Digital currencies are stored digitally in crypto wallets. However, not everyone has the proper knowledge to understand and choose the right wallet. There are mainly two different types of wallets that include custodial wallets and non-custodial wallets. At first, it is essential to know the difference between the non-custodial and custodial wallets present there. Then, it entirely depends on the investor’s choice about choosing the wallet. In this article, we will read about the pros and cons of both custodial and non-custodial wallets. So, without further ado, here’s a beginner’s guide on bitcoin wallets.
What is a non-custodial wallet?
The meaning of a non-custodial wallet is clear from its name, which means self-custody. Non-custodial wallets are those wallets that are in control of users. Users control their private keys and make transactions easily. If you use a non-custodial wallet, you are responsible for securing your coins and remembering the private keys of digital wallets to secure your investments. If you forget private keys, you will lose your coins and will be incapable of accessing your digital currencies.
Investors are responsible for ensuring that they are using the suitable securing measures and best wallets like cold storage wallets. The most popular cold storage wallets are hardware wallets, basically physical devices that store private keys offline. Hardware wallets are considered as the safest wallets to store your crypto coins and private keys, but there are still many risks associated with these wallets. Therefore, it is crucial to find the right and reputable hardware wallet provider and use security measures to secure your wallet to avoid being destroyed or stolen.
Hot wallets are internet-connected wallets, and this is why these wallets are considered risky. Even if you are not using your wallet, the hacker will always try to access your private keys and hack your crypto wallet. Therefore, it is imperative to secure the private keys of your wallet physically. Some investors tend to use hardware wallets and secure their keys in a hardware device, while others use the paper wallet, print their private keys on paper, and lock it at a safe storage place. Experienced investors always choose non-custodial wallets that offer a security feature that adds a security layer and protects your digital assets.
Multi-signature is a great security measure that secures your digital assets as it requires multiple keys to access the digital wallet. Different devices store different keys, including hardware wallets and phones stored in distinct locations. Along with it, the main thing that matters is the way you are backing up the keys or your wallet. It is crucial to create a backup of your wallet to recover it lost or destroyed.
What is a custodial wallet?
In a custodial wallet, the third party like crypto exchanges controls the private keys of your wallet. It means that if you purchase crypto coins from an exchange, the exchange keeps the crypto wallet’s private keys and users only get to know their wallet information. Though in the bitcoin community, there is a saying that if you don’t own your keys, you don’t own the coin, still many investors choose to store their crypto coins in the custodial wallet. But unfortunately, it is the reason why most investors are losing their funds permanently.
Even if you choose to store your funds with an exchange, it is crucial to do proper research and understand it. Choose a centralized exchange to store your funds as these are regulated by central authorities instead of storing your funds in a decentralized exchange. Additionally, make sure to understand the risks involved in storing coins with the exchange. In custodial wallets, hackers won’t require your phone or hardware and directly hack the exchange and attack your coins where you’ll no longer access your coins and keys.
Storing funds in custodial wallets doesn’t add a layer of protection to user’s funds. However, many reputed exchanges are investing heavily in their security to provide a high level of security to users. But the hackers are smart enough to find creative ideas to hack your account. So, use the best security methods to protect your wallet and exchange account.
