Cryptocurrency has seen a huge increase in popularity over the past few years and a wide variety of people are increasingly becoming investors, often without significant prior experience in investing.
Understanding the difference between custodial and non-custodial wallets is an important step in understanding cryptocurrency. When buying any form of cryptocurrency, you will have to choose whether you want to store it in a custodial or non-custodial wallet, which can have a large impact on the future of your investments.
But what is the difference between these two types of wallets and how do you know which is best suited for you?
What is the difference?
If you have a custodial wallet, the wallet’s private keys will be held by a third party. This means that the third party is responsible for looking after your funds, while you only have permission to send or receive payments. Most first-buyers of cryptocurrency will open custodial wallets, and most internet-based crypto wallets and platforms will be on custodial wallets.
Examples of custodial wallets are major cryptocurrency exchanges that you may see advertised online or on television, including:
A non-custodial wallet gives the owner of the wallet more control, as there is no third party. You have full control over the wallet’s funds, and are solely responsible for keeping your cryptocurrency secure.
Examples of non-custodial wallets include:
There are a number of advantages and disadvantages to holding each type of wallet, so it’s important to be aware of the various differences between custodial and non-custodial wallets. Holding one or the other could have a significant effect on your investments and how you can access them. The advantages and disadvantages include:
The most significant difference between a custodial and non-custodial wallet is who holds the private key. On the one hand, non-custodial wallets allow more freedom and control over your funds. But, on the other hand, this comes with greater responsibility and the need to keep your funds completely secure yourself
The security of custodial wallets lies with the third party who is responsible for the private keys. This requires you to trust that the third party has the capabilities to keep your data and money safe. Unless the third party follows strong security measures, sensitive user data could be more liable to be stolen or hacked.
With non-custodial wallets, only the owner has access to the wallet’s sensitive data, making it more secure and less likely to be stolen or hacked. However, this also means that the responsibility for the wallet’s security rests solely with the wallet’s owner.
Backup and Recovery
Because the security of custodial wallets lies with the third party, this means that backup and recovery of the wallet’s key are possible in the case of loss. If you lose the key, you’ll be able to contact the third party and they will share it with you again.
However, in a non-custodial wallet, recovery is not possible. Since you are the only one with the key, you cannot organize a recovery should you lose it. With a non-custodial wallet, you must be confident that you are able to keep your funds accessible and secure.
Accessing your funds and private details on a custodial wallet requires an internet connection. Your data must be processed and verified by a centralized authority for security purposes.
But, non-custodial wallets do not require an internet connection, and the blockchain can be accessed in real-time.
Why should you care?
So, given the wide differences between these two types of wallets, why should you care? Well, given your current experience level when it comes to cryptocurrency or the amount of responsibility that you want to take over your crypto finances, it’s important to know whether a custodial or non-custodial wallet would work best for you.
Knowing the difference between a custodial and non-custodial wallet, and how this difference affects your own personal situation when it comes to cryptocurrency, is imperative.
If you would prefer to spread the responsibility for your crypto’s security, or don’t 100% trust that you’ll be able to keep your keys safe, then it is logical that a custodial wallet would work better for you.
On the other hand, if you would rather have a greater level of personal security, then a non-custodial wallet would probably suit you better.
It is also possible to use a combination of both custodial and non-custodial wallets. Maybe you want to keep certain funds in a more secure non-custodial account, and others in an account where you’re not solely responsible for the security of the private keys. This is, of course, completely possible.
Crypto Wallets with Hydrogen
Hydrogen offers custody cryptocurrency wallets with connected physical, virtual, and tokenized cards (which means the cards are added to the Apple, Google, and Amazon Pay wallets), that allow consumers to spend their cryptocurrency assets in-store merchants or online. The merchants don’t need to accept cryptocurrency!
Sign up with Hydrogen to help your customers gain access to a variety of cards, as well as a range of other financial services.
Contact us today to learn more.