The question asked in the title has been edited from what was asked today at Quora, the Q&A forum at which I participate as expert columnist. The original question was a bit more ambiguous: “Which is better? — a digital bitcoin wallet or a physical one?” I have included the original question, to better distinguish products and terms.
All bitcoin wallets are all digital—even a paper wallet, whether a character string or a QR code. Conversely, an exchange may use “physical” wallets to host client assets, individual application wallets, or they may simply keep records of client assets that are stored, collectively, in their own master wallet. To complicate matters, Bitcoin is never really “stored” by you or an exchange service.
It is stored on a public blockchain, where assets and transaction history can be traced through time by anyone. Therefore, all forms of user access are “digital”. What the reader really wants to know is “
Which form of access control is better? — custodial or personal?”
Type 1: Custodial Wallets are Managed by a Trusted Party They hold your assets. You view a statement balance—just like a bank account.