Custodial vs Non-Custodial Crypto Wallets
Recently Coinbase, one of the biggest crypto exchanges in the world sparked some controversy after revealing some obvious details in their latest quarterly earnings report 2022. It was regarding the clause that says if Coinbase goes bankrupt then all of its users' funds will be subject to bankruptcy proceedings. As @themarkymark pointed out in his recent post that it's a real possibility that they might go down that path. People in crypto should know this about all the custodial wallets out there. They are prone to such risks and all users must be aware of them irrespective of what these services would like to reveal or not.
After this post, you will have good clarity on what are custodial & non-Custodial crypto wallets with their pros and cons. Then you will be able to decide which one is best for you. Let's start
What Are Custodial Wallets?
The custodial wallet is a service where the service provider manages the private keys of your funds. It generally provides a backup & security with customer support and the ability to recover the funds. For ex: Coinbase Exchange Wallet. The company owns the keys to your funds while you have a login id and password for your account to access those.
PROS:
- Convenient
- User Friendly
- Trader Friendly
- Customer Support
- Account Recovery
CONS:
- Not Your Keys, Not You Crypto
- KYC
- No Offline Access
- Prone To Hacking
- Prone To Data Breach
- Prone To Bankruptcy. LOL @ Coinbase!
All exchange wallets are custodial wallets. Exchanges may provide different services, perks, security levels & insurance for retail/institutional investors. With custodial wallets, Users are at risk of losing access to their holdings if the company providing the service ever went bankrupt or hacked or burned, you are fucked! Coinbase CEO Brian Armstrong went ahead on Twitter to explain why customers are protected in case of a 'black swan' event like 'bankruptcy' which is highly unlikely according to him. He said this when the quarterly earnings are at $430m LOSS! 😝
What Are Non-Custodial Wallets?
Non-Custodial Wallet or Self-Custody Wallet gives the power in the hands of its users. You are responsible for your own keys and security. For ex: Metamask & cold wallets like Ledger. They let you interact with BC to access funds with your password & seed phrase!
PROS:
- Self Custody
- More Security
- Full Control Over Funds
- No CEX Fees
- Can Access Offline
- No KYC
CONS:
- Technical
- More Responsibility
- Lose Your Keys, Lose Your Funds
- No Support
- Bad UX/UI
Which one is better?
It all comes down to what level of security you want in your crypto life! Most people in the space use a combination of both of them:
- Custodial Wallets: If you are a trader or a complete newbie with little to no experience of crypto.
- Non-Custodial Wallets: If you want more security to protect your wealth.
And if you are like who wants to have maximum security then go for cold wallets like Ledger or Trezor. Here's a great guide to cold wallets. Also, checkout the difference between Hot vs Cold Wallet to know which one is better and why.
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In custodial wallets, your funds are at the mercy of exchanges, meaning that if they for some reason halt services and don't let you transact, what could you do except waiting for services to resume.
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Like Binance keeps suspending and starting crypto deposits & withdrawals. It sucks!
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Yeah
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You usually have to have a custodial wallet to interface with the traditional banking system.
So, if you want to do business outside of cyberspace; you will probably need a custodial wallet in the mix.
Of course most people will have a combination of wallets and it is easy to move funds between different wallets.
That's right mate. A balance of both is great. But keep most of your wealth in non-custodial wallets for max. security. And don't talk to anyone about your assets or earnings in crypto. Lay low! It's a bad bad world out there. I have stopped telling my friends and family about what I do in crypto. Nobody cares anyway!
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I think most people will probably be fine using custodial wallets because it's more convenient but you are right about the security issues and we also don't want the service to go bankrupt. I don't have a custodial wallet right now but I should consider one when my funds do grow big enough.
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A good cold wallet will cost a few hundred dollars. Get it whenever you feel your wealth needs protection. ;) It's better to be safe than sorry.
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