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Cryptocurrency wallets are where digital assets are stored, and typically allow you to send, receive, and manage your cryptocurrencies.
However, it is important to note that not all cryptocurrency wallets are the same.
There are many different variations of wallets, along with their own subsection of options.
The two main types are Self-guarding and Custodian governorwhich determines who controls your private keys. And from there, there programming Governor and Devices The wallets available within each of them.
Knowing the difference between these two is key to deciding which option is right for your encryption needs.
Whether you are a day trader, a decentralized finance (DeFi) user, or a long-term holder, this may affect your preferences. In this post we will explore the world of A Self-custodial wallet versus non-custodial wallet To help you decide which option is best for you.
List of contents
Custodial Crypto Wallets vs. Self-Crypto Wallets
| Nursery portfolio | Self-preserving wallet |
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What is a custody wallet?
A custodial wallet is a type of cryptocurrency wallet where an external service, such as a cryptocurrency exchange, “holds” your private key.
In a way, this means that even though you own your cryptocurrency funds, you can’t actually control who has access to your assets as you do. You do not have custody On your private keys.
For example, popular exchanges like Coinbase and Binance use custodial wallets. To some extent, this has some benefits for some users, especially beginners who do not understand what a public or private key is, or for day traders who want easy access to the exchange.
You can think of a secured crypto wallet similarly to a bank, meaning that as a customer, you have to trust that the bank, or in this case, exchange, will protect your assets.
But the main problem is that not all exchanges are secured or can necessarily return your money if they are hacked or stop working!
Did you know?
Binance was hacked in October 2022 for about $570 million.
What is a self-custody wallet?
A self-custodial wallet gives you complete control over your private key. This means that there is no third party involved in managing your assets.
When you use a non-custodial wallet, it is now your bank. This means that you are responsible for the safety and security of your private key.
If you lose access, your cryptocurrencies could be lost forever – unless you’re smart enough to back them up in a seed phrase crypto wallet!
Although it may seem like more work and more responsibility, 66.5% of cryptocurrency investors prefer self-custody wallets.
Cryptocurrency wallet providers such as MetaMask, Ledger, and Material Bitcoin offer non-custodial wallets, however, it is essential to understand the difference between these three examples.
Here’s a summary of each to help you understand the difference:
Software portfolio
Although MetaMask is a self-custodial wallet, it is a wallet Hot walletWhich means it is always online. There are security measures in place to protect your assets, but the basic nature of a software wallet means it is more vulnerable to hacking attempts and attacks.
Electronic hardware wallet
Ledger is a popular hardware crypto wallet used by many around the world. It is known for its ease of use and safety features.
However, this is a hardware wallet which means it relies on a connection to external devices to function, such as a mobile phone or computer.
Since the actual device itself has an electronic display, it also depends on the user’s responsibility to charge the device for it to work.
Non-electronic hardware wallet
A non-electronic hardware wallet, such as Material Bitcoin, is a wallet Cold wallet. This means that it is 100% offline and does not rely on a connection to external devices to function.
All of these wallets are self-custodial, but as you can see, each provides degrees of additional security and security.
Custody and self-custody wallets differ in several important ways. Here’s an overview of the two:
| feature | Nursery portfolio | Self-preserving wallet |
|---|---|---|
| Control of money | Third-party service control keys | User control keys |
| protection | Depends on the exchange or provider | The user is responsible for security |
| Ease of use | Beginner friendly, easy to pick up | More complex, requires knowledge |
| risk | Vulnerable to third party hacking | Risk of losing access if keys are lost |
| privacy | Less privacy (KYC required) | More privacy (no KYC needed) |
Self-locking wallet vs security wallet: which is more secure?
Safety of self-preserving wallet
When you control your private keys, you have more autonomy over your assets and the security of keeping them offline under your own control. However, this comes with its own set of risks, including user error.
Losing access to your private key or falling victim to phishing scams can result in a permanent loss of funds. For example, even if you are smart enough to use seed phrase recovery, if you misplace that phrase, your wallet will be lost forever.
Self-custodial wallets, on the other hand, have additional security features such as two-factor authentication (2FA) and the ability to pair with a hardware wallet.
