What are custodial and non-custodial wallets?
The difference between a custodial and non-custodial is who has custody of the private keys.
Custodial wallets store your crypto, but you don’t hold your own private keys. Instead, they’re held by a third party, either the exchange that you’re trading on or the company that created the wallet.
The first advantage —if you’re forgetful or careless, then leaving your private keys with a custodian gives you little to no chance of losing your keys. Additionally, your funds are more accessible. All you need is a stable internet connection, and you should be able to manage your funds quickly and at any time.
However, they also have their own disadvantages. First of all, you don’t have control over your own money. This means that if there’s a court decision that directly affects your third party (in this case, an exchange), your coins can be seized by the government. It also means that if the exchange gets hacked, your coins are as good as gone. And if a fork were to occur for the specific crypto you’re holding, there’s a chance you won’t be receiving your coins.
In essence, custodial wallets act like banks. You own the money inside, but you don’t have any control over it—it’s in the hands of another company. Generally, as compared to non-custodial wallets, the former is less secure.
Non-custodial wallets, on the other hand, give you full control over your money, meaning that you hold your own private keys. The keys are stored on your personal device.
There are several types of non-custodial wallets:
Web wallets – your private keys are stored on the web browser
Mobile wallets – these are downloadable applications for your smartphone and tablet that are usually downloadable on your app store; private keys are stored on your device
Desktop wallet – these are applications downloaded and installed directly onto your laptop or computer; private keys are stored on your computer or laptop
Paper wallets – these are literal pieces of paper that hold your public and private keys; although the storage system is offline, you can always enter your keys on any device and access your crypto
Hardware wallets – these are physical devices that look like UBS flash drives, but with an OLED screen and buttons to navigate through the interface; arguably the most secure crypto storage system
Despite non-custodial wallets being a more secure option, it isn’t free from fraud. There are fake smartphone apps, downloadable applications, and wallets—so be wary of these. Even hardware wallets, arguably the most secure crypto storage solution, can sometimes get infected with malware.
The choice is yours
With both custodial and non-custodial wallets having their own sets of pros and cons, it’s up to you to decide which better suits your trading style. That’s where non-custodial wallets seem to shine more.