Custodial and Non-Custodial Wallets: Know the Difference

Custodial wallets are those that are managed by a third-party service, such as a cryptocurrency exchange or a digital asset company. When using a custodial wallet, you give control of your private keys, which are used to access and manage your cryptocurrency, to a third party.

One of the main advantages of using such a wallet is convenience. With a custodial wallet, you don't have to worry about protecting your private keys or managing your cryptocurrency, as the third party takes care of it.

In addition, custodial wallets often offer additional features, such as the ability to easily buy, sell, or trade cryptocurrency. In some situations, the service that manages your wallet may provide insurance coverage for assets against a hack or security breach. However, trusting such a service is an entirely separate matter.

Examples of custodial wallets include:

Non-custodial wallets are those that provide you with full control over your private keys. By using such a wallet, you are solely responsible for storing and managing your cryptocurrency.

The main advantages of non-custodial wallets are privacy and security. Since you are the only one with access to the private keys, there is less risk of your assets being stolen or compromised.

These wallets provide greater confidentiality since you do not need to provide personal information or undergo identity verification (KYC) to use your cryptocurrency.

Examples of non-custodial wallets include:

Choosing between the two types of wallets depends on your individual needs and priorities. If you value convenience and additional features, then a custodial wallet may be the right choice for you. However, if security and privacy are more important to you, it is better to choose a non-custodial wallet. Nevertheless, there is nothing stopping you from using both options for different purposes. In any case, it is important to carefully analyze the risks and take measures to protect your digital assets.

After understanding custodial and non-custodial wallets, it is worth learning about another classification. Cryptocurrency wallets are also divided into two types: cold and hot wallets. To understand the difference between them, read our separate article on this topic.