Custodial and Non-Custodial Cryptocurrency Wallets

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency, Web 3.0, and metaverse ecosystems.

Introduction

Cryptocurrencies (crypto) are a relatively new type of currency evolving rapidly in an increasingly tech-driven economy. They do not have an actual physical form, but rather exist in a blockchain on a server. They are not backed by banks or other traditional lending institutions, and transactions are highly encrypted to keep personal information private.

Crypto can be purchased, sold, or swapped on different types of cryptocurrency exchanges or on peer-to-peer marketplaces, like LocalCryptos. Once crypto is purchased, it is important to understand how this digital asset should be properly stored and how it can be securely transported or moved.

What is a Cold Wallet?

At the most secure end is what is called a "cold" wallet. A “cold” wallet is a digital wallet that stores the crypto private keys offline on a physical medium, such as a USB drive. These physical mediums are called cold storage wallets because they are not linked to the internet.

With a “cold” wallet, a user retains full control over when and where the wallet is accessed. Since all of the digital assets are stored offline, this makes it more difficult for hackers to access this crypto. But if you need to access the wallet quickly or while traveling, it is not the most convenient option of the two types of wallets. Let’s first take a look at soft wallets.

There are essentially two types of soft wallets: custodial crypto wallets (also referred to as hosted wallets) and non-custodial crypto wallets.

Custodial versus Non-Custodial Crypto Wallets (source:hub.easycrypto.com)

What is a Custodial Crypto Wallet?

Custodial wallets are essentially browser-based wallets that allow users to interact with them like a website. With custodial wallets, a trusted third party holds the private key and is tasked with keeping these assets and the private key safe. Two of the more popular custodial wallets are offered by Coinbase and Binance.

Online wallets are perhaps the easiest crypto wallets to use, making them very popular. However, cryptocurrency traders should be aware there are a number of obvious downsides to custodial wallets.

First, allowing a third party to manage and secure crypto might be convenient, but giving up control of the private keys can create susceptibility to exit scams, hacking, and theft.

Moreover, a custodial wallet provider can set a withdrawal limit setting a maximum number of crypto that one can withdraw. Alternatively, the wallet provider may unilaterally set high fees for using their services. In addition, if the platform experiences technical issues or system outages, this might cause crypto owners to temporarily lose access to their digital assets.

Basically, with custodial wallets, crypto owners are at mercy of the wallet providers since they do not have their own private keys. As they say in crypto, “not your keys, not your coins.”

What is a Non-Custodial Crypto Wallet?

Non-custodial wallets can be software wallets or hardware wallets. A software wallet can include an App that is downloaded to a mobile device or computer. A non-custodial wallet means that the wallet owner is in possession and control of the private keys. A few of the more popular non-custodial wallets include Zengo and Nuri.

A non-custodial wallet gives the owner complete control of their digital assets. However, as the owner, you alone are responsible for the safety of your crypto keys. Therefore, choosing from the best non-custodial wallets is critical.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

Thomas Wettermann is not an independent financial advisor. Any opinions, news, research, analyses, prices, or other information contained on this website is provided as a general market commentary of Thomas Wettermann and does not constitute investment advice. Thomas Wettermann will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. All opinions expressed on this site are owned by Thomas Wettermann and should never be considered as advice in any form.