Custodial vs. Non-Custodial Wallets: Which is Safer?

Do you want to determine which wallet type is the safest for your crypto assets? Then you came to the right source. This article will examine the pros and cons of custodial and non-custodial wallets and show you all possible solutions and security measures to keep your keys and your coins safe. By the end of this article, you will know what type of wallet is the right choice for you.

• Custodial Wallets
• Non-Custodial Wallets
• Security Measures for Crypto Wallets
• Other Wallet Solutions
• What Wallet Should You Choose?

Custodial Wallets

Let’s start with the basics. A custodial wallet is where a third party, such as an exchange, holds the private keys for your blockchain address. This means that access to your assets depends on their security infrastructure, and if something were to happen to that third party, your coins and tokens could go down with it. Be especially aware of fraudulent brokers, often claiming to be high leverage brokers. This is the opposite of true ownership and should be a cause for concern for anyone looking to secure their crypto holdings.

Custodial wallets are kind of the black sheep of the crypto world. These wallets have been shunned by purists who preach the gospel of decentralization and total control over your assets. But let’s not forget, sometimes it’s good to have a little backup, especially for beginners unfamiliar with private keys and wallet shenanigans. 

Pros and Cons of Custodial Wallets

A custodial wallet can be a lifesaver for those who aren’t tech-savvy or don’t have the time to constantly monitor their funds. You hand over your crypto to a trusted third party, keeping it safe and sound. There is no need to worry about losing your private keys or falling victim to a hack; these third-party custodians have covered you.

Another perk of using a custodial wallet is easy to access to popular cryptocurrency exchanges. If you want to trade, you’ll often be required to deposit your funds into a custodial wallet managed by the exchange. And for those looking to earn passive income, some custodial wallets offer interest on your savings, just like a traditional bank.

So don’t be too quick to dismiss custodial wallets; they might just be the safety net you need in the wild world of crypto. Just remember, with convenience comes sacrifice. By giving control to a third party, you’re giving up some of the freedom that Bitcoin promised in the first place. But hey, sometimes a little compromise is worth the peace of mind.

For more cons, read “Not Your Keys, No Your Coins,” showing the devastating effects it might have on using custodial wallets. 

Non-custodial Wallets

Now, we will enter the realm of the non-custodial wallet, a concept that turns the traditional financial world on its head and gives power back to the people. With this type of wallet, you have exclusive control of the private keys, and your assets are not at the mercy of any third party. This means that your access to your assets is not dependent on anyone else, and another entity cannot confiscate your assets.

According to cryptoslate, massive amounts of Bitcoin were leaving exchange reserves and moving into the hands of individuals. In 2022, we saw over 550,000 Bitcoin leave the exchanges and more than a million move into self-custody. That’s right, the trend is moving towards non-custodial wallets, with 78% of the circulating Bitcoin supply now held in cold storage.

So, how does a non-custodial wallet work in practice? It’s quite simple, really. You download the wallet software to your device, generate a new blockchain address, and hold onto the private keys. The private keys are used to sign transactions and give you access to your assets. This direct link to your blockchain address makes the wallet censorship-resistant, meaning that no one can block your access to your assets.

Types of Non-custodial Wallets

First up, we have the software non-custodial wallet. These wallets are software applications you can access through a web portal, computer, or mobile device. They store your private keys within an interface that is always connected to the internet, making them easy to access. However, with great accessibility comes great responsibility, as these wallets also make your private keys vulnerable to digital hacks. Examples of software non-custodial wallets include Metamask and Morpher.

Next, we have the trusty hardware wallet. These wallets store your private keys offline in a secure physical (hardware) device isolated from the internet connection. They are portable and can be plugged into a computer to access your crypto assets. Examples of hardware wallets are Ledger or Trezor.

Finally, we have the old-fashioned paper wallet, the prospector of the crypto world. These wallets store your private keys offline, on a printed piece of paper that contains your private keys and QR codes. To access your assets, you need another crypto wallet app that can scan the QR code and transfer your assets into the software wallet. Although paper wallets are considered the safest way to store your crypto assets, they are less common because paper is a less durable storage mechanism. However, some replace paper with steel, making it a durable alternative to paper. 

