CUSTODIAL VS NON-CUSTODIAL BITCOIN WALLETS

Have you heard of the phrase “Not your keys, not your coins” which is common in the Bitcoin space?

What is a Bitcoin wallet?

First, a Bitcoin wallet is a piece of software that allows you to store, send and receive Bitcoins. Think of it as your bank account.

Storing your Bitcoins in the wallet is similar to how you keep your money in a bank account which you can access over the internet using your phone or pc and make transactions.

When you want to send money to a friend, you log into your app, enter the transaction details and tap on “Send”.

After that, the bank validates that you actually have the money you want to send and that the account you are sending the funds to is also valid. When all their checks are cleared, your friend receives the money.

If we try to draw parallels here

  1. The money you are sending – Bitcoin
  2. Banking app – Bitcoin Wallet
  3. Recipient’s Bank Account – Bitcoin Address
  4. Bank – Bitcoin Network

Now sometimes we have issues sending money using our banking apps with for a lot of reasons. Either their network is down, there is something wrong on their servers or there is something wrong with the entire banking network in the country. At times like this, you are helpless, it’s frustrating, you cannot even use your own money. I have been there before, many times. 

This can also occur with Bitcoin wallets that are custodial, meaning that a single company has control of the wallet and stores the Bitcoins for you, so whenever the company’s servers are down or something similar, then you cannot use your Bitcoin. The same issues you face in the banking scenario above comes into play.

Also if the company shuts down, then all your Bitcoin goes with them, basically, you are at the mercy of the company and have to trust that they won’t run away with your money.

There is a way to avoid finding yourself in this situation. By using non-custodial wallets, you are not dependent on any single entity to carry out your Bitcoin transactions, no one has access to the Bitcoins you store except you.

Bitcoin wallets come with something called Recovery Phrases(Mnemonics) which is a set of words, mostly > 12 that you can use to recover your wallet. Once you download any Bitcoin wallet and add these words, you get all your Bitcoin back.

It is encouraged that as you understand Bitcoin better, you move your Bitcoins into wallets you have total control of. It is important to note that there is always a tradeoff, the advantage of leaving it on exchange platforms is that they have better security procedures than you and will save you the hassle of having to secure your Bitcoin yourself.

Some exchanges are also insured, so your Bitcoin losses to exchange hacks can be paid back.

Examples of non-custodial Bitcoin wallets include

  1. Bitnob Wallet – (Android only right now)
  2. Green  Address Wallet
  3. Blockchain wallet
  4. Exodus Wallet
  5. Bitcoin-QT
  6. TrustWallet
  7. Samurai wallet and many more

So as you learn more about Bitcoin, you should be looking into moving a greater percentage of your Bitcoins into a non-custodial wallet.

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