A crypto wallet is a physical device or software that keeps your cryptocurrency safe and accessible. However, your cryptocurrency isn’t actually stored in the wallet. Your wallet only has the address where your coins are kept on the blockchain so you can send, receive, or store cryptocurrency.
If you have looked for a way to manage your cryptocurrency, you might’ve come across these types of wallets: custodial and non-custodial.
So, what’s the difference between a custodial and non-custodial crypto wallet? And, which one should you choose?
Custodial Wallet
There is a high chance you already used this type of crypto wallet. Some of the most popular crypto exchanges, such as Coinbase or Gemini, are considered custodial wallets.
A custodial wallet (also known as a hosted wallet) is a digital wallet that holds your private keys and takes care of your funds. To put it in another way, you are trusting a third party to secure your funds. The best part about this is that you (technically) can’t lose access to your wallet. You can’t lose the private keys because you simply don’t have them.
If you forgot your account password, you can reset it once you confirm your identity. Also, these platforms will provide you with some recommended security measures to protect your funds, so make sure to follow them.
With a custodial wallet, it’s easy to access your funds. You only need your login credentials, and you are ready to trade. Additionally, transaction fees are usually lower, and if anything goes wrong, you can contact customer support services.
Crypto veterans will tell you that if you don’t have the private keys, the coins inside your wallet are not yours. Technically, the wallet owns the coins, and it owes you money for how much crypto is in the wallet. Also, the platform providing you the wallet can use your coins for its interest.
Note: Custodial wallets depend on an internet connection, so if you can’t get a steady connection, you might have a hard time managing your funds.
Non-Custodial Wallets
With non-custodial wallets, you are the only one controlling your funds and your private keys. One advantage of this wallet type is that you can easily monitor and control any activity. For any transaction to take place, it needs to be authorized using your private keys. Also, you can access a non-custodial wallet without an internet connection, so you can check your funds at any time.
When setting up a non-custodial wallet, you’ll get a mnemonic phrase of 12 to 24 words that you should write down and deposit somewhere safe. If you can’t access your wallet anymore, you can use the recovery phrase to regain access.
Keep in mind anyone can access your crypto wallet if they have access to your seed phrase. Don’t share it with anybody, and don’t store it online.
You can choose between different types of non-custodial wallets. For example, there are browser-based wallets, hardware devices, or software that you can install on your phone or computer. If you are going for a physical wallet, make sure it doesn’t get lost or damaged, as there is no way of getting your funds back if this happens.
If you plan on buying a lot of cryptocurrencies to hold for a long time, a non-custodial hardware device could be the best choice.
To make any transaction using this wallet type, you should connect it to a mobile device or computer’s Bluetooth or USB port. So keeping it in a secure place will keep your currency safe. Just make sure you don’t lose the private key to access it.
Custodial vs. Non-Custodial Crypto Wallets
Choosing between a custodial and non-custodial wallet depends on how you want to secure your cryptocurrency. If you have just started trading crypto, a custodial wallet might be the right fit as it protects your assets while you gain some experience. On the other hand, if you feel you need more control over your crypto and want to follow the “not your keys, not your coins” rule, a non-custodial is the better choice for you.
Nevertheless, you can use both types of crypt wallets for the best results.
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