Pros and Cons of Non-Custodial Wallets

With non-custodial wallets, you have complete control over your assets. The private keys, the recovery phrase, and all lies solely in your hands. No more having to rely on some centralized authority to keep your funds safe. No more waiting for approval from some faceless entity to make a transaction. You’re the king of your own crypto castle, with all the power and responsibility that comes with it. 

And that’s just the tip of the iceberg. Non-custodial wallets are also censorship-resistant. It’s like having a crypto fortress fortified against the prying eyes of government regulators and corporations. They can’t restrict your transactions, they can’t freeze your funds, and they can’t control your access to your own assets. It’s a beautiful thing, my friends.

In conclusion, non-custodial wallets offer a new level of financial freedom and security, with each type offering its unique pros and cons. If you want complete control over your crypto kingdom, then non-custodial wallets are the way to go. No restrictions, no limitations, just you and your crypto, riding off into the digital sunset. And if that isn’t the epitome of financial freedom, we don’t know what is.

With freedom comes responsibility, which is also the biggest drawback. If you lose access to your non-custodial wallet, you will also lose everything that is stored on it, even if you are only starting to grow a small account. It is estimated that around 20% of Bitcoin has been lost. So, unless you are a genius hacker, you might never get your coins back from a hardware wallet if you forget the password. 

Security Measures for Crypto Wallets

Even if the blockchain technology that underlies cryptocurrencies is secure and tamper-proof, the real threats to your funds come from human factors. That’s why it’s crucial to follow at least some basic security measures that can help you protect your wealth.

• Public Wi-Fi networks: Avoid public networks and use a virtual private network (VPN).

• Phishing scams: These can be fake websites that look like the real thing or emails that trick you into giving away your login credentials. Always check the URL of the website you’re visiting to ensure it is legitimate. 

• Back up your recovery phrase. This way, you’ll be able to recover your funds even if your device is lost or stolen. Additionally, it’s a good idea to spread your savings across multiple accounts, so that your other funds will still be safe if one is hacked.

With a little extra care and attention, you can help ensure that your assets are safe and secure for the long haul. Also, stay updated about the newest measures with the best crypto podcasts.

Other Wallet Solutions

Now, to increase security, there are two more options we want to talk about: multi-signature wallets and social recovery wallets. These two solutions are rising in popularity to mitigate the risk of catastrophic losses due to exchange hacks, state seizures, or even plain old forgetfulness.

Multi-signature wallets reduce the risk of a single point of failure. With these wallets, you’ve got multiple private keys being shared amongst a set number of parties. For example, two out of three, or three out of five keys may be required to make a transaction. This means that even if one party falls prey to hackers or simply drops the ball, your coins are still protected.

Social recovery wallets take this idea one step further by incorporating the idea of multiple guardians. If you lose your private key, you can initiate a recovery process by reaching out to these guardians and getting their signatures on a special transaction. If more than half of the guardians sign, a new key is generated and your funds are secure again.

We see more and more folks flock to these solutions as they become more user-friendly and accessible. The multi-signature wallet trend is especially on the rise, with companies like Casa and Unchained Capital leading the charge. 

Sidenote: There is also an additional third option. If you are a crypto millionaire, you might go straight for the hidden bunker solution in the swiss alps. 

What Wallet Should You Choose?

Some might say that a custodial wallet is a way to go for beginners, but we say, don’t you dare give up control of your hard-earned funds. They might have good intentions, but the fact remains, they could still leave you high and dry.

That’s why we are all about non-custodial wallets. Sure, they might take a bit more know-how to set up, but you’ll be in the driver’s seat with complete control over your assets. Plus, with the right security measures in place, you’ll be sleepin’ sound at night knowin’ your funds are safe from the dangers of the internet.

So, if you’re lookin’ to dive into the crypto world and search a way to safely allocate your crypto portfolio, do yourself a favor and go for the non-custodial route. If you want to start with a simple and secure wallet – try Morpher Wallet. Morpher Wallet combines the simplicity of a custodial wallet with the benefits of a non-custodial wallet. It’s the way of the future, and the only way to keep your assets truly secure.

Disclaimer: All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs. This post does not constitute investment advice.