Custodial Vs. Non-Custodial Wallets – What’s the Difference?

What’s a Crypto Wallet?

A crypto wallet is a device that enables you to store digital assets like Ethereum, Bitcoin, or NFTs. The wallet can be hardware or software.

A hardware wallet is a standalone physical device for storing digital assets, while a software wallet is installed on a crypto user’s device, including a mobile phone or desktop. Both crypto wallets store private keys, which are a series of numbers and letters that serve as a password.

These private keys give you the ability to send digital assets to various wallet addresses; therefore, you should keep them safe at all times.

Custodial Wallets Vs. Non-Custodial Wallets

Custodial wallets usually suit new crypto users as they are easy to use and are accessible from multiple devices as long they have an internet connection. But the key concern is security.

The private keys of a custodial wallet are held by a third party, like a crypto exchange, meaning users do not actually control their digital assets. Instead, they have to trust that the external custodian will safeguard the assets on their behalf.

While some third-party custodians provide insurance for the crypto assets they store, most custodial wallets have caused great losses in the past because of mismanagement or negligence in securing users’ assets.

On the contrary, a non-custodial wallet is designed to allow users to have full control over their private keys. Users have the sole responsibility for safeguarding their crypto assets.

One of the most used non-custodial wallets is known as a cold wallet. Crypto users who wish to keep private keys offline will find this type of wallet useful since you will only connect it to the internet when conducting a crypto transaction.

Other non-custodial wallets like MetaMask, Bitpay, and Electrum come as software that users can install on their mobile phones or computers.

Uses of crypto Wallets

Once you install a wallet on your device, you are able to trade and store your crypto assets along with making other transactions like receiving payments or paying for goods and services.

To send funds, most wallets require users to know the receiving address. However, some wallets have simplified the process using QR codes, allowing you to send crypto assets fast. The same is true when you want to receive funds.

Great Privacy

A major difference between a crypto wallet and a bank account is that crypto users can use their wallets to make transactions anonymously since there’s no direct way to link a wallet address with a specific individual. But as for bank accounts, each account is directly connected to the holder’s identity, making it easy for the government and financial institutions to track your transactions.

In other words, crypto wallets allow users to interact without compromising their privacy or needing a trusted intermediary.

Security Aspects

There are various advantages and disadvantages to storing your crypto in different wallet types. But in theory, non-custodial wallets are considered safer than custodial wallets since they cannot be compromised by third parties. We all witnessed the FTX case, in which the company misappropriated customer funds for its own purposes.

However, your crypto is only safe when you properly maintain the private key. If you lose it, you won’t be able to access your assets forever, as there’s no central authority to whom you can appeal to recover your funds.