The difference between custodial and non-custodial crypto wallets

You have done thorough research on cryptocurrencies and finally decided to invest, but you are not sure how to store your cryptocurrencies? You may have heard of custodial wallets and non-custodial wallets, but don’t know the difference between the two?

Here’s everything you need to know about the type of crypto wallet you need.

What are Custodial Wallets?

A custodial wallet is a cryptocurrency wallet where private keys to the wallet are held by a third party. The most common type of custodial wallet is an exchange wallet, where the exchanges hold private keys on behalf of their users.

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The biggest advantage of custodial wallets is that they are easy to use. You don’t need to worry about generating or backing up private keys, as the service will do this for you.

Another advantage is that custodial wallets are usually connected to an exchange, making it easy to buy and sell cryptocurrencies or otherwise leverage your holdings.

The disadvantage of custodial wallets is that you are dependent on the security of the service and you do not have actual ownership of your funds. If the service gets hacked or goes bankrupt, you could lose your money.

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Another disadvantage is that custodial wallets usually do not offer the same level of security as non-custodial wallets. This is because they often sacrifice some security features to make them easy to use.

The custody wallet pros

1. Easy to use

2. A third party handles your security for you.

3. Easier to buy and sell cryptocurrencies or invest in other exchange products

4. Easy to recover your account if you lose your password

Custodial Wallet Cons

1. You don’t keep the keys to your wallet.

2. The lower security level

3. You will most likely have to go through the KYC and AML verification

What are non-custodial wallets?

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Non-custodial wallets are the complete opposite of custodial wallets. With a non-custodial wallet, you generate and hold your private keys. This means that you have full control over your crypto assets and are responsible for their security.

The main advantage of non-custodial wallets is that they offer a higher level of security than custodial wallets. This is because you are the only one with access to your private keys, so even if the service is hacked, your crypto assets are safe. You do not need to rely on the security features of a third party because you have put your security features in place.

Another advantage of non-custodial wallets is that they offer more utility than custodial wallets when accessing decentralized finance. This is because you have full control over your private keys and can use them to do more than just store and trade cryptocurrencies. For example, you can use them to use decentralized applications (dApps).

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The disadvantage of non-custodial wallets is that they are not as easy to use as custodial wallets. This is because you need to generate and back up your private keys, which can be complicated. If you accidentally lose your private key or recovery phrase, you have no way to get your money back.

Another disadvantage is that non-custodial wallets usually do not offer the same customer support as custodial wallets. This is because they are not as common, so fewer people are familiar with them and how to use them.

Pros of no-custody wallet

1. You keep the keys to the wallet.

2. Higher level of security

3. Access to DeFi

Non-custodial wallet Cons

1. Not as easy to use

2. You are responsible for your safety.

3. The lower level of customer support

4. Impossible to recover money when you have lost private keys or recovery phrases

Which type of wallet should you choose?

Which wallet you choose should depend on your needs and wishes.

If you’re just looking to buy and sell cryptocurrencies or invest in other exchange products, or if you don’t want to take on the responsibility of taking care of your wallet security, then a custodial wallet is a good choice. This is because they are easy to use and you don’t have to worry about the safety of your funds. We recommend custodial wallets for crypto newbies, crypto traders, and those not planning to move into DeFi anytime soon.

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Suppose you want to access decentralized applications or use your funds in someone else who just wants to make your funds as safe as possible. In that case, a non-custodial wallet is a better choice. This is because they offer more utility than escrow wallets and a higher level of security. We recommend non-custodial wallets to users who want to take security into their own hands and dip their toes into decentralized finance.

Ultimately, it’s up to you to decide which type of wallet to choose. It is important to consider your needs and wishes carefully before making a decision. If you’re not sure which type of wallet is right for you, we recommend researching or even trying out both wallets to see which one you prefer.

About the author: Johnny Lyu is the CEO, KuCoin. All views/opinions in the article are those of the author.