Difference between Custodial and Non-custodial Wallets

Jack R. Mitchell

Explore the world of cryptocurrency wallets – custodial vs. non-custodial. Learn how to safeguard your digital assets and choose the right wallet for your needs.

Cryptocurrencies have become a household financial product widely used in almost every industry.  This also means that users are used to purchasing crypto wallets as a way to hold and protect their digital assets.

However, some crypto education is still widely needed when it comes to choosing the best wallet for your needs and preferences.  In this regard, there are two main types of wallets: custodial and non-custodial.  We will outline the differences and explain which one suits which kind of user.

What Are Crypto Wallets?

 A cryptocurrency wallet is a piece of software that stores private and public keys used to interact with blockchain networks and send and receive cryptocurrency payments.  Therefore, the wallet doesn’t hold actual currency as is the case with a real one but limits and enables the ability to transfer funds.

Public keys are the ones that the user can share with others, while private keys serve as passwords and prevent or allow payments.  Safeguarding the private keys is the most important task for a crypto owner and for the wallet.  There are two types of wallets based on fund security: custodial and non-custodial ones.

Custodial Crypto Wallets

 A custodial wallet is a crypto wallet managed by a third party.  This means that when using this type of wallet, the user doesn’t have control over the private keys. When using such a wallet, the user puts trust in the company providing them the service to store and keep their keys.

The main advantage of this approach is the ease of use.  The user doesn’t have to worry or know about the technical aspects of the process.  It’s, therefore, a better choice for novice investors and those who are not that tech-savvy.

Non-Custodial Crypto Wallets 

Non-custodial crypto wallets are the ones where the user has complete control over their private keys, and no third party is involved.  The user is responsible for the safety and security of their keys and crypto assets.

Typically, the private key is represented by a 12 to 24-word recovery phrase.  It’s up to the users to store the keys in a private location and to make sure no one has access to it.  In most cases, this means that the key is held on a hard drive that’s not connected to the internet and therefore can’t be hacked.  Control and safety are the main advantages of this type of wallet, but it requires the user to understand the technology behind it.

Which One is better?

There’s no simple answer as to which of these two wallet types is better.  It’s about choosing the one that best suits individual users and their own interests.

A custodial wallet is a better option for an investor who wants to hold small amounts of cryptocurrency and is not deeply involved in the tech side of things.  Investors who accumulate larger amounts and become more familiar with the industry should move on to non-custodial wallets.

Disclaimer: The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

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