Crypto and Blockchain Basics — Lesson 2
Crypto Assets, Wallets, and Keys
Learning Objectives
- 1Distinguish between different types of crypto assets.
- 2Understand wallet types, private keys, and custody.
- 3Evaluate security and risk for crypto asset management.
Types of crypto assets
Bitcoin is a cryptocurrency designed as a digital store of value and medium of exchange. It operates on its own blockchain and has a fixed supply of 21 million coins. It is the oldest and most widely recognized cryptocurrency.
Ethereum is both a cryptocurrency (ETH) and a platform for building decentralized applications and smart contracts. While Bitcoin focuses on value transfer, Ethereum enables programmable transactions and decentralized applications.
Stablecoins like USDC and USDT are cryptocurrencies pegged to stable assets, usually the US dollar. They are designed to maintain a consistent value and are commonly used for trading and transfers. Their stability depends on the reserves backing them and the entity managing those reserves.
Tokens are crypto assets created on existing blockchains (usually Ethereum) that represent various things: utility access, governance rights, ownership claims, or membership. The value and purpose of tokens varies enormously — from legitimate utility to speculative instruments with no underlying value.
Wallets and custody
A crypto wallet stores the private keys that control access to cryptocurrency. It does not literally hold coins — the assets are recorded on the blockchain. The wallet holds the keys that prove ownership and authorize transactions.
Custodial wallets (like Coinbase or Kraken accounts) are managed by a third party who holds the private keys. They are convenient but mean you are trusting the custodian with your assets. If the custodian is hacked or goes bankrupt, your assets may be at risk.
Self-custody wallets (hardware wallets like Ledger, software wallets like MetaMask) give you direct control of your private keys. They provide more security against custodian failure but require you to manage your own security. If you lose your private keys, there is no password reset — the assets are permanently inaccessible.
Security fundamentals
Crypto security follows the principles from Unit 5 but with higher stakes because transactions are irreversible. There is no chargebacks, no customer support to reverse a mistake, and no way to recover assets sent to the wrong address.
Private key management is the critical security practice. Private keys should never be shared, stored in plain text, or kept in cloud storage. Hardware wallets store keys offline. Seed phrases (backup words that can regenerate keys) should be stored physically in secure locations, never digitally.
For business crypto holdings, consider multi-signature wallets that require multiple approvals for transactions, insurance for significant holdings, and clear procedures for who can authorize transfers and under what conditions.
Case Study
The exchange that collapsed
Situation
FTX, once the third-largest crypto exchange, collapsed in November 2022, losing approximately $8 billion in customer funds. Customers who held assets on the exchange lost access to their cryptocurrency because the exchange — their custodian — had misused customer funds.
Analysis
Customers who self-custodied their crypto were unaffected. Those who trusted the exchange as custodian lost access to their assets. The event reinforced a core crypto principle: if you do not hold the keys, you do not truly hold the assets. Custodial convenience comes with custodial risk.
Takeaway
Custodial convenience comes with custodial risk. For significant crypto holdings, understand and mitigate the risk of custodian failure through self-custody or multi-custodian strategies.
Reflection Questions
- 1. If your organization holds or accepts cryptocurrency, who controls the private keys? What happens if that person becomes unavailable?
- 2. Do you understand the difference between custodial and self-custody risk for your situation?
Key Takeaways
- ✓Crypto assets range from currencies (Bitcoin) to platforms (Ethereum) to stablecoins to tokens.
- ✓Wallets hold private keys that control access — not the assets themselves.
- ✓Custodial wallets trade convenience for trust risk; self-custody requires security responsibility.
- ✓Crypto transactions are irreversible — security mistakes cannot be undone.