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What are Custodial and Non-Custodial Wallets?

On average, traders are torn between custodial and non-custodial wallets when it comes to storing cryptocurrencies. This is because they individually offer pros and cons that make them good fits under different circumstances. So what are custodial and non-custodial wallets? What are their differences? Which one is more suitable for you to use?

This article discusses both in-depth, highlighting all you need to know to make the right decision. Let’s dive in! 

What is a Crypto wallet?

Many people believe that crypto wallets will store or contain their crypto assets. However, this is wrong because a crypto wallet isn’t like a regular physical wallet, in which you would keep your cash and credit cards. They are just a tool through which crypto users can gain access to their funds on the blockchain and also initiate crypto transactions.

Essentially, cryptocurrency wallets help to store users’ private keys as well as public and provide an easy-to-use and seamless interface to manage and operate crypto balances. Also, they provide support for cryptocurrency transfers via the blockchain.

The-best-crypto-exchange-platform
The-best-crypto-exchange-platform

What is a Custodial Wallet?

As its name implies, a custodial wallet is a crypto wallet where a third party assumes custody of private keys on behalf of the users. Essentially, the third party is given total control over all the crypto assets, accepting the obligation of managing and regulating the user’s wallet key, all signing transactions, as well as protecting the user’s crypto tokens.

Custodial wallets are usually available from regular crypto exchanges or any other custodial wallet provider. It comes in the form of a web or mobile app. Once a user signs in to their wallet account, they can make use of the crypto wallet provider’s interface to regulate and manage their funds and even initiate transactions.

Essentially, this means that users must trust the custodial wallet service provider to securely keep their assets before choosing to go for this. Also, they must implement strong security measures to avert unauthorized access. These security measures can include biometric authentication (facial or fingerprint verification), two-factor authentication (2FA), and even email confirmation.

With a custodial wallet, you’re entrusting your crypto assets into the hands of a third party to help store them. However, you can access them at any time if you want to sell or send your assets somewhere else. While custodial wallets generally lessen a user’s personal responsibility, it requires their users to have trust in the custodian that holds the assets. Most custodial wallets nowadays are web-based exchange wallets. 

You’ll love this – How to save money as a student using Crypto

What are the advantages and disadvantages of custodial wallets?

what is a wallet address
Wallet address

Here is a list of the advantages and disadvantages of using custodial wallets:

Pros

  • Less responsibility for users
  • Can easily reset password to retrieve access to digital assets
  • Simple and very easy to use for beginners

Cons

  • Private keys are completely controlled by a third party
  • Custodial wallets are very vulnerable to hackers
  • KYC and AML verification for all account creation
  • Less advanced features obtainable for experienced and experienced crypto users

Which is the best custodial wallet service provider? 

If you desire to keep everything simple and prefer that a third party holds your crypto assets, there are numerous custodial wallet service providers. Basically, Bitmama offers the best and most secure custodial wallet services for crypto enthusiasts.

What is a non-custodial wallet?

A non-custodial wallet, also known as a self-custody wallet, is a wallet where the crypto owner/user is solely responsible for managing and operating their own funds. Essentially, with this type of wallet, the user has total control of all their crypto holdings, manages and regulates their own private key, and even handles all transactions themselves. 

Non-custodial wallets could come in different forms. Mobile wallets usually come as regular downloadable mobile apps. Browser-based wallets are a kind of browser extension that allows users to place their private keys and make transactions. On the other end, hardware wallets come as physical devices that you can see and touch. Since hardware wallets can be accessed and managed offline, many people regard them as the most secure type of wallet.

When you use a non-custodial wallet, you have complete control of all your private keys, which in turn supervises your cryptocurrency and ascertain that the funds are all yours. This also means that you are entirely responsible for not misplacing your keys and demands that you take your own active precautions to protect and safeguard your funds.

What are the advantages and disadvantages of non-custodial wallets?

What is a non-custodial wallet
What is a non-custodial wallet

Here is a list of the advantages and disadvantages of using non-custodial wallets:

Pros

  • You solely control your keys
  • Assets won’t be affected in cases of any exchange hacks
  • Fast and extremely easy to create new wallets
  • More advanced features and functions are available than the custodial services
  • Lastly, no KYC or AML process is necessary for creating or storing crypto tokens

Cons

  • Impossible to get back crypto tokens if you lose private keys and/or your recovery phrases
  • More technical knowhow required to use the advanced features

What is the difference between custodial and non-custodial wallets?

The major difference between a custodial and a non-custodial wallet is private keys. When speaking of if a crypto wallet is custodial or non-custodial, the major factor that is taken into consideration is the private key required to gain access to their crypto tokens.

Generally, a custodial wallet service, such as Bitmama, keeps the private key. So it is usually responsible for protecting a user’s digital asset. On the other hand, a non-custodial wallet, also called a self-custody wallet, provides users with total control over their own private key, thereby giving them the sole responsibility for safeguarding their holdings.

What are Crypto Keys?

Keys are lengthy alphanumeric sequences, generally 25-36 characters in length. Every crypto wallet comprises one or more pairs of “keys” — one public, while the other is private. Basically, the public key is just like a bank account number and it was designed to be shared with others, so anybody who has it can easily send crypto to the affiliated wallet. However, the private key is just like your regular debit card PIN code, as it allows anyone with the keys to access the crypto assets in the wallet.

How to create a custodial wallet on Bitmama

With Bitmama, a custodial wallet address is automatically created for you as soon as you open an account. Follow the steps below to find your custodial wallet address on our platform:

1. Download the Bitmama app for Android or iOS, register and log in. 

2. Navigate to the verification page in your ”Account” section. Click on the verification button to submit the necessary documents and verify your account up to level 3.

Bitmama Verification
Bitmama Verification

3. On the bottom menu, select “wallet”

Bitmama Wallet
Bitmama Wallet

4. Navigate to “Crypto Wallet”

5. Lastly, select your preferred cryptocurrency (we selected Bitcoin in this example)

Bitmama Crypto Wallet
Bitmama Crypto Wallet

Following the steps above, you can find your custodial wallet for the supported cryptocurrencies on our platform.

Ultimately, what are custodial and non-custodial wallets and which option is best for you? Both custodial and non-custodial wallets carry their own loads of benefits and restrictions. If you are a user who prioritises ease of use and reasonable backup recovery options, it will be best to go for custodial wallets, as they offer their user such. However, if you prefer to have full control and ownership of your private keys, non-custodial wallets may just be what you’re looking for.

As the best crypto exchange app in Africa, Bitmama offers a secure marketplace for crypto enthusiasts and secure custodial wallets that leaves you with no worries. 

Perform activities like crypto exchange, crypto staking, and creating virtual dollar or crypto cards for online payment. Get started today by downloading the Bitmama app on Android or iOS.

bitmama

Emmanuel

Jun 1, 2023

6 mins read

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