Custodial and non-custodial wallets

• What does custodial mean?

• What are custodial wallets and why do they look like banks?

• Ease and dangers of custodial wallets

• What are non-custodial wallets?

• Hardware wallets

• Keeping all data from your wallets

• The role of transaction fees

• Advantages of custodial and non-custodial wallets

• Disadvantages of custodial and non-custodial wallets

• Best wallets

• How does the Anycoin Direct Vault work?

• Which wallet should you choose?

What does custodial mean?

Custodial may sound somewhat unfamiliar, but in custody you will have heard more often if you like detective stories. In custody means in custody, which simply means an arrest.

Fortunately, we can report that your cryptocurrency will never be arrested, but your coins may be taken into custody.

So someone else then stores your currency for you. This is your own free choice.

The storage of crypto

If you purchase cryptocurrencies, you will put these crypto on a wallet need to store, because they must be located at an address. If you choose to store your crypto on a custodial wallet you let others store your crypto and give you control of your private keys out of hands, about which more later.

You can also choose to store your crypto through a non-custodial or self-custodial wallet. In this case, you control the private keys of your crypto currency yourself, but also have more responsibilities.

Let's go into some depth.

What are custodial wallets

Custodial wallets are repositories where a third party holds your crypto for safekeeping.

Custodial wallets are encountered at brokers and crypto exchanges and any party where the private keys are not in your own possession.

Ownership of coins

So with a custodial wallet, you give a third party access to your private keys. This makes them the de facto owner of the coins you bought yourself. You give them custody, but they have to give something in return. And that is convenience.

Comparing custodial to a bank

You can compare it to a bank. You put your money in a bank because it's safe there. You trust them to handle your money well and when you log in tomorrow your money will still be there. Everyone is free to keep your money at home and do without a bank, but where do you leave those ten bags of bill money and how do you protect it from theft?

In these times, you really can't do without a bank account, because a company really won't start paying you your salary in cash. Other companies won't readily accept cash payments either, such as health insurance or your landlord.

So you give up the possession of cash money and accept it that the bank owns your money, but you expect in return a very easy environment in which to pay for all kinds of things and that your money is safe. With the deposit guarantee of 100,000 euros, it is safe to say that this is very well taken care of.

Convenience and danger custodial wallets

You expect the same from a broker or exchange. That's the reason you create a custodial wallet and not a non-custodial one. The interface of a custodial wallet is made to be clear and informative.

The basis of blockchain and cryptocurrency is to build systems that are not based on the trust of intermediaries. A custodial wallet does not meet this and can lead to complete loss of all your cryptocurrency, as we saw with FTX, which still seemed very large and trustworthy.

Custodial wallets are often used for real world opportunities, such as buying airline tickets, paying in stores or even your bills. Exchanging crypto for cash or fiat money is also an important reason. This does not work with non custodial wallets.

What are non-custodial wallets?

Custodial wallets then, of course, are wallets where you hold the private keys. Be your own bank, such as Satoshi Nakamoto intended. This also comes with a price.

If you have your own private keys to your cryptocurrency, you are also responsible for keeping your coins safe. While it's not rocket science, you still need to know what you're doing.

Danger non custodial wallet

For newbies, this can be an arduous task, where a mistake is easily made. And the crypto world is relentless. A small mistake at a non-custodial wallet can cost you the entire stack.

Creating a non-custodial software wallet is a snap. You get an address of your crypto wallet on MetaMask, for example, and make up a strong password to go with it. You save your private key or backup text and you are ready to start trading. Sometimes you get a seed phrase, a group of simple words to put on paper when you have run out of all other information to still get to your funds.

The hardware wallet

A hardware wallet is already a lot trickier to set up, but fortunately you get a good manual with them, if all is well. They are similar to a USB flash drive. You have to do about the same as with a software wallet, but there are a few more options. In both cases, you control the private keys and no one can get to your cryptocurrency unless you make a mistake.

Seed phrase on paper

The best non custodial wallets allow you to still access your coins if you forget the password or lose your wallet. Then you do need to write down the seed phrase and all other important things before you start working with them.

Hot and cold storage

There is also a difference between hot and cold wallets. A hot crypto wallet holds your crypto online, which means a risk. A cold wallet keeps your coins in cold storage, which means your coins are offline and no one can access them. Cold wallets are therefore far preferable, if you are already working with non-custodial wallets.

Of course, what you really have to be careful of is that no one can get to your hardware wallet. Theft can be a problem. If everything is good, you have the thing well secured, so that a thief can not do anything with it and you still have the seed phrase so you can get the contents of your wallet back, but it remains be careful. Never leave it lying around somewhere.

If you're on vacation, it's better not to take it with you, but then you can't do a transaction either.

Retaining data wallets

Do yourself a favor and put all the important information about all your wallets together in one place. That way, you won't be searching frantically when you can no longer access your coins, and you'll avoid a combination of anger and fear, having never opened a safe before! Put this notebook or something similar in a place where visitors can't take it with them.

