Custodial vs. non-custodial wallets: Where to store your crypto

Key takeaways

• Custodial wallets are managed by third parties, offering convenience but less control over your private keys.
• Non-custodial wallets give you full control over your private keys, enhancing financial sovereignty.
• Losing your non-custodial wallet’s private key or seed phrase means losing your crypto forever, whereas custodial wallets offer recovery options.

One of cryptocurrency’s touted benefits is that people can take custody of their own crypto, retaining full control over their digital assets and transacting as they see fit.

But not everyone is interested in this extra level of responsibility. For that reason, many digital asset service providers and brokerage firms offer crypto custody services for their clients, safeguarding them like stocks, bonds, and mutual funds.

There are two main types of cryptocurrency wallets: custodial and non-custodial. In this guide, we’ll compare and contrast custodial versus non-custodial wallets, so you can make a better-informed decision when it comes to securely managing your crypto assets.

What’s a custodial wallet?

Cryptocurrency wallets are tools that allow you to conduct transactions on a blockchain network. These wallets are designed to secure your private keys, which are like the combination to a safe. Anyone who knows the private key can access the assets, which are held on a specific blockchain address. That address is also known as a public key. 

A custodial wallet is a crypto wallet where a custodian – a third party such as a crypto exchange or brokerage firm – manages and stores the private keys on your behalf. The private key isn’t usually shared with the underlying account holder for security purposes. 

The custodian is responsible for safeguarding your private key, and does so by implementing security measures like encryption, multi-factor authentication, and cold storage. When you want to sell, swap, or otherwise dispose of the assets in your custodial wallet, you must submit a transaction request to the platform. 

The main benefit of custodial wallets is that professional third parties protect your private key. Leaving security up to professionals means it’s less likely you’ll lose access to your digital assets permanently, either through forgetting your private keys or accidentally exposing them to malicious actors. This makes custodial wallets one of the safest ways to store cryptocurrency for beginners.

What’s a non-custodial wallet?

A non-custodial wallet allows you to hold and safeguard private keys on your own. For optimal security, no one else should have access to your private key, aside from people you trust with your money.

With non-custodial wallets, you’re free to sell and swap the contents of your wallet as you see fit – no outside approvals necessary. This financial sovereignty offers an extra degree of agency to the world of digital asset management, but it comes with more risks. 

Anyone who has the private key to a wallet can access and transact with the assets inside, so it’s imperative to secure your private keys to prevent bad actors from stealing your wealth. And if you lose or expose your private keys, there’s little support or compensation available, just like dropping a paper bill on the ground.

Examples of non-custodial wallets include hardware wallets like Trezor or Ledger (which are physical devices that store your crypto), software wallets like MetaMask or Trust Wallet (which function more as hot wallets for regular use), and paper wallets (where you record your private keys physically).

Custodial vs. non-custodial wallets: 7 key differences

The table below shows seven key differences between custodial and non-custodial wallets, aside from who’s in charge of the private keys. 

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Pros and cons of custodial wallets

Custodians managing your crypto’s security is a big draw of custodial wallets, but it’s not the only feature worth mentioning. Here are the biggest pros and cons of using a custodial wallet. 

Pros

• Ease of use: Custodial wallets are easy to use, with built-in user-friendly features that provide a similar experience to online banking or brokerage transactions.
• Professional security management: The custodian is responsible for managing and securing your private keys and assets. They typically employ a variety of security measures, like cold storage and insurance, to secure your funds.
• Account recovery: Custodians offer the ability to recover your account in the event that you misplace your password or are part of a security breach.
• Convenience: Many custodial wallet providers offer the ability to trade, stake, or lend your crypto directly from inside the platform, eliminating the complexity of trading in decentralized finance (DeFi). And if you exclusively stay on the provider’s platform or use other centralized exchanges (CEXs), it’ll be easier to accurately report crypto taxes. 

