5 Reasons To Choose A Non-Custodial Wallet

Handy Tips / 22.08.2019

With all the advantages that cryptocurrencies and blockchain bring into our lives, they are not deprived of some risky points, which you should keep in mind as a future holder of coins.

Roughly speaking, all these features may be reduced to one characteristic, which is the security of your funds. Whatever currency you buy, its safety will largely depend on the precautionary measures you take, and one of the most important ones is to choose where to store your funds.

Basically, there are two types of wallets: custodial and non-custodial. Custodial wallets store your private keys on a server in a nutshell, while non-custodial wallets let you remain in full control over your funds. Now, let’s take a close look at their differences.

1. Only you have access to your funds

The first main difference lies in where your keys are stored. Private keys and mnemonic seeds are necessary to access your wallet in case of an emergency. If you choose custodial storage, it will keep your keys on the server, and you will need only a login and password to access the wallet.

As easy as it may seem compared to entering private keys, trusting a third party with your private information is not the most secure way to store the funds. On the other hand, a non-custodial wallet (for example, AtomicTrustWalletCoinomi) encrypts and store the private keys only on the user’s device so that nobody else can access the money.

2. Custody-free and Instant withdrawals

Trusting a third party with your private information means that this third party should confirm any action you want to perform with your funds. In this sense, custodial wallets are similar to traditional banks, where transactions might take up to one week because you need to get the approval of every step, however small it might be. Conversely, with a non-custodial wallet, you’ll be able to perform instant withdrawals, which makes the process much easier and faster. Whether you want to send money to your friend or practice trading, you’ll be able to send funds as soon as you make a decision.

3. Your funds are safe

There are many possible force majeure threats, and one of them is a chance of your funds being frozen due to KYC (Know Your Customer) requirements. Exchange platforms are obliged to comply with law regulations, and governments or other authorities have every right to request additional information on users within their jurisdiction.

KYC procedure normally takes up to three days, but the bank is entitled to require details if a transaction seems suspicious. Another consequence of trusting custodial platforms with your funds is that the maintenance process might freeze all the platform’s assets. Exchanges care about user’s funds and their security. That’s why your crypto can be frozen if you send it on exchange. In case you hold crypto in the wallet, which doesn’t have control over your funds and your private keys, nothing will happen under any circumstances.

4. No hacking threat

Another potential threat to custodial wallets is the possibility of hacking. Centralized exchanges have a huge database of users, and they store their funds in cold and hot wallets. Cold wallets seem to many hackers as not easy targets due to several confirmations to access the money. However, there are still many examples of thefts of funds due to security breaches on such platforms. Mostly, there is a possibility of hot storage’s hacking.

For instance, in 2014, the Japanese exchange Mt. Gox, which was hosting 70% of all bitcoin transactions at that time, was hacked, and consecutively, its users were deprived of over $450 million. Thus, custodial platforms can’t protect you with the maximum security level because of their centralized model.

5. 100% fork ready

Finally, custodial wallets are vulnerable should a fork happen. One of the most recent examples is the Bitcoin Cash fork case: its implementation left numerous platforms and exchanges such as Coinbase without access to the funds. Their customers could not send and receive coins unless the platform allowed the transactions. Later, when BCH wallets became operational, users had to wait until BSV was implemented on the platform. On the other hand, non-custodial wallets didn’t experience any difficulties because of the hard fork. Continuing with the example of BCH, users of non-custodial wallets could access their funds despite the fork.

Lessons to learn

When choosing between a wide range of wallets available today, consider the safety of your funds in the first place. Briefly, custodial wallets store the funds on a centralized server and provide customers with a login and password. As easy as it looks like, a user might not be able to access their money without the platform’s consent, which happens in KYC cases, maintenance works, or even a hard fork. On the flipside, non-custodial wallets provide you with the software you install on your device and then use it to your advantage, having full control over your funds.
Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.