Custodial vs Non-Custodial Wallet. Which Should You Choose?
Choosing the right wallet to store your Bitcoin can be a tough decision. Understanding the difference between custodial and non-custodial wallets is the first step toward making an informed choice.
Custodial and non-custodial wallets have their pros and cons. You must evaluate your choice, whether you’re a short-term investor or you hodl.
Whether you prioritize security or ease of use - some wallets offer you both, it's important to understand the unique features of each type of wallet before you choose where to keep your BTC.
Custodial vs non-custodial wallets refer to how the private keys of a wallet are handled.
In custodial wallets, also known as 'hosted wallets', a third-party provider keeps your private keys.
Non-custodial wallets give you full control over your assets and your private keys. They are generally more secure but you must also take extra measures to protect your bitcoin from hackers and other malicious actors.
In this article, we'll highlight the key distinctions between custodial and non-custodial wallets, thus empowering you to make the best choice for your needs.
Who Owns Your Crypto Keys?
When it comes to owning and managing your bitcoin, one of the most important things to understand is the concept of "crypto keys."
A question that often arises is, "who owns your crypto keys?"
The simple answer is, you do!
However, where and how you store your keys can greatly impact the level of control you have over your bitcoin.
For example, if you store your keys on an exchange, it means that the exchange has control over your bitcoin. On the other hand, if you store your keys in a software non-custodial wallet or hardware wallet that you own, you have complete control over your bitcoin.
It is important to remember when dealing with bitcoin, you are your bank and the responsibility of securing your keys and protecting your assets lies with you. Make an informed decision on who owns your crypto keys.
What Is A Crypto Key?
Crypto keys are the gatekeepers to your digital assets. In the case of bitcoin, it refers to both a private and public key.
The private key is a secure 256-bit code that proves ownership and makes transactions possible. You should keep it safe at all times as it can be used to steal your BTC if compromised.
The public key, on the other hand, is used to receive bitcoin and is derived from the private key. It is not possible to determine the private key from the public key. The public key is used to create a bitcoin address for receiving payments.
Custodial Crypto Wallets
Custodial wallets (aka centralized wallets) are a type of cryptocurrency wallet managed by a third party. The third party (usually an exchange or a software company) manages the private keys and access to the wallet.
This type of wallet is convenient for beginners and those looking for an easy way to store or manage their bitcoin. However, you could lose control of your assets if the exchange becomes insolvent or mishandle your keys.
With a custodial wallet, you're giving control of your private keys and assets to the custodian, hence the name "custodial".
Pros Of Custodial Crypto Wallets
Custodial wallets offer convenience and added security. They have friendly user interfaces and a wide range of features. They also offer insurance against hacking and theft using two-factor authentication (2fa).
You can trade BTC on custodial wallets. Some custodial wallets also offer extra services like staking, lending, and borrowing. It's important to consider the risks, but the benefits of custodial wallets make it worthwhile for some.
Cons Of Custodial Crypto Wallets
Before using custodial crypto wallets, you should be aware of their cons.
One of the main disadvantages of custodial wallets is that you do not have full control of your private keys. The custodian wants you to trust them in safeguarding your bitcoin.
Trusting your wallet provider seems easy, but you could lose your assets if they file for bankruptcy or are hacked.
Another disadvantage is the lack of privacy. Custodians need your personal information to set up an account and may have access to transaction details. Custodial wallets are also regulated by company and government policies, thus limiting your ability to use bitcoin freely.
Therefore, you should weigh the convenience of custodial wallets against the downsides before deciding to use one.
Non-Custodial Crypto Wallets
Non-custodial wallets (aka decentralized wallets) give you full control of your assets. Unlike centralized wallets, you hold your private key thus, you can control and manage your assets.
Non-custodial wallets are more secure than custodial wallets. This however means you're fully responsible for protecting your private keys and safeguarding your bitcoin.
Examples of non-custodial wallets include hardware wallets, software wallets, and paper wallets.
If you want full ownership of your assets, non-custodial wallets are the way to go.
Pros Of Non-Custodial Crypto Wallets
Non-custodial wallets are the ultimate solution if you value security and privacy for your assets.
The biggest advantage of using a non-custodial wallet is that you hold your private keys. This gives you full control over your bitcoin and removes the risk of losing them due to a hack or insolvency.
Additionally, non-custodial wallets offer enhanced privacy. You do not need to submit your personal information when setting up an account.
Decentralized wallets give you freedom. You are not subjected to the regulations and policies of a third party. They also give you peace of mind, allowing you to securely and privately use bitcoin.
Cons Of Non-Custodial Crypto Wallets
Although they come with better control and security of your assets, non-custodial wallets come with downsides you'd want to consider.
For example, you're fully responsible for safeguarding your private keys. This means a lost or stolen key can result in permanent loss of access to your bitcoin.
Non-custodial wallets are technical and require a good understanding of crypto concepts to set up. They also lack customer service support teams, making them sometimes less accessible to newbies.
Another factor to consider when choosing a non-custodial wallet is regulatory compliance. It's crucial to research any jurisdictional limitations that may affect the use of non-custodial wallets in your area.
How Do You Want To Secure Your Bitcoin?
When it comes to securing your bitcoin, we recommend a non-custodial wallet. It allows you to store your keys on paper, in a computer file, on your cloud drive, or in any other desirable manner. Having total control of your wallet eliminates the need to trust a third party.
Non-custodial wallets are much safer than custodial wallets as they are virtually impossible to hack. Just like the keys to your car or home, the hacker would need to have physical access to your mnemonic seed phrase.
Some popular non-custodial wallets include hardware wallets like Trezor and Ledger and software wallets like BitMask, BlueWallet, and Eclair.
The control and security non-custodial wallets give you makes it a solid choice for hodling your bitcoin. It's important to remember that you need extra precautions to keep your private keys (or the storage medium of the keys) safe.
Bitmask Is The Gateway Wallet For Web 3 Utility On Bitcoin
Still considering what wallet to get?
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BitMask is a taproot and Lightning Network-enabled, non-custodial wallet that ensures true financial sovereignty. Store, send, and receive your Bitcoin with confidence, knowing that your private keys are under your control. In addition to providing unparalleled security, BitMask also makes it easy to stay up-to-date with the latest news and developments in the Bitcoin world.
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