Never put this information together online or on your computer. If someone hacks your computer, they will have everything neatly lined up together and can start emptying all your wallets one by one.

The role of transaction fees

Transaction fees ensure that miners or stakers add your transaction to the blockchain. Without transaction fees, they would have no reason to do so.

Another role that transaction fees have is to ensure that each transaction costs money, making a DDoS attack too expensive to carry out and preventing spammers from having a chance.

When choosing custodial or non-custodial wallets, you will also have to deal with this. You will have to weigh up which one you choose based on these fees.

Fees when trading

If you're going to do a lot of trading, for example, then working with a non-custodial wallet is a real task. You have to send the coins back and forth from your crypto wallet to, say, an exchange all the time in order to trade. Thus, you pay fees for sending your crypto, buying and selling it on the exchange and again for sending it back to your crypto wallet.

While this is secure, it is rather cumbersome. If your coins were in a custodial wallet, on the exchange for example, you would only have to pay buying and selling fees.

Network fees

If you send coins on expensive networks, such as Bitcoin or Ethereum, then the cost of shipping can add up significantly. On a broker like Anycoin Direct, everything is sent internally because the exchange bought these coins itself and only sends them back and forth between buyers and sellers. You don't pay any network fees for this.

Fees per trading strategy

Your trading strategy is also very important. If you have the HODL Strategy applies, a non-custodial wallet is preferable, in swing trading it can be both, depending on how often it occurs, and if you are doing day trading, a custodial is far preferable, otherwise transaction costs will skyrocket.

So usually working with non-custodial wallets is more cumbersome and expensive, but you get tremendous security in return. The larger your stack is, the more important this consideration will become.

Not your keys, not your coins

You often hear this yell in the corridors. So now you also know what this one means. If you are not in possession of the private keys, you are dependent on third parties to get your crypto back if you ask for it.

Now in more than 99.99% of cases that is not a problem, but it is also not risk-free to put your private keys in someone else's hands.

What are the benefits of custodial wallets?

• Brokers and crypto exchanges have invested a lot of money in the interface of their software. As a result, a newcomer quickly feels comfortable and can just start trading without doing considerable research on how to use blockchain and wallets.

• On trading platforms of custodial wallets, they normally have excellent customer service who know exactly how everything works.

• Purchasing, paying and withdrawing your money again via fiat money is well managed.

• In a crypto exchange or broker there is high liquidity, so you can also sell the coins if you want, because there are also buyers.

• A custodian usually has all sorts of technical gimmicks for technical analysis, an order book and a whole range of features that really benefit you as a trader.

• A trade in Ethereum or another expensive network costs you nothing extra because the coins are exchanged internally. You only pay taker and maker fees.

• If you lose login credentials, you can ask customer service to make your account accessible again. Next of kin can also request funds from customer service much more easily because backups are present.

• Brokers and exchanges are responsible for the security of your coins, although this can also be counted among the disadvantages.

What are the advantages of non-custodial wallets?

• A non-custodial wallet generates the private keys.

• Intermediaries have no control over your coins or your transactions.

• A hack of your crypto wallet is very difficult or impossible if they are offline.

• You can control the transaction costs yourself to some extent by paying lower gas fees, though your order will be executed less quickly.

• They can with smart contracts work, giving you access to decentralized services. This allows you to borrow and lend and staker in your own wallet on a decentralized wallet without a fee to an intermediary.

• Since you are responsible for the security of your crypto assets yourself, you can sleep more peacefully once you get this right.

• No KYC and other intrusive questions when creating your crypto wallet.

• More privacy.

What are the disadvantages of custodial wallets?

• Brokers and exchanges can be hacked. In the process, users' assets can be stolen. Nowadays, cold storage, high security, insurance and external audits have become a lot more common, though. However, our Vault cannot be hacked, about which more later.

• Third parties are in possession of the Private keys, so it is never certain that you will get all your coins back in case of problems of any kind.

• If the middleman goes bankrupt, you usually lose all your coins, as we saw with FTX.

• Preservation of crypto has been around since the MiCA law regulated, requiring a user to take all sorts of actions, such as KYC and other fill-in-the-blanks exercises, to get started with a custodial wallet. Regulation can also cause a broker or exchange to freeze your assets.

• The interests of the broker or exchange may outweigh those of the user in some cases.

• If legislation is changed you may have to move all your crypto, as in the case of Binance. In some cases, you may then not even be able to get your crypto back from such an exchange at all, or they charge additional fees.

• Shady custodials can come up with all kinds of tricks, such as the impossibility of cashing out. So choose mainly the custodials with the best reputation.

What are the disadvantages of non-custodial wallets?

• You have to protect the private keys very well. If someone else knows them, they can empty your wallet. If you don't remember them, you can't access your crypto.

