Custodial Wallets Guide
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Wallets play an essential role in the cryptocurrency world. These wallets are not only great for keeping coins but also a necessity for making different crypto transactions. Please note, however, that crypto wallets are nothing like physical wallets. Today we will concentrate on Custodial wallets.
What is a custodial wallet?
A custodial wallet is one in which your private keys are stored in an exchange or controlled by some agency. Unlike the hardware wallets also called non-custodial wallets where you have full control of your coins, you do not have full control of your coins in a custodial wallet. In a way, they are not really wallets.
Here are the pros of using such a wallet:
- You can use your coins to trade at any place and at any time as long as you have an internet connection
- You won’t spend any money as the exchanges never charge you for this service.
- There is no risk of losing your private keys like when you have them printed on a piece of paper.
- Some exchanges are very secure, so if you’re a newbie, you’d be better off with such a wallet
- You do not have to download any special software to your computer
Here are some cons:
- Your custodian has a lot of control over your money and can easily take full control.
- Your coins can get seized by a court order
- In case the exchange is hacked, you’ll lose your coins
- In case of a fork, you do not have any guarantee of receiving your coins
Exchanges as Banks
When you keep your money in a bank, you do not fully control your money. It is your money, but the bank can refuse to give it to you. In case a bank goes into a receivership, you might lose your money. This situation is similar to that of storing your coins in an exchange. The exchange, just like a bank has full control of your coins even if the coins are yours. If the exchange is not secure enough, it can be hacked and your coins get stolen, in the same manner, there might be unscrupulous individuals in a bank that can redirect your cash to their accounts.
Examples of Custodial Wallets
Here are some examples of custodial wallets you’d like to know about.
Bitfinex is one of the largest and most advanced digital coins’ trading platforms registered in Hong Kong. The exchange is known for high 24-hour trading volumes and special features such as leverage trading. Although most popular for its US dollar to bitcoin trading, Bitfinex also supports top cryptocurrencies like Monero, Ethereum and ZCash.
In 2016, Bitfinex became victim to one of the biggest hacking heists in the industry. Hackers made away with 120,000 bitcoins valued at $72 million in August 2016. The exchange quickly tightened its security measures, spread the losses to all traders and vowed to compensate hacked accounts using the company’s profits.
Bithumb is a cryptocurrency exchange operated by BTC Korea.com Ltd and based in Seoul. Though it’s one of the biggest exchanges based on daily trading volumes, Bithumb mainly pairs cryptocurrencies with South Korea’s currency, KRW. The exchange supports more than 10 cryptocurrencies and provides quick registration for new members.
On the negative side, Bithumb was apparently hacked in July 2017 and lost about 1.2 billion Won. The exchange denied this incidence claiming that it is one of its worker’s computer that had been interfered with. Even then, 30,000 users reported that their accounts had been compromised. The company, however, promised to compensate all that have been affected.
In November 2017, their servers crashed due to increase in trade volumes. This crash led to a significant fall in the price of Bitcoin Cash that users were trying to sell. Many investors lost a lot of money.
Cryptsy – important for you to know!
Cryptsy was a regular cryptocurrency exchange founded by Paul Vernon, a US citizen. The exchange was based in South Florida and supported mainly bitcoins and litecoins. In January 2016, the exchange’s CEO announced that as many as 13,000 bitcoins and 300,000 litecoins valued at more than $5 million had been lost. Following the incident, crucial data about its customers and how much they lost were deleted. A lawsuit against the exchange and its founder is currently ongoing despite the fact that Vernon disappeared in late 2016.
These are hardware, mobile, desktop and paper wallets. With these type of wallets, you have full control of your coins. You get to keep your private keys. These are the safest wallets you can keep your coins.
- Hardware wallets >> are among the safest. You get to keep your coins offline in a storage device. Your coins are not prone to hackers’ attacks online.
- Mobile wallets >> allow you to download and install a software on your mobile phone. You select a wallet depending on your smartphone’s operating system. There are so many you can find online but you need to check their reviews for authenticity. Examples include MyCelium, Copay.io, and Jaxx for Android as well as AirBitz, CoPay and Breadwallet for iOS system. With mobile wallets, you can spend your coins anywhere as long as you’re connected to the internet.
- Desktop wallets >> are types of wallets that you keep on your laptop or desktop computers. You should find one that is compatible with your operating system. Examples include Bitcoin Knots, BitGo, ArcBit and Electrum among others. You can use your coins anytime your desktop is connected to the internet. Though these wallets are secure, you can still lose your coins in case someone gets hold of your computer and you have saved your passwords in it. You can also get hacked when you are connected to the internet if you haven’t secured your accounts appropriately.
- Paper wallets >> enable you to print your public address and private keys on a piece of paper. You get to keep your coins offline, but you can always use your address and private keys to access your cryptos and trade. There is no possibility of electronic damage or hacking since your private keys are secure with you. It’s more like keeping hard cash in your house.
Cold Storage Wallets
All hardware wallets are cold storage wallets. They all store your coins offline away from hacking threats. Cold storage involves keeping your coins in an offline device. If for instance, you are buying coins to keep them for a long time waiting for their price to increase, then this is the best way to store your coins.
Though there are some risks too associated with these custodial wallets, their risks are way less than non-custodial wallets. For instance, once you print your private keys on a paper wallet, the greatest risk would be to have those papers stolen physically. This would require the thieves to access your property physically. You can never lose them to an anonymous person somewhere in the world. For a desktop storage, a hacker would need to access your machine which is virtually impossible.
Papers are still susceptible to wear and tear. It can get torn or defaces, or get destroyed in case of a fire or a natural disaster. So, keep them safe and have some backups.
The disadvantage of cold storage wallets is that you are not able to carry out quick transactions since you won’t be carrying your hardware devices everywhere you go. However, you can have a mobile wallet which is also a cold storage that can allow you to carry out trades remotely.
These wallets require multiple keys to operate. A wallet can have two or three keys to log in. Hackers find a hard time when they trying hacking such wallets since they have to break through several layers of security. However, these are still hot wallets operated online. You must take caution and not leave a lot of digital coins in them.
Leaving your digital currency in any hot wallet despite its security features is leaving your money in control of another party. In case of an electronic error, you can easily lose your coins. You are also susceptible to online attacks and hacks. In case of an exchange collapsing or a currency fork, you can lose all your money.
Time Locked Wallets
Time-locked wallets lock your coins until a specified time. You are not able to use those coins until the time set for them to stay locked elapses. If let’s say you have some bitcoins, and you do not intend to use them immediately, you can keep them in a time-locked wallet in which an encrypted software sets a block height using a distributed contract. This contract is recorded in the blockchain. The software will allow transactions to take place when that particular block height is achieved. This could be after a certain period of time. Time locked wallets are a good way of speculating and saving, though you may miss a chance of liquidating your investment in case of a price hike before the set time.
To Sum it Up
We’ve endeavored to give you as much information as possible. It is our hope that this information assists you in making the most informed decisions as you continue investing in the cryptocurrency space. Keep reading our publications for such and more informative content.
We will keep carrying out intensive and extensive research to keep you informed. Thank you.