Just as with traditional financial assets, there are multiple ways to store your crypto. How you choose to store your funds depends on your investor profile (the type of crypto investor you are) and what your risk appetite is.
In this article, we will explore the two main wallet types you can use to store your cryptocurrencies: custodial and non-custodial, and offer some guidance on how to choose the right one for you.
What is a custodial crypto wallet?
With custodial wallets, your funds are in the possession of a third party. You can think of this like a bank: when you deposit and store your money, the bank is securing it for you so that you don’t have to take on the risk of storing it yourself. In this case, you will not have access to your private keys, as you are delegating custody of your funds to the crypto exchange.
Many popular crypto exchanges offer custodial accounts, such as Binance and Coinbase. It is recommended to check with your wallet provider to see if they have any insurance or guarantees when storing your funds, should something happen to the exchange.
Benefits of custodial wallets include:
You take on less risk by outsourcing the burden of storing your crypto to a third party
You don’t have to worry about losing your private key code
Risk of getting locked or frozen out of your wallet and account
Hacks targeting third party storage can wipe out your funds. Like with a bank, a custodian may use depositor’s assets in investments of their own, and when they fail, you fail too.
Crypto exchange collapse covered by Bitcoin.com here
What is a non-custodial crypto wallet?
If you prefer to have total control over your funds, then non-custodial wallets are the choice for you. Going back to our bank analogy, with a non-custodial wallet you are acting as your own bank. No one else has access to your funds, which you keep under your own personal lock and key.
You can think of your non-custodial wallet as your own private digital safe. You own the private keys, and no one else can withdraw or send funds from your wallet without access to these keys. If you decide to send funds to another wallet, you have the authority to do so instantly, and whenever you decide to.
Benefits of non-custodial wallets include:
Total control over your crypto, with no third party risk of losing your funds in investments
Ease-of-access to your funds
If you forget your keys or wallet information, you may be locked out of your own account and lose access to your crypto
Your wallet is your own crypto vault. How will you choose to store it? Image from unsplash
Deciding which crypto wallet is right for you
To understand whether a custodial or non-custodial wallet is the right fit, you need to evaluate what kind of crypto investor you are. If you prefer to have complete access over your own funds, or if you send and receive crypto quite frequently, then you may be inclined to choose a non-custodial wallet, such as ZenGo (no key, no password), Bitcoin.com or Spot. If you’re new to crypto and prefer that a third-party manages your funds, you may lean more towards a custodial wallet.
Looking to create a new wallet address? You can get started here.