• You need to write down the seed phrase offline and other things that go with your non custodial wallet. You have to keep them well, so no water or fire can get to them. If you don't handle it responsibly, you can lose everything.

• If you want to start trading, you must first transfer your coins to a place where you can trade. Then you have to do the trade and transfer the new coins back to your wallet. This is a rather cumbersome process.

• The interface is less accessible and more difficult to understand, especially in the beginning. This can be a hazard to your coins.

• Some coins are not supported by your non custodial wallet. Then you can't store them in it either.

• Mistakes in smart contracts can hit users of non-custodial wallets hard.

• A user needs to know much more about blockchain networks and cryptocurrency to avoid costly mistakes.

Best custodial and non-custodial wallets

The best custodial wallets are repositories for your cryptocurrency from reputable brokers and exchanges that must not risk their reputation by disregarding customer interests. You can check this at CoinGecko or at Trustpilot and the like. Anycoin Direct scores very high on Trustpilot.

Never put your money in unknown or obscure places, before you know it you will lose everything.

The best non-custodial wallets are hardware wallets. The well-known brands of Trezor and Ledger Nano S are preferred here, given their support for many popular coins, their long experience and their high reputation. If you want to go non custodial, this is your best option.

Some people prefer the paper wallets. It should be kept in mind that while they are free, they are highly susceptible to fire and water, as well as fading.

Choose the Anycoin Direct Vault for security

At Anycoin Direct, we give you two choices for storing your cryptocurrency. You can store your purchased coins on your hardware wallet, or you can store them in the Vault.

There are a number of reasons to choose the Vault. Many people value convenience. You can swap coins internally within seconds without paying to use the blockchain network, which in the case of Bitcoin or Ethereum can be quite high. Fast and cheap, in other words.

When you trade internally you also have the advantage of not being able to make mistakes in the network you are sending coins to or the cryptocurrency address, a common mistake when you are just starting out. Both new and experienced traders therefore quickly feel comfortable using the Vault.

In our Vault, we keep everything 1 to 1. If you buy 100 euros worth of Ethereum and store it in the Vault, we keep 100 euros, so that no issues can arise in terms of liquidity. A unique feature of the Vault is that only euros can go in and out. You can send money to your bank through the Vault, but you cannot send crypto to another wallet. This is done so that hackers have no chance, even if an account were cracked.

We have more than 10 years of experience in managing and securing cryptocurrency. We take this responsibility very seriously and have built in the highest level of security. We are registered with DNB and licensed with BaFin, so it is clear that we follow financial regulations and financial security is assured.

If you choose to store your coins in the Vault they are completely secure. Hackers do not have any access to the coins because a third party monitors it. Therefore, you can always be sure that the coins are at your disposal when you want to start trading. Customer funds and company funds are strictly separated. The third party is responsible for managing all customer funds so that no conflict of interest can arise.

Software wallets

There are now also many non-custodial software wallets on the market. Working with software reduces the benefits of a non-custodial wallet, because there can always be bugs in the software that can cost you a lot of money. We therefore advise against it, even though they are often free. After all, a hardware wallet does not cost a fortune, they cost from around 50 euros to say 150 euros.

What kind of wallet should you choose?

This is really not for others to determine. We can only give clues as to what to look for when making this choice.

Trading strategy and choice of wallets

If you are doing trade after trade, it is not convenient to work with a hardware wallet, where you move coins back and forth from the wallet to the broker or exchange on a daily basis with all the additional costs. Day traders should store their coins at a broker or exchange and trade from there. Optionally, at the end of the day, you can transfer your coins back to your hardware wallet. But it's still inconvenient. If you only trade with a portion of your coins, it remains a good option.

If you are a swing trader you can work with a hardware wallet. Swing trades have a timeframe of days to weeks. Then you don't have to switch wallets as often.

If you are the HODL type and hold Bitcoin, for example, until it is worth a million (or so) then a hardware wallet is far preferable to a custodial wallet. Your coins are then safe and offline 100% of the time.

Knowledge of crypto and choice wallets

If you don't know anything at all about blockchain and cryptocurrency yet, it might be useful to store your money in the Vault for the time being until you do. The advantages of such a custodial wallet will outweigh the disadvantages.

If you know enough to keep your coins safe in a non-custodial wallet you can always switch. You should then know what blockchain networks there are and what they are called before you start sending coins. You should also have figured out how to keep the seed phrase and private keys and make sure you never reveal them to others.

Cost per wallet

Another consideration is cost of transactions. Calculate carefully how much everything costs, as this can quickly add up in some cases. If the fees get too high, you put your chances of success at risk.

Regulation and crypto wallets

Custodial wallets are increasingly facing regulation. You can see this, for example, in the resignation of Binance from the EU. So at some point, your custodian may take its turn as well.

So look carefully at your own situation and think about it before choosing one or the other.