Wallets are used to store private keys that give access to cryptocurrencies. There are many types of wallets, including hot and cold, software and hardware wallets. Which one you use depends on your goals and the level of risks you can tolerate.
We focus on two types of wallets in this article – custodial and non-custodial wallets. We will discuss each one with examples and also the differences between the two.
If you are thinking of choosing a crypto wallet, you should read this to have a clear idea of which wallet is best for.
What is a Custodial Wallet?
You can have cryptocurrencies in a wallet that you do not have control over.
For example, exchange wallets are controlled by the exchange, and they decide what happens to it even though it is your assets that are held in the wallet.
Such wallets are called custodial wallets.
In other words, someone has custody of the wallet on your behalf. Custodial wallets are great as long as nothing goes wrong.
You don’t have to worry about the security of the assets since you don’t hold the private keys and other security information regarding the wallet.
Unfortunately, things can quickly go wrong with a custodial wallet. How?
First, the custodian can restrict your access to the wallet. Have you ever read that a crypto exchange restricted withdrawal of assets for a time?
That’s what can happen and in some cases, you may never access that wallet again.
Secondly, you can’t guarantee the security of such a wallet, since you don’t hold the private keys.
That means hackers or even the custodian can steal and run off with your digital assets.
There is no way to recover your assets in such as situation.
As the saying goes, if it’s not your keys, it’s not your assets.
Examples of custodial wallets are exchange wallets.
This is why it isn’t advisable to keep your assets on an exchange for long, because you can’t determine what happens to them.
What is a Non-Custodial Wallet
A non-custodial wallet is the direct opposite of a custodial wallet. You get to hold the private keys and you’re fully responsible for the security of your assets.
You can access the private keys and even the recovery phrase which you can use to recover the wallet should anything go wrong.
Most personal wallets are non-custodial wallets.
They may be browser-based such as Metamask, mobile or computer based such as Exodus, or even hardware like Ledger wallets.
With the seed phrase you generate when creating the wallet, you can recover the wallet if an unauthorized person gains access or the hardware is lost.
You will be in charge of initiating and authorizing transactions, making you fully responsible for the safety of your wallet.
Non-custodial wallets are generally considered to be safer because of this attribute, and crypto experts would recommend it to new users.
Which Should You Choose?
Now that you know the difference between custodial and non-custodial wallets, you may be asking which you should choose.
There’s no clear-cut answer to this question because as mentioned earlier, it all depends on your goals.
For example, if you wish to trade cryptocurrencies, there’s no choice but to use an exchange wallet.
This means you must use a custodial wallet to hold the funds you’ll use to trade.
However if you’re just an investor who wants to buy and hodl crypto assets, a non-custodial wallet will be perfect.
This is because non-custodial wallets are 100% within your control and you can recover them if something goes wrong.
Whenever you can, you should use one to ensure you don’t lose your hard earned money.
To be more specific, hardware wallets are even better, because they don’t get exposed to the internet as often as hot wallets or software wallets.
This significantly reduces the chances of a bad actor accessing it and stealing your funds since such wallets are only connected to the internet to initiate transactions.