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Cryptocurrencies are digital assets and they exist in the blockchain ecosystem. Users control the ownership of cryptocurrency by using digital wallets or cryptocurrency wallets. Wallets are essential for storing and transferring cryptocurrencies in the digital space. However, they do not store the actual cryptocurrency, instead, they store the private keys that can be used to access the cryptocurrency.
Depending on where the wallet is storing the private keys, they can be divided into custodial and non-custodial wallets. Custodial wallets store the private keys on the issuing company’s server. Whereas, non-custodial wallets store the private keys in the user’s device.
Either wallet can be useful to a cryptocurrency holder in different ways. Read on to find out the differences between using custodial and non-custodial wallets. By the end of this article, you will be able to decide which wallet is best for you.
Custodial Wallets
Custodial wallets are cryptocurrency wallets where the custody and complete control of your cryptocurrency private keys are with third-party entities such as the exchange that issued the wallet. They are often far more user-friendly than non-custodial wallets and are easily accessible to beginners.
Custodial wallets are similar to using a banking app for your fiat currency. The bank manages your assets for you, and they provide advanced features, giving you a stress-free experience. Some of the notable features of custodial wallets include account recovery options in case the user forgets the password, backup facilities to undo or restore previous transactions, and extended services such as trading, lending, and staking.
It is a big responsibility to manage the private keys yourself. If you lose access to the wallet, misplace the device, or forget your seed phrase, you will end up losing your investment. So, it is better to stick with custodial wallets, especially if you are new to cryptocurrency.
However, your possessions are only as secure as the wallet or the exchange that issued the wallet. So, only choose credible wallets with positive track records. You can also opt for crypto wallets that have insurance coverage from threats to secure your possessions.
Non Custodial Wallets
In non-custodial wallets, the complete custody and control of your crypto private keys are invested in you. The wallet stores the keys locally in your device, and you are the only person who will have access to it.
Using non-custodial wallets is like running your own bank. Here, you will have the sole responsibility for whatever happens to your crypto possessions. So, you should choose them only if you are capable of securely and safely managing your private keys. Usually, non-custodial wallets are recommended for more experienced cryptocurrency investors.
Non-custodial wallets are generally safer than custodial wallets from online threats, scams, and data breaches. Historically custodial wallets have faced many threats including the infamous bankruptcy of the FTX platform which made billions of dollars of worth crypto assets obsolete.
While FTX customers are expected to get paid back their lost funds, these kinds of threats are what make the users take the responsibility of safeguarding their private keys into their own hands by choosing non-custodial wallets.
Custodial Wallet Vs Non-Custodial Wallet Comparison
Here is a head-to-head comparison table of custodial and non-custodial wallets. Analyzing this comparison can help you better understand what you should choose for your needs.
| Features | Custodial Wallets | Non-Custodial Wallets |
| Control of private keys | Third-parties | Users |
| Security | As secure as the custodian (third-party) | Depends on user’s ability to secure private keys |
| Ease of use | More user friendly and ideal for beginners | Requires some technical knowledge, ideal for experienced investors |
| Transaction speed | Faster | Slower |
| Recovery options | Have multiple recovery options | Funds are generally irrecoverable if private keys are lost |
| Fees | May include: Service charge Transaction fee withdrawal fee Deposit fee | Typically just the network transaction fee is applicable |
| Privacy | Requires KYC (Know Your Customer) verification. | Offers privacy, but still may require KYC in exchanges. |
| Access to features | Limited features that the custodian provides | Full access to blockchain features like DeFi, staking, peer-to-peer transfer, and more |
| Risk of hacking | Higher | Comparatively lower |
| Backup | Managed by the custodian | Users are responsible for backups |
| Regulatory compliance | Must comply with regulations | Less regulated |
| Customer support | Usually offer robust customer support | Limited customer support |
As you can see in the above comparison table, there are both advantages and disadvantages to using ether wallets. While non-custodial wallets offer more freedom and security, custodial wallets are more convenient and easy to use.
How to Choose a Crypto Wallet?
Cryptocurrency wallets store your crypto private keys. Whoever manages to acquire the private keys will get the ownership of the crypto tokens assigned to that address. So, it is more than necessary to select the best crypto wallet for securely and conveniently managing your assets. Here are some of the basic things you should consider when choosing your wallet.
