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Non-Custodial vs Custodial Wallets

What is a non-custodial wallet?

Self-custody or non-custodial means that you are in possession of the private keys and recovery data that control your wallet address on the blockchain. This means that you have complete control over your funds and are responsible for the safe keeping of your private information. 

Some examples of non-custodial wallets are CoinomiExodus and Trust Wallet.

What is a custodial wallet?

Custodial means that an entity or company has control of your private keys and your funds on the blockchain. These exchanges also require that you provide them with KYC (know your customer) identity details as part of the local government’s compliance policies.

Some examples of custodial wallets/exchanges are CoinbaseBinance and BitMEX.

How to tell if you’re using a non-custodial wallet:

  • You did not give any personal information/details to open and have full functionality of your wallet.
  • When you created your wallet, you were asked to write down and save your 12-word recovery phrase.
  • You have access to your private keys.

Benefits of using a non-custodial wallet – The pros

Some benefits of using non-custodial wallets are:

  • Full control of funds: Since you are in custody of your Private Keys, you alone have full control of your crypto. Your funds cannot be locked out by a third party or government entity. Not even the wallet company has the power to access your funds.
  • Privacy: A non-custodial wallet does not require any personal information in order to send, receive, and manage your funds.
  • Create unlimited wallets.
  • Pseudonymous transactions. Your transactions are private. While anyone can see every transaction on the blockchain, nobody initially knows who owns what wallet address.

Risks of using a non-custodial wallet – The cons

Some risks of using non-custodial wallets are:

  • Responsible for security: You are 100% responsible for every security aspect of your funds. Your funds are only as safe as you are.
  • If you send funds to the wrong address, the only person that can return those funds is the owner of the address you sent the funds to. As mentioned, it is almost impossible to find out who owns an address.
  • If you lose access to your device or recovery details, nobody can help you regain control of your funds.
  • Unregulated currencies. There’s no one to turn to when black swan events happen.

Summary

If you are comfortable with technology and want to have full control of your funds, a self-custody or non-custodial wallet is your best choice for long-term investments.

If you are not good with technology and don’t have the time to learn how to safely manage your own funds, I would recommend you stay with a custodial Exchange that you trust. Best for new users, as the onboarding process is currently the easiest way to connect to your bank.

The decision is yours, but we highly recommend taking the steps to learn how to create your own non-custodial wallet. The benefits outweigh the risk when you know how to keep your crypto investments safe.

F4 Team


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