If you've been involved in cryptocurrency for some time and have been following recent developments, you've probably heard the phrase "Not your keys, not your coins.".

Nowadays, owning cryptocurrency is much easier than it was ten years ago, and anyone with a credit card can buy Bitcoin in just a few minutes. However, this also means that the average person is not aware of some of the intricacies of crypto wallets. In this article, we'll explore this interesting topic and shed light on the benefits and risks of the different options available.

What is a crypto wallet?

A crypto wallet allows you to own a digital currency, such as Bitcoin. Crypto wallets can be a piece of software installed on your computer, an online service provided by a company, or even as simple as a piece of paper.

To be more precise, crypto wallets do not store the coins themselves; they store the private keys that enable you to manage those funds on the blockchain.

Apart from the most basic feature of holding your private and public keys, the majority of wallets enable you to generate multiple addresses, send transactions, and more.

What is a wallet address?

A wallet address is your public key. You can think of your wallet address as your IBAN number. It's a unique string generated by your wallet that you can give to anyone who wants to send you coins.

However, unlike traditional banking where transactions are kept private, most blockchains are entirely public. This means that anyone can look up the transaction history for your wallet address, including incoming and outgoing transactions.

What are private keys?

A private key (or PK) is a secret string of characters generated by your wallet that is used to generate your wallet address (a public key).

You can think of your private key as your bank account password. Anyone who controls your private keys controls all coins in the address, even if they don't have access to your particular wallet option of choice.

Because your private keys are so sensitive, many wallets will require you to set a wallet password that is used to securely encrypt the private keys from your addresses. However, these two should not be confused.

Custodial vs non-custodial wallets

Now that you understand the importance of private keys in the blockchain, it's time to understand the fundamental difference between a custodial and a non-custodial wallet. In a custodial wallet, the private keys are held by a third party, while in a non-custodial wallet, the private keys are held by you.

Since the entity in possession of the private keys controls the funds, you can think of a custodial wallet provider as a bank and a non-custodial wallet as your wallet with actual money in it that you can control.

The risks and benefits of custodial and non-custodial wallets

The most common custodial wallet providers are crypto exchanges, but many other online services provide them, such as staking platforms, some banks, and even some payment processors like PayPal.

The risks associated with holding your coins in a custodial wallet are clear. The funds held are not yours but the institution's funds. This is where the saying “Not your keys, not your coins” comes from, and it is repeated over and over again whenever an exchange goes bankrupt or withdrawals suddenly stop on these platforms.

If or when things go wrong, you are entirely powerless, and all your hard-earned money is at risk.

However, while custodial wallets go against the original vision of a decentralised currency, where you are in control of your money, they are still a compelling option. Beginners find custodial wallets particularly advantageous because they offer intuitive interfaces and integrated services that simplify the processes of buying, trading, and staking cryptocurrencies.

Custodial wallets, although contradicting the decentralised vision of cryptocurrencies, provide an intuitive interface and integrated services that make buying, trading, and staking crypto easy for beginners. These wallet providers invest heavily in security, making it harder for hackers to attack them compared to individuals. However, being responsible for your own money requires good security practices, which can be challenging for the average person. For those willing to take on this challenge, non-custodial wallets offer complete control of funds and the best choice. Good security practices are essential in both custodial and non-custodial wallets to prevent loss of coins due to malware, online scams, phishing sites, infected browser extensions, etc.

Paper wallets, Bitcoin Core, exchanges, and hardware wallets are different types of wallets. Paper wallets are the most basic form of non-custodial wallets and offer cold storage options, whereas Bitcoin Core is an open-source non-custodial wallet software that allows running your own full node. Exchanges mostly offer custodial wallets that come with features like trading or staking. However, exchanges and online services require a strong password and 2FA with an OTP device for securing accounts. Finally, hardware wallets or metal plates provide a secure option for long-term cold storage of funds. A combination of both custodial and non-custodial wallets can help one use crypto on a daily basis and safeguard their portfolio.