7.6 Self-Custodial vs Custodial Wallets

Before detailing the different types of Bitcoin wallets and their characteristics, let’s make an important distinction between self-custodial and custodial wallets. You can see the benefits and risks of using each wallet type and who controls the bitcoins in each case. Self-custodial means the user holds the private keys, which means they are in true possession of their bitcoins, while with the second type, a third party holds their bitcoins.

In a self-custodial wallet (also called non-custodial wallet), you are the only one with the keys to the wallet and you have full control over what goes in and out. On the other hand, in a custodial wallet, someone else holds the key and can access and manage the contents of the wallet on your behalf.

Self-custody is like being your own bank. Transactions are not subject to control or authority by any government or company, but it also means you bear full responsibility for keeping your bitcoins secure. Self-custody ensures that third parties cannot confiscate your bitcoins without your consent. It gives peace of mind in times of uncertainty, knowing your bitcoins are secure.

It’s important to choose the right type of wallet for each individual’s needs. Sometimes, people find it hard to distinguish whether they are installing a self-custodial or a custodial wallet.

“Not your keys, not your coins” is a popular saying among bitcoin holders. It refers to the idea that if you don’t have direct control over the private keys associated with your Bitcoin wallet, you don’t have true ownership of the coins. Whoever accesses your private keys will gain ownership of your bitcoins. This is why it is of the utmost importance to protect them by keeping them away from prying eyes! We’ll see a few ways you can do that later in the book.

For what follows, we’ll be talking about self-custodial wallets only, where the user owns their keys and has complete control over their bitcoins.

Don’t worry if it seems complicated or you don’t understand everything—this is a journey, and you will learn along the way.