backup for cold wallets, and then encrypted backups. These are more complex. As an example, the hardware two-factor authorization, instead of sending a passkey to your email or phone number, it sends it to an actual uh separate hardware device. The caveat is then you need to always know where that device is. A seed phrase backup is important because if you ever forget the password to your wallet, it's a way to get back in. Seed phrases can be from 12 to 24 words.

[00:05:52]Finally, there's encrypted backups uh for cold wallets. And these protect against the loss or damage of the wallet.

[00:06:01]The more complex ways would be to use uh multiple cold wallets and then multi-signature cold wallet.

[00:06:08]So, cold wallets are good because they're not um attached to the internet. They can't be hacked. And the caveat is they can be lost. And so, holding a lot of cryptocurrency in one wallet that can set you up for risks. Spreading that cryptocurrency across several wallets reduces that risk from a single point of failure. And then a multi-signature cold wallet minimizes the risk due to loss of a single point of failure. And this is the most commonly used wallet by institutions.

[00:06:41]So, what is Bitcoin?

[00:06:43]Bitcoin was launched in 2009. It's the native currency of the Bitcoin blockchain.

[00:06:49]Bitcoin was primarily created as a decentralized digital currency aimed to serve as the the peer-to-peer electronic cash system.

[00:06:57]It uses a proof-of-work consensus mechanism.

[00:07:01]And so, what this means, miners compete with each other to solve a cryptographic problem. It's very highly energy intensive and there's a reason for that. The first miner that solves this problem is rewarded uh Bitcoin as a result. Every 10 minutes or so, a block of transactions is approved. The reason that this is highly energy intensive is because there's risk that if a miner or a group of miners had enough computing power, they could take control of the network. They could change historical transactions. By having an energy cost associated with a uh creating Bitcoin and validating transactions, that actually uh serves to have miners use their computing power for good. Why take over the network when you could just validate the network and reserve and receive rewards for it?

[00:08:01]What is Ethereum? Ethereum is the second largest blockchain.

[00:08:06]It was launched in July 2015, and it's open-ended. It's a decentralized software platform.

[00:08:12]It was aimed to uh really do something different than Bitcoin.

[00:08:16]It's intended to facilitate and monetize the operation of smart contracts, decentralized applications, and any other blockchain solutions. So, many people think of Bitcoin as a payment network or a um a means of storing value, whereas Ethereum is really seen as a network for creating programmable money. So, you can have uh money with underlying logic that if someone says does this, when they do it, they're automatically uh receive the money.

[00:08:51]And the thing that makes Ethereum different than Bitcoin, it uses a proof-of-stake validation net.

[00:08:57]And what that means is validators stake the Ethereum that they hold in an escrow account. And when they say, "This is the most correct version of the blockchain," and other validators approve it, they either receive more ether as a reward for that.

[00:09:16]However, if they put forward an an incorrect or an untruthful version of the blockchain, they actually lose the ether they've staked. So, again, it's another way to force honesty on the network. And this is a much less energy-intensive way of um uh securing a blockchain network.

[00:09:36]Thanks for joining us for Coaching.

[00:09:38]Looking forward to seeing you soon.