Non-custodial cryptocurrency wallets give you sole control of your funds, while custodial wallets give that control to a third party. Your choice to self-custody your cryptocurrency and NFTs comes with responsibilities, but can ultimately be rewarding and empowering.
PROS of the Non-Custodial Wallet
- You maintain control. The non-custodial wallet allows you to control your private crypto keys and your funds. There’s no need to trust a third party with your holdings. In comparison, custodial wallet services — ordinarily web-based cryptocurrency exchanges — own the private key to your wallet and control your funds. Entrusting your assets to a third party has consequences. Recent news was dominated by the collapse and bankruptcy of the Celsius Network, a platform that, along with lending services, also held investor funds in custodial wallets. Withdrawals were frozen and many can only hope to recover their deposits. Self-control is a critical consideration.
- Lower hacking risk/ personal information protection: Because custodial wallet services store users’ keys in centralized servers, they are more vulnerable to broad cyberattack than keys to noncustodial wallets. Plus, custodial wallet providers require your personal information to open an account, and a hack on the provider database can compromise your identity.
- Censorship-Resistance. A custodial wallet service has the power to refuse your requested transaction. This becomes significant when that centralized provider is ordered by a government authority to halt transactions associated with a particular wallet address. For example, in early 2022, a Canadian court directed certain platforms and crypto exchanges to freeze crypto transactions believed to be donations to Canadian trucker protesters. When you self-custody your crypto assets, restrictions placed on third party providers will not affect you.
- Fewer Transaction Delays. Transactions made through your noncustodial wallet are authenticated without involvement of centralized entities, often resulting in a speedier transaction. A custodian has discretion to delay transactions for verification and other purposes.
- Empowerment, Education and Health. Learning how to manage your own wallet is ultimately a rewarding and empowering experience. When you acquire a new skill, it improves your brain function and helps you gain courage and confidence.
CONS of a Non-Custodial Wallet
- Losing your Password. You are solely responsible for securing the private keys to your wallet. If you lose your password and the seed phrase that protects your wallet, your holdings will be inaccessible, resulting in a financial loss. A custodial exchange maintains your private keys and will ordinarily allow you to reset your account password if you forget it.
- Additional Precautions. You need to be vigilant in approving transactions and interacting with platforms. Hackers will try to steal your assets by tricking you into revealing your seed phrase, password or other personal information to drain your wallet. Hackers also use malware programs to obtain your data. Maintaining a self-custody wallet means taking additional precautions like using anti-virus software, authentication services, account settings and hard wallets to help ensure that your holdings are not compromised.
- Investment of Time. Learning how to use a non-custodial wallet takes time. Whether you’re using a software, browser-based, hardware wallet or a combination of all three, the learning curve can be steep. Be prepared to delve into the world of online tutorials and written manuals to set up and secure your devices.
- Inconvenience. Non-custodial wallets can be inconvenient. For example, you may need to connect a hardware device to your computer or mobile to transact. You’ll have to stash your Ledger, Trezor, or other hardware in your pocket or purse if you intend to use it on the go. In comparison, custodial wallets are primarily web-based and usually have a user-friendly interface, allowing novices to navigate them easily.
The Key Decision
After weighing the pros and cons, you may decide to self-custody your assets, place them with a custodial wallet provider, or opt for a combination of both. The myriad choices for holding crypto-based assets will only increase with time. But it’s important to do your research now and develop a strategy that suits your needs.