Custodial vs Non-Custodial Crypto Wallets Comparisons
Ready to take your crypto knowledge to the next level? Learn the differences between custodial vs. non-custodial crypto wallets.
How do you store cryptocurrency? It’s digital. It has no physical form. But how come people are able to store them inside of “wallets”? If that makes no sense to you, don’t worry — read on.
When talking about how to store crypto assets, the topic of custodial vs non-custodial crypto wallets often comes up in discussion. Here’s a short guide on crypto storage. After reading, you should be able to decide which type of wallet (custodial or non-custodial wallet) is best for you.
What is a custodian?
When you buy gold online, you most likely won’t see that shiny gold bar mailed to your doorstep. Instead, the agency that sold you gold, stores the gold for you (or asked someone else to do it on their behalf), and you receive a receipt that you can later present as proof that you owned an amount of gold.
This agency is a custodian, because it stores your assets on your behalf. A custodial agreement is that relationship you have with the agency — you present a proof of identity in order to have access to your gold bars.
Can a third party store my crypto?
These days, it’s so easy to buy and hold crypto. All you have to do is sign up to an exchange, verify your identity, buy crypto with cash, and essentially “own” a certain amount of crypto.
In this model, the crypto exchange that you’re buying from acts as a custodian. In other words, the crypto wallet that you are using with the exchange is a custodial wallet — your crypto assets are stored by a third party on your behalf.
When you log into your account of that crypto exchange, you are providing proof of identity which takes the form of your email and password. When you buy crypto through well-known exchanges, you are most likely going to have a custodial agreement with the exchange, by virtue of that custodial crypto wallet.
You are also relying on the security protocols of the exchange. Your only responsibility is to make sure that you do not share your account password, and do not compromise your email (which is used to recover forgotten passwords).
Can I store crypto without relying on a third party?
Absolutely you can! If you find that you can’t trust a third party to store crypto for you, there is another option — non-custodial wallets.
You may be surprised to read this: Non-custodial wallets are the original wallets in the crypto world. Back when crypto wasn’t well-known, tech enthusiasts used these wallets to send and receive crypto among each other without an intermediary like a crypto exchange.
Non-custodial wallets require a few extra steps, like backing up your wallet with recovery phrases, instead of an email address. But these days, most non-custodial wallets are quite intuitive. The setup process have been so refined that it’s easy to follow the setup instructions and doing it right.
Another advantage of storing crypto in a non-custodial wallet is that you are in full control of the security and management of your crypto funds. You basically own the “master key” that has access to your crypto funds, and not a third-party custodian.
Learn the fundamentals: How do crypto wallets work?
When to use a custodial wallet
There isn’t really a rule that specifies when or why you should use a custodial wallet. A custodial wallet is simply going to offer you the following benefits:
- Intuitive setup processes
- Being able to manage all (or most) assets in one place
- Low-cost transaction fees (though not on all exchanges)
Most beginners in the crypto space opted for custodial wallets, simply because it’s more familiar than the non-custodial alternative. Some advanced traders also use custodial wallets to make day trading more affordable.
Some custodial providers make the process of creating a wallet as easy as creating a new social media account. You just need to prepare your username or email address, a strong password, and supporting security tools, like 2-factor authentication with your mobile phone.
When to use a non-custodial wallet
Again, the choice to use a non-custodial wallet over a custodial wallet comes from personal preferences. Non-custodial wallets offer you another set of benefits:
- You have full control over your wallet security
- Your transactions are more private
- You can decide how much to pay for each transaction (which affects how fast your transaction gets processed)
Many investors who are more experienced as they’ve spent months to years investing in crypto find themselves preferring non-custodial wallets over the custodial ones. This is primarily due to security concerns. It’s a fair reasoning — the longer you invest, the more wealth you accumulate in the form of crypto assets.
Eventually, these long-term investors want to be in control of as many factors as possible. They obviously can’t control the market volatility and the inherent risks associated with it. However, they have learned that they could at least take security into their own hands, and not have to rely a company to manage their assets on their behalf.
Custodial vs. non-custodial crypto wallets
The differences between Custodial and Non-Custodial wallets are minor in terms of functionality, but when it comes to security and peace of mind the differences are quite significant.
Custodial wallets entrust the security of your assets with a third party while offering the benefits of accessibility and ease of use (at least, for beginners). Non-custodial wallets leave you the full control of your fund’s security to your hands.
So, as I prefaced early on – it comes down to your personal preferences, how much control you are willing to exert over your assets, and what features you seek for your crypto investment purposes.
Someone with a large capital wanting to dive into cryptocurrencies as a way to diversify their assets may want to opt for a non-custodial crypto wallet for the utmost security.
While newcomers in the crypto space who want to get to know and familiarise themselves with digital crypto assets may find the custodial wallet option perfectly tailored to their needs.
Need some wallet suggestions? Narrow down your choices with our guide on crypto wallets.
When it comes to crypto storage, I feel like knowing and understanding the differences between custodial and non-custodial is just as important for anyone wanting to get into the crypto space.
Cryptocurrency has opened up a world for people to regain this responsibility essentially freeing you from reliance on a third-party entity.
As always remember to take responsibility for your wealth and investments.
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated September 5, 2023