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Unlike regular wallets you’d put your debit card in, a crypto wallet is a digital wallet that stores a virtual key, giving you access to your cryptocurrency on the blockchain.
When it comes to securing your digital assets, crypto wallets can be custodial or non-custodial. But what’s the difference?
Here’s how these wallets work and an overview of their similarities and differences.
Custodial vs. non-custodial wallets
While crypto investors use the word wallet, it’s probably more accurate to think of it as an interface of sorts that holds your private keys — essentially your password that allows you to access your crypto on the blockchain.
The main difference between custodial and non-custodial wallets comes down to who is responsible for securing your keys and managing your digital assets. With a non-custodial wallet, you alone are responsible for keeping track of your private keys, meaning if you lose them, you also lose access to your crypto. With a custodial wallet, a third party manages your keys.
Here’s a deeper dive on the differences between the two types of wallets and what to know.
What is a custodial wallet?
Custodial wallets are a type of crypto wallet in which a third party, usually a crypto exchange, manages your private keys.
How you’d use a custodial wallet: Let’s say you purchase crypto on a crypto exchange. The exchange secures your private keys for you, which means you don’t have to worry about keeping track of them.
Lots of investors use custodial wallets because it is generally more convenient to have someone else manage your keys. On top of that, if you forget your password to your account, the crypto exchange (or whatever platform you’re using to trade crypto) can help you reaccess your account. You don’t have to deal with managing your private keys or the crypto wallet itself.
If you choose to use a custodial wallet, you’ll want to make sure the crypto exchange or platform you’re using has strong safety measures in place, like two-factor authentication. It’s best to avoid crypto exchanges that aren’t known, reputable platforms, because if they can’t protect your key, your crypto (and the money you invested) is gone forever.
Pros
- It’s simple to buy, sell and trade crypto in the same place as your wallet.
- The wallet is managed by someone else, so you don’t have to worry about losing or misplacing your keys.
- The log-in process is generally simple, with usernames and passwords, because the company manages your private keys for you.
Cons
- You do not have full control over your crypto funds or keys.
- Your crypto may be lost if the company gets hacked or encounters a security breach.
- You’re relying on online systems that might experience technical difficulties.
What is a non-custodial wallet?
A non-custodial wallet is a type of crypto wallet in which you have full control over your crypto investments and private keys.
How you’d use a non-custodial wallet: A non-custodial wallet generates a seed phrase that you have to keep track of, either by writing it down or finding another way to remember it. The wallet then uses your seed phrase to generate private keys.
Non-custodial wallets are typically used more by experienced crypto investors who want full control over their assets or those who are storing large amounts of crypto at a time. They are often seen as more secure, since you are solely in charge of keeping the keys safe, not a third party.
Pros
- You have complete control over your crypto and where it’s stored, whether that be a hardware wallet, software wallet or paper wallet.
- There’s no need to rely on a third party’s security or system.
- You have the ability to access your crypto at any time.
Cons
- Accuracy and security of your private keys and seed phrase are absolutely necessary. If you lose this information or it is stolen, you lose your crypto forever.
- You need a bit more technical knowledge when it comes to buying, selling and trading crypto since you’re not keeping it on a third party’s platform.
- It’s often more complex and less user-friendly than accessing your crypto on an exchange or other platform.
Bottom line
Custodial and non-custodial wallets are two types of cryptocurrency wallets that hold private keys.
Custodial wallets are managed by a third party and offer convenience, allowing you to buy and sell crypto in the same place. Non-custodial wallets offer security and control, but it is your responsibility to keep track of your keys. If you lose this information, you risk losing your crypto assets forever.
Each type of wallet has its own pros and cons to weigh ahead of choosing which is best for you.
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