Cons

• Lack of control: You must obtain authorization to trade or sell your cryptocurrencies on other platforms. 
• Dependence on third parties: If your provider goes down, declares bankruptcy, or acts maliciously, you’re at risk of losing your funds. 
• Less anonymity: Custodians typically conduct Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, reducing your privacy when it comes to your crypto transactions. Providers have the option to freeze your access if you don’t comply with regulations or internal policies.
• Risk of hacks: Centralized platforms are a prime target for hackers, so it’s crucial to use one with extensive security measures in place.

Pros and cons of non-custodial wallets

Non-custodial wallets grant plenty of flexibility and are good options for traders who don’t want to wait for a thumbs-up to use their crypto. Here are other major pros and cons to consider before putting your investments in a non-custodial wallet.

Pros

• Full agency: You’re the sole owner of your private keys and the funds stored in your wallet.
• More control over safety: When properly managed, non-custodial wallets reduce the risk of hacks or third-party failures leading to the loss of funds because you’re the only one with access.
• Censorship resistance: No third-party approval is required to access and transact with your assets.
• Privacy: Most non-custodial wallets don’t require any personal information to operate, allowing for greater anonymity.

Cons

• Increased responsibility: You’re solely responsible for securing your private keys. Losing access to them means permanently losing access to your funds. 
• No account recovery: There are almost no recovery options or support services available to recover access to your wallet if you lose your private keys. 
• Technical learning curve: Using non-custodial wallets comes with a steep technical learning curve that may be challenging for new users.
• Vulnerability to scams: Without a third-party watchdog, there’s little protection or recourse if your private keys become compromised.

Should you choose custodial or non-custodial wallets?

Your level of experience, needs, and intended use dictates what option might be right for you: 

• Beginners: Custodial wallets are a good choice for beginners and casual traders because they’re easy to use. Their integrated trading features and added protections mean you don’t have to be fluent in technical language to use crypto.
• Long-term holders: Non-custodial wallets, especially hardware wallets, are better for those who want their digital assets secured offline and in their own possession for years.
• Traders: Custodial wallets are better for frequent traders who want access to liquid markets offered by CEXs like Coinbase or Binance. For traders who prefer to engage with DeFi, non-custodial wallets allow for the freedom to choose.
• Privacy advocates: Non-custodial wallets are ideal for those who want total anonymity, as there’s no need to share personal information with third parties.

Monitor all your wallets with CoinTracker

Knowing what the difference is between custodial and non-custodial cryptocurrency wallets is necessary to make informed decisions about your digital assets. Whether you opt for the custodial route or prefer to have your private keys locked in a physical notebook, managing your digital assets and accounting for all tax implications shouldn’t be complicated. 

CoinTracker syncs your crypto accounts and lets you track your entire portfolio across multiple exchanges and wallets, all in one place. Join the 2 million users who rely on CoinTracker for a seamless crypto experience – start free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

FAQ

What are the convenience benefits of using a custodial wallet?

Custodial wallets are generally easier to use than non-custodial wallets. They offer simplified account access (usernames and passwords), recovery options, and the ability to convert crypto directly into fiat.

What types of wallets are considered non-custodial?

Any wallet not maintained by a third-party – one you own and operate – is a non-custodial wallet. Some examples include hardware wallets (like Ledger and Trezor), software wallets (like MetaMask and Trust Wallet), and paper wallets. 

What factors might influence a user's choice between a custodial and non-custodial wallet?

Your technical proficiency is a major factor in deciding between a custodial and non-custodial wallet, as is your need for privacy or convenience. Other factors to consider include any security concerns, desire for autonomy, and whether you’re interested in trading or long-term storage. 

Can I move between a custodial and non-custodial wallet? 

Yes, you can easily move between a custodial and non-custodial wallet. After getting approval from your custodian, you can transfer crypto from a custodial wallet to a non-custodial wallet. And since you’re free to do what you want with crypto in a non-custodial wallet, you can send crypto to another non-custodial or custodial wallet whenever by initiating the transaction from your wallet interface.