Some of the best hardware wallets, like Material Bitcoin, are physical objects that store your private keys offline, making them highly resistant to hacking.
Backup and recovery options for self-custodial wallets
Self-custodial wallets rely on seed phrases, which is the only way to recover your wallet if access is lost.
You are responsible for storing this seed phrase securely, and it is always recommended to keep it offline, preferably in a cryptocurrency wallet, vault, or safe.
Did you know?
Chaina Analysis found that more than 20% of Bitcoin in circulation was lost due to forgotten passwords or unrecoverable private keys.
Safety of nursery governors
Dedicated wallets, where a third party holds and manages your private keys, are usually more convenient for users but come with greater security risks.
The biggest threats are hacking, internal fraud, and stock exchange closures. Since the provider controls the private keys, you are vulnerable if the platform is hacked.
One famous example is the hack of the Mt.Gox exchange in 2014. It resulted in a loss of 850 thousand Bitcoins! Most recently, in 2019, Binance lost over $40 million worth of Bitcoin due to a security breach.
These are just some examples of major incidents that highlight The problem of handing over custody of your private key to a third party.
Fees: Self Custody Portfolio vs Custody Portfolio
Custodial wallets typically charge fees for services such as withdrawals, deposits and transactions, especially when moving funds on and off exchanges.
The fee rate can change depending on the platform and can vary in relation to the traffic on the blockchain. On the other hand, self-custodial wallets usually do not have direct fees, because they do not use third-party services.
However, you need to keep in mind that you may still need to pay network or transaction fees when sending cryptocurrencies.
When choosing a wallet based on fees, consider how often you plan to transact, and which cryptocurrencies you want to buy/sell.
If you are an active trader, a self-custody wallet with lower fees is your best option, and those looking to hold Bitcoin long-term should consider cold storage wallets for the highest level of security.
Pros and cons of a self-custody wallet versus a custodial wallet
| Self-custodial wallets | Nursery governors |
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KYC and legal requirements
When it comes to regulations between a self-custodial wallet and a custodial wallet, there are some similarities and some differences, depending on your region and government jurisdiction.
KYC (Know Your Customer) in custody wallets
Custodial wallets often require users to complete Know Your Customer (KYC) procedures to comply with legal and regulatory requirements.
The KYC process usually involves verifying your identity by providing your personal information. This could hopefully include government-issued IDs or passport numbers Preventing money laundering, scamand Other illegal activities.
As cryptocurrencies grow globally, many governments are imposing stricter compliance rules to monitor and regulate cryptocurrency transactions. In the US, Financial Action Task Force (FATF) guidelines mandate that exchanges and custodial wallet providers use KYC to comply with global anti-money laundering (AML) regulations. This also applies to Europe and some parts of Asia.
Is KYC required for self-custodial wallets?
Self-custodial wallets, on the other hand, do not always require KYC…
In theory, since the private keys are owned and controlled by you, your funds do not involve any third party. This should relieve you of the need to provide your personal information.
However, things are changing quickly.
In 2022, the European Union implemented laws requiring KYC verification even for self-custodial wallet users in an attempt to hinder illegal activities.
This is a gray area that is constantly evolving and changing depending on governments and regions.
How to choose between custody and self-custody portfolios
When choosing between custodial and self-portfolios, you should consider the most important factors:
➡️Security
➡️User experience
➡️Fees
➡️KYC requirements and responsibilities
➡️Your investment strategy (trade or hold long term)
No matter which option you choose, our suggestion is to do so Always store larger amounts of cryptocurrencies in a cold storage wallet.
The security of your digital assets is more important than anything else.
Frequently asked questions
What is the main difference between a self-custodial wallet and a custodial wallet?
- The main difference is ownership. Custodial wallets are managed by a third party, while self-custodial wallets are controlled by you.
What are the best self-custodial cryptocurrency wallets?
- MetaMask is great for DeFi and Ethereum-based assets, while Exodus is a good option for multi-cryptocurrency investors, and Material Wallets are ideal for investors who want easy self-custody with high security features.
What is the safest option for storing cryptocurrencies?
- For maximum control, self-custodial cold hardware wallets are the most secure.
