We know that getting started in the cryptocurrency space can be a little daunting, especially when you are faced with so many wallets to choose from.

There are many different types of wallets on the market, such as web wallets, mobile wallets, desktop wallets, hardware wallets and paper wallets. But in simple terms, all wallets can be divided into two categories: custodial wallets and non-custodial wallets.

What are custodial wallets and non-custodial wallets?

By definition, a custodial wallet refers to a third party holding your Bitcoin key. In most cases, the third party here is the exchange or platform where you buy cryptocurrency. On the contrary, non-custodial wallets allow you to keep your keys and you can take full control of your funds.

Both wallets have their pros and cons. Each wallet caters to different transaction needs. In order to help you make a better decision, let us take a closer look at the next two wallets.

Pros and cons of the two wallets

1. Custody wallet

The first advantage of using this type of wallet is its easy access feature. You only need to enter your login information to access the funds, and you can use or trade immediately.

Since the service is provided by a centralized third party (such as an exchange), the transaction fees are usually lower when you use an escrow wallet.

In addition, since you are likely to trade on the exchange, if you encounter trading problems, you can also enjoy customer support services.

Finally, and perhaps the most important point, using this wallet will not lose the key. Your key is the only way to access funds. If you trust the exchange to keep the key more than yourself, then the custodial wallet is your best choice. If you lose your wallet password, you only need to confirm your identity to access your account again.

Now, let’s discuss some of the shortcomings of this wallet.

Since the key is not controlled by you, you do not “own” the cryptocurrency in the wallet in essence. Instead, what you have is debt. You can compare this situation to the bank holding funds, or the casino converting your cash into chips. The wallet owes you a debt for the tokens it holds, and at the same time, the wallet can also use it for its own purposes.

Secondly, because funds are stored in a centralized third party such as an exchange, everyone’s funds may be affected by data leaks or hacking to some extent. Because many platforms hold personal and private information, many criminals (such as hackers) regard it as the main target of attack. Of course, this depends on the cryptocurrency exchange you choose. Some platforms are more secure than others. On the whole, with the development and evolution of the cryptocurrency field, various platforms have been fully aware of these problems and have taken corresponding preventive measures.

The final disadvantage of using this type of wallet is its reliance on the Internet. In short, if you are not connected to the Internet, you cannot access funds.

2. Non-custodial wallet

The first advantage of using a non-custodial wallet is that you have a unique key, that is, only you can access your funds. To complete a transaction, you must use your own key to authorize it.

Second, the risk of data leakage and hacker attacks is low. Although everyone can be a target for malicious attacks, the amount of funds in your wallet is relatively small compared to the amount held by a centralized exchange, so it is unlikely to be the target of an attack.

Since you have complete control over the funds and keys, you can avoid delays that may be caused by third parties, so you can achieve instant withdrawals.

Finally, you do not need to be connected to the Internet to access funds. Some non-custodial wallets can be accessed without the Internet, allowing you to manage funds anytime, anywhere.

Now, let’s talk about the disadvantages of using this type of wallet.

First of all, you cannot enjoy customer support services. Since all matters are managed by you, if there is a problem, you can only bear the consequences. A small spelling error may cause a loss of funds, and there is no room for recovery.

If you like full control of funds, then this also means that you have to take sole responsibility for the funds. Pay special attention to this when you just start. The process of setting up non-custodial wallets, and even the process of sending funds to such wallets, may be bothering you. Although not technically difficult, the whole process may be more complicated and lengthy.

The last disadvantage is that if you lose the key, you also lose your funds. This type of wallet is susceptible to human error, that is, if you lose or damage the physical wallet that stores the funds, and your key is not recorded elsewhere, it cannot be retrieved.

Without the key, there is no cryptocurrency: a detailed explanation
” Without the key, there is no cryptocurrency ” is a common saying used to describe the difference between a custodial wallet and a non-custodial wallet: if you don’t hold the key, then the cryptocurrency is not yours.

For example, you bought Bitcoin on Robinhood. Strictly speaking, you do not own the bitcoin you bought. Instead, the platform owes you the corresponding amount of funds based on the amount of bitcoin you purchased. The same goes for buying Bitcoin on PayPal.

However, people usually have a misunderstanding about this, thinking that this is the worst-case scenario. In fact, the fact that a third party holds your key does not mean that your funds are in danger. Recently, the escrow wallet has upgraded its security and user interface, making it more convenient and safe to use.

Let’s take Paxful wallet as an example. In fact, your key is held by our wallet service provider BitGo, and you cannot download it, but you at least know that your key is in safe custody because BitGo is one of the industry leaders. In addition, we have also established a system to ensure the safety of your funds-high-security custody services, two-factor authentication, and advanced blockchain analysis tools to identify suspicious activities. At the same time, you can also receive and send cryptocurrency with any non-Paxful cryptocurrency wallet.

Escrow wallets are very friendly to beginners, so using this kind of wallet is often essential. For beginners who are just entering the industry, it takes a lot of energy to understand all aspects of cryptocurrency, and a custodial wallet will make the whole process easier. In addition, most custodial wallets are similar to banking applications, and the user interface is much more familiar than non-custodial wallets.

Managed and unmanaged

Choosing between a custodial wallet and a non-custodial wallet is an important decision you have to make before you start a cryptocurrency transaction. Some people like custodial trading accounts, some people choose non-custodial wallets, and some people use both types at the same time. The final decision-making power is in your hands.

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