1. Security
For obvious reasons, the security features of a cryptocurrency wallet are the first thing you should consider when choosing a wallet. Ideally, the wallet should ask for any kind of authentication including PIN, password, or biometrics each time you log in. Though it may make trading a bit inconvenient, you may also opt for wallets with two-factor authentication to maintain the highest level of security.
2. Reputation
The reputation of the company issuing the digital wallet matters when it comes to protecting your possessions, especially if the wallet is custodial. The custodian should be a trustworthy company with a good track record against thefts and hacks. You can check the reputation of wallets by reading their reviews and paying attention to crypto-related news.
3. Backup features
If you are using a custodial wallet, it will automatically provide some form of backup features to recover your private keys. You can contact the customer support team and learn about ways to recover your account. It is best to choose a wallet with a variety of backup features, especially if you are new to cryptocurrency.
4. Fee
Choose wallets that can help you customize the fees you are willing to pay for facilitating transactions. Some of the best wallets can make it easier for you to choose from different presets like fast, medium, and slow. Fast transactions have higher fees, and vice versa.
Best Custodial Wallets
Custodial wallets are usually offered by exchanges. They assume the custody of your private keys on behalf of you. Here are some of the most popular custodial wallets available today:
1. Coinbase
Coinbase is one of the largest cryptocurrency exchanges with trading volume in the United States. The exchange offers a user-friendly custodial wallet that is available in more than 130 countries. The wallet supports an extensive range of cryptocurrency tokens including Bitcoin, Ethereum, Litecoin, DogeCoin, Tether, and more.
With a proven track record of years of reliable services, Coinbase is one of the most reputable exchanges in the world. It offers multiple security features including biometrics, passwords, security locks, and more.
2. Gemini
Gemini is a cryptocurrency exchange that also offers custodial wallets to the public. Gemini has an easy-to-use interface that attracts more users to the platform. They support more than 80 cryptocurrencies including BTC, ETH, USDT, and LTC.
The platform provides advanced security features such as 2-factor authentication, hardware security keys, and a multi-signature digital signature scheme to prevent cyber security threats. The wallet has a reputation for providing security, and insurance to the private keys.
3. BitMEX
Bitmex is another custodial wallet that offers a user-friendly interface. They provide both hot and cold wallets. Hot wallets can connect to the internet and can be used for active trading. Whereas cold wallets offer a more secure alternative that is not connected to the internet.
While BitMEX is a user-friendly platform suitable for beginners, it is also beneficial for experienced traders who are comfortable with margin trading and technical studies. Like other custodial wallets, BitMEX can also support a range of cryptocurrencies including Bitcoin and various altcoins.
Best Non-Custodial Wallets
If you have decided that you need a non-custodial wallet for storing your digital assets, then here are some of the top ones you can choose from.
1. Best Wallet
Best Wallet is one of the best non-custodial wallets for digital assets. In addition to offering a secure place for storing cryptocurrency and non-fungible tokens (NFTs), the platform can also let you analyze the crypto market without leaving your wallet. The best wallet can make it easy to secure private keys with two-factor authentication, and a four-digit password.
2. Exodus
Exodus is the second one in our recommendation. It is a non-custodial wallet that can support more than 260 cryptocurrencies and NFTs across multiple blockchains. The wallet is compatible with a range of devices including smartphones, web extensions, and desktops, making it accessible to a wide range of users.
3. Zengo
Zengo is a digital wallet that is available for both Android and iOS users. The wallet removes the need for the users to remember randomly generated seed phrases to retain the custody of the asset. The platform has over 1 million users and it has been running successfully for over 5 years without a reported incident of wallet hacks.
Conclusion
Custodial wallets are cryptocurrency wallets, where the private keys are managed by a third party such as an exchange. Whereas, a non-custodial wallet gives complete control of the private keys to the user.
Generally, custodial wallets are ideal for novice users, and non-custodial wallets are for experienced investors who can responsibly manage the private keys.
In this article, we have seen the difference between the two in detail and also identified some of the factors you should consider when choosing a wallet.
