New Bitcoiners may have trouble figuring out the best way to secure their assets, but the pros of non-custodial storage are worth considering.
This is an editorial opinion by Brandon Mintz, founder and CEO of the North American bitcoin ATM network Bitcoin Depot.
Digital wallets are essential for interacting with Bitcoin. In light of recent events in the cryptocurrency industry, it’s time to ask yourself what you’re doing to protect your digital assets. Today’s cryptocurrency landscape provides a variety of options that you can use to secure your bitcoins – but one of the easiest ways is to use a non-custodial wallet.
When using a non-custodial wallet, you will have complete control over your digital assets.
Wallet Custodian Vs. Non-Custodial Wallet
When you are looking for ways to store bitcoins, you will find two types of wallets: custodial and non-custodial. The most important difference between the two wallets is that, with a custodial wallet, you give control of your bitcoins to a third party, while with a non-custodial wallet, you are in control.
Custodian Wallet
As the name suggests, a custodial wallet gives custody of the private keys associated with the wallet to a third party. Using a custodial wallet is not different from keeping cash deposits in a commercial bank, which are your own assets, but you do not have exclusive control over them. This may create an opportunity for the custodian, or other third parties, to transact with your assets without authorization.
Many large crypto exchanges operate their business using custodial wallets. While you can buy, sell and trade crypto, you trust a third party to safeguard your private keys and, therefore, your crypto assets.
In certain cases, customers who hold assets can be considered unsecured creditors and, since unsecured debts can be discharged in bankruptcy, in the event that they never recover and the assets are lost. More than that, due to the custodial nature of these types of wallets, crypto exchanges have the ability to freeze wallet ownership and often have the discretion to do so according to terms and conditions agreed upon by wallet users.
Why Use Custodial Wallets?
With many custodial wallets, you don’t have to store your own private key – all you need to do a transaction is sign in to the wallet with your username and password, then enter the public key of the intended recipient. And, if you forget your password, custodian bitcoin wallets often allow you to reset it.
Disadvantages of Using Custodial Wallets
There are also some disadvantages to using a custodial wallet for your bitcoins. Most custodial wallets require users to agree to their policies and procedures. This can include your assets being frozen or delayed if, for example, withdrawals are halted by the exchange where you store your bitcoins, meaning your bitcoins are not as liquid as you would like. Beyond that, the custodian wallet can have a maximum value of the transaction you can effect at a certain time.
Most custodian bitcoin wallets are provided by a centralized entity, which means that you must submit to the entity’s know-your-customer (KYC) requirements, including providing personal information to confirm your identity, such as a copy of your driver’s license or social media. security number.
Non-Custodial Wallet
By comparison, non-custodial wallets allow you to store and manage the private keys associated with your wallet. That means you have full control and access to the assets held in your non-custodial wallet.
Private keys are used to validate asset ownership when transactions are proposed on the blockchain. Your private key is associated with your public wallet address and is protected by a passphrase given only to you, consisting of 12 or 24 random words.
The tradeoff is that, with a non-custodial wallet, you are responsible for managing and monitoring wallet ownership and related transactions: the only individual or entity that can protect your own assets. No centralized institution or authority can electronically censor or confiscate your assets.
Why Use Non-Custodial Wallets?
Although risk-free, non-custodial wallets give users complete control over their digital assets. Those who own large amounts of bitcoins may feel more comfortable with the responsibility of monitoring their digital assets.
This level of autonomy and control can reduce the potential impact of a data breach, subject to due diligence and security measures taken by wallet users. With the added control also comes additional responsibility for users to establish proper safety protocols to safeguard their assets. Non-custodial wallets also make it easier to send and receive crypto and give you faster access to your bitcoin assets when you need them.
Another benefit of non-custodial wallets is that, if you lose access to your wallet due to the loss or compromise of your private keys, users can use the passphrase associated with your wallet’s private keys to regain ownership of your wallet – either by re-accessing the same wallet or creating a wallet new. Essentially, losing your private key doesn’t mean you’ve permanently lost access to your bitcoins.
Disadvantages of Non-Custodial Wallets
There are some disadvantages to non-custodial wallets. With a non-custodial wallet, you are responsible for your private keys. You have sole control over your bitcoins, which means greater responsibility from you. This also means that extra precautions must be taken to ensure that private keys are kept in a safe and secure place.
While non-custodial wallets can help reduce the chance of losing assets to hackers, they require less time and effort to set up. Managing bitcoins and maintaining passphrases can be overwhelming for users who just want to store bitcoins without the hassle of maintaining security through private keys.
What Types of Wallets Are Non-Custodial?
Non-custodial wallets come in a variety of options. There are hardware wallets, mobile wallets and wallets that can be added as an extension to your web browser. You’ll find mobile wallets in the Android or iOS app stores, and you can buy hardware wallets online.
When you create a wallet, it should be clear whether the private key is kept by the provider or not. When you set up your wallet, do you ask to write down a 12 or 24 word password and keep it in a safe place? If so, your wallet is not a custodian. If this type of request is not made, then there is a possibility that you are using a custodial wallet.
This is a guest post by Brandon Mintz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.