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Custodial and Non-Custodial Crypto Wallets

With the rapid growth and popularity of cryptocurrencies over the last few years, there have been many instances of fraud and theft also. Hence, it is really important to keep your valuable cryptocurrencies safe. A crypto wallet serves the purpose so let us understand what exactly is a crypto wallet.

What is a Crypto Wallet?

A crypto wallet keeps your private keys which are the password required to access your cryptocurrency holdings safe and secure. There are basically two forms of crypto wallets hardware wallets (which basically look like a USB) and software wallets which are basically the websites and apps you can use to access your crypto holdings.


Why is a Crypto Wallet Important?

Cryptocurrencies are considered to be a valuable asset so it is really important you keep them safe and secure. Unlike a physical wallet which is used for keeping hard cash, your cryptocurrencies are not kept in the wallet instead they live in the highly secure blockchain technology and can only be accessed using a private key. Wallets provide you with the private key. If you lose access to your private key, you lose ownership of your crypto. Hence, it is always advisable to use a trusted wallet provider.


Benefits of Using  Crypto Wallets:

Crypto wallets are not just used for accessing your cryptocurrency. It has a wide range of other functions also. They are used to

  • Store cryptocurrencies.
  • Make transactions.
  • Purchase goods.
  • Manage crypto balance


Types of Crypto Wallets:

As seen above, there are basically two types of crypto wallets hardware and software wallets but they also come in variations. Some are custodial and some are non-custodial. We shall see in detail everything related to it.


Custodial Crypto Wallets: 

In the case of custodial crypto wallets, the user is completely not responsible for the crypto holdings he has. This type of wallet is mainly offered by a centralized business mostly a cryptocurrency exchange. Here, the user decides to outsource his private key information to a business that offers the facility. 

Here, if the user wishes to send the coin to a location, the user simply puts the address of the place where he wants to send the coin and the custodian is responsible for incorporating the private key. This reduces a lot of tasks from the user side but it is really necessary to use a trusted custodian as there are always some risks involved with it.


Non-Custodial Crypto Wallets: 

In this type of crypto wallet, there is no third party or organization involved and the user is solely responsible for whatever he does. However, non-custodial wallets are not as easy to use as custodial wallets.  Users must keep in mind that if they lose access to their private key, there will be no one responsible for it and it can prove to be a costly affair. Apart from this, the user should frequently develop a set of practices to ensure the security and protection of the private key.


Pros and  Cons:

Both of these wallets come with their own pros and cons. Let us look at them.


Custodial Wallet Pros:

  • Free transaction: The major advantage of using a custodial wallet is that there are no transaction fees involved. Users can do as many transactions as they want without paying a single fee. It is very beneficial for people who are looking for ways to save money.
  • No major problem with losing private keys: As we have seen, in the case of a custodial wallet, a third party manages your wallet and has the access to your private keys. There will be no major issue if you forget or lose your private key. It can be retrieved easily.
  • Backup facility: Another advantage of using a custodial wallet is that the party managing your wallet even offers a backup facility which can prove to be very beneficial.


Custodial Wallet Cons:

  • No offline facility: Most of the custodial wallet providers operate in an online manner so it is not a great option for people who are looking at offline devices, especially those who are not that tech-savvy.
  • Third-party manages your crypto: Your crypto is completely not in your hand. There is always an involvement of a third party. Someone having access to your private keys poses some level of trust issues and they have complete power to take any action including freezing your assets.
  • Need for KYC: Opening a custodial wallet account is cumbersome and a lot of procedures are required. It is not possible to open one without submitting your documents which can be a very tiring process.


Non-Custodial Wallet Pros:

Non-custodial wallet also has many advantages. Let us look at them.

  • User has complete control: Unlike a custodial wallet, the user has complete control over his holdings. This makes the user completely responsible for anything happening within his account. This type of wallet gives a sense of security to the users.
  • Instant withdrawals: Unlike a custodial wallet, there is no confirmation required from a custodian to initiate any transaction. This makes it a much easier process.
  • Less data breach: Every transaction is completely in the hand of the user. There is no third party involved so it reduces the risk of your data being sold or misused.


Non-Custodial Wallet Cons:

  • More responsibility: There is more responsibility associated with a non-custodial wallet. Users must keep up with the latest updates and develop a set of practices to make sure that their holdings are safe.
  • User interface: This type of wallet comes with a complex user interface which may be difficult for some people to understand.
  • Losing private keys equals money lost: Unlike a custodial wallet, there is no one responsible for keeping your private keys safe. If you lose it, you will never be able to access your valuable holdings.


Which One should you Use?

It is completely the personal choice of the investor if they want to go with a custodial or non-custodial wallet. If you are confident about not losing or misplacing your private key and fund recovery is not in your strategy then a custodial wallet is for you but you need to be very cautious and stay updated about the latest trends to ensure there is no data breach and theft of crypto.

On the other hand, if you do not want to take in a lot of headaches and want smooth management of your holdings then you may consider using a non-custodial wallet. Here, you will not have to worry even if you lose or misplace your private key as it is with a custodian and can be retrieved. Currently, institutions use custodial wallets. It is not much popular among retail investors but you need to always keep in mind the risks involved with a custodial wallet as with the involvement of a third party there is always a buildup of trust issues. There have also been a few instances of betrayal by custodians.