What is a custodial wallet?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Today, let’s talk about a different type of wallet. The so-called “custodial” wallet.

You may have never heard the term before, but it is the most common form of wallet. And if you have a crypto account with Coinbase, Binance, or other exchanges, you might actually have your crypto in a custodial wallet without knowing what it is.

Remember that on a blockchain, each bank account is represented by a wallet. That wallet has an address, like your bank account number, and a secret key. Without the key, nobody has access.

And managing that is cumbersome. You have to write down the keys somewhere, make sure you don’t lose them and keep others from stealing them. Countless amounts of crypto have simply been lost because people misplaced their secret key and will never be able to access their wallets again.

Enter those “custodial” wallets. Instead of making you manage all those keys, they are simply managed by someone else, for example Coinbase. You may have noticed that once you are signed up, those services simply work - no need to write any special passwords down for each blockchain.

This has huge usability advantages for you as a user of course. But at the same time, you have to trust those services not to lose your password or let hackers in. It’s a tradeoff, and some people who want to keep crypto for a very long time opt for cold storage instead - saving those passwords somewhere offline in a nearly indestructible form.

There you have it: Custodial wallet just means someone else is keeping your funds in a wallet they have custody over. You don’t have to worry about keys and such, but have to trust them to do the right thing.

The decision, as always, is yours.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.