Understanding Custodial vs. Non-Custodial Crypto Wallets

Understanding Custodial vs. Non-Custodial Crypto Wallets

Exchanges \ Wallets General Information
April 27, 2021 by DanCurranJr
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What are Custodial and Non-Custodial Wallets? Having custody means being in charge of someone or something for their/its safekeeping. So how does this relate to cryptocurrencies and cryptocurrency wallets? Well, the difference between a custodial and non-custodial is who has custody of your private keys. Private keys are cryptographic keys that allow people access to
bitcoin-wallet

What are Custodial and Non-Custodial Wallets?

Having custody means being in charge of someone or something for their/its safekeeping.

So how does this relate to cryptocurrencies and cryptocurrency wallets? Well, the difference between a custodial and non-custodial is who has custody of your private keys.

Private keys are cryptographic keys that allow people access to their cryptocurrencies. They’re kind of like house or car keys—they allow you to access something that’s yours. However, there are instances where you don’t necessarily trust yourself withholding those keys—maybe you’re forgetful or careless (and hopefully, you know it). So instead, you have a family member, a loved one, or a friend hold the keys.

The same is true with cryptocurrency wallets. Whoever has custody of these private keys plays an integral role in a person’s trading style.

 

Custodial Wallets

Custodial wallets store your crypto, but you don’t hold your own private keys. Instead, they’re held by a third party, either the exchange that you’re trading on or the company that created the wallet.

You may be wondering: “Why would I let anyone else hold my private keys?” And don’t worry, it’s a valid question. Although it may not sound ideal for a third party to hold your private keys (therefore limiting your control over your funds), it has its advantages.

The first advantage was mentioned above—if you’re forgetful or careless, then leaving your private keys with a custodian gives you little to no chance of losing your keys. Additionally, your funds are more accessible. All you need is a stable internet connection, and you should be able to manage your funds quickly and at any time.

However, they also have their own disadvantages. First of all, you don’t have control over your own money. This means that if there’s a court decision that directly affects your third party (in this case, an exchange), your coins can be seized by the government. It also means that if the exchange gets hacked, your coins are as good as gone. And if a fork were to occur for the specific crypto you’re holding, there’s a chance you won’t be receiving your coins.

In essence, custodial wallets act like banks. You own the money inside, but you don’t have any control over it—it’s in the hands of another company. Generally, as compared to non-custodial wallets, the former is less secure. However, they’re more accessible and more ideal for beginners.

Examples include:

Great places to buy into crypto but for the most part – move your purchases to a non-custodial wallet asap.

Non-Custodial Wallets

Non-custodial wallets, on the other hand, give you full control over your money, meaning that you hold your own private keys. The keys are stored on your personal device.

There are several types of non-custodial wallets:

Web Wallets – your private keys are stored on the web browser.

Mobile Wallets – these are downloadable applications for your smartphone and tablet that are usually downloadable on your app store; private keys are stored on your device

Desktop Wallet – these are applications downloaded and installed directly onto your laptop or computer; private keys are stored on your computer or laptop.

Paper Wallets – these are literal pieces of paper that hold your public and private keys; although the storage system is offline, you can always enter your keys on any device and access your crypto.

These are more or less defunct now but if you have an old paper wallet and your crypto is stored there –  get it in a hard wallet!

Hardware (Hard) Wallets – these are physical devices that look like UBS flash drives, but with an OLED screen and buttons to navigate through the interface; arguably the most secure crypto storage system

Despite non-custodial wallets being a more secure option, it isn’t free from fraud. There are fake smartphone apps, downloadable applications, and wallets—so be wary of these.

Even hardware wallets, arguably the most secure crypto storage solution, can sometimes get infected with malware.

The gold standards are:

It’s Up To You!

With both custodial and non-custodial wallets having their own sets of pros and cons, it’s up to you to decide which better suits your trading style.

Ideally, the former is better for beginners—people who are still learning the ins and outs of trading crypto.

However, they’re not ideal for holding large amounts of money. That’s where non-custodial wallets are a better choice.

Helpful? Useful? Enlightening?

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