Custodial vs Non-custodial Wallets
Cryptocurrency may be a completely digital alternative to fiat money, but it doesn’t mean you don’t need a storage place to own some. So, after you decide on a cryptocurrency to own, the next step will be to pick where to store it: i.e., a crypto wallet.
Crypto wallets are programs, softwares, or applications that let you store your crypto and enable you to control and protect your assets while making them available for others to transact with. This is made possible by way of unique codes called public keys and private keys.
Simply put, your public keys are your wallet’s address or the crypto counterpart of a bank account number. This means that anyone who has a copy of it may be able to send you money or, with your confirmation, may get money from you. Meanwhile, your private keys are your pin or passcode which ensures that no transaction is finalized until it’s been authorized. Who gets to have access to your private keys is one of the major considerations in choosing which kind of crypto wallet you choose to store your assets in: custodial or non-custodial wallets.
What are custodial and non-custodial wallets?
Choosing a custodial wallet is to put your trust in a third party, usually a web-based cryptocurrency exchange, to control your private keys. Similar to keeping your fiat money in a bank, keeping a custodial wallet means you handing the responsibility of securing your funds to a third party. By handing them sole access to your private key, you put your trust in them to do what they want with it on the condition that they return them to you should you want to trade or put them elsewhere, while you only have to grant permissions to receive and send payments.
Choosing a non-custodial wallet, on the other hand, is choosing to have sole control over your crypto. It’s decentralized finance in its truest form. With a non-custodial wallet, only you have your private keys and there is no need to put your trust in any third party — usually a crypto exchange — to control and regulate your funds. However, this option also bears more responsibility as it also means that only you must take the necessary precautions to protect your account and you must ensure to never lose your keys.
Pros and cons of custodial and non-custodial wallets
Despite the prospect of entrusting one’s funds to a third party being less enticing, custodial wallets remain to be popular and preferred by a lot of crypto users because of the convenience and peace of mind they offer. One doesn’t have to worry much about losing their private key as custodial wallets allow for easier recoverability of accounts in the event that a user forgets or loses their private keys and there are customer support channels they may contact whenever they run into trouble.
Should you choose a custodial wallet, exercise caution and pick one that’s compliant to regulations and offers great insurance coverage. Some popular choices are Coinbase, BitMEX, Binance, and FreeWallet.
On the other hand, non-custodial wallets’ biggest perk is that they enable users to be their own bank by allowing them full control of their assets. Not having a third-party custodian allows for faster transactions and withdrawals as you don’t have to wait for anyone’s approval. And because you’re not reliant on a custodian to manage your funds, you also don’t have to pay for custodial fees which can get pretty steep depending on the crypto exchange you’ve chosen to handle your funds.
Still, the biggest downside of non-custodial wallets is the responsibility that it lays on their users. So should you choose to use one, be sure to take precautions such as using a strong password, keeping back-up copies of your keys in very discreet and secure places, and enabling two-factor authentication in your account and being vigilant against phishing and scams.
Which is the better choice?
There may be clear distinctions between custodial and non-custodial wallets that make you prefer one over the other, but we have to remember that not all wallets under these categories are built equally. You may want a non-custodial wallet, for example, but a more trustworthy custodial wallet would still remain superior to a non-custodial wallet by a provider with questionable history. While this is by no means a professional financial advice, we suggest that you consider the following in choosing a wallet for your crypto: the company’s reputation, technology and features, the cryptocurrencies they’re able to keep, available platforms, and their customer service.
No matter your preference, make sure you check the reputation of the company that’ll be holding your crypto. Consider their technology and features. Do they offer two-factor authentication to further avoid people from snooping into your account? And say your device crashes, does the service provider have a back-up feature that’ll allow you to transfer doing your transactions to another device?
Furthermore, because not all wallets, whether non-custodial or custodial, are able to keep a wide variety of coins, you also have to consider which cryptocurrency you’re planning to own. If you’re planning to own various coins, consider getting a wallet that allows that like Coinbase, which right now lets you keep more than 500 kinds of crypto. Or if you see yourself converting one crypto to another, you might want to consider Exodus which does that easily with ShapeShift. It’s also worth considering in which platforms is your wallet of choice available — do they only operate on mobile, desktop, or both?
Finally, the choice between custodial and non-custodial wallet really relies upon how much of your time you are willing to devote into crypto. It all boils down to their first and most glaring difference: responsibility. If you intend to devote much of your time in growing and securing your funds and you have assets on the line that you are not comfortable to leave in the hands of an intermediary, then perhaps a non-custodial wallet will work better for you as it gives you complete agency. However, if you are just casually trying out crypto and only taking risks that you are comfortable enough to not pay off, a little shared responsibility with a trustworthy custodial wallet doesn’t sound too bad.