Self-custody is essential for users who want more control and security over their digital assets. Instead of relying on third parties to hold their keys, self-custody allows individuals to manage their own private keys and funds. However, taking on this responsibility means understanding the details involved. This article covers ten essential terms for self-custody users, providing the foundational knowledge to manage and secure crypto effectively.
What is self-custody?
Self-custody refers to users taking full control and responsibility for assets, such as cryptocurrencies, tokens, and NFTs, by directly handling private keys to their wallets. This allows users to manage their assets directly instead of relying on third-party services like exchanges or custodial wallets.
What is a self-custodial wallet?
A self-custodial wallet, also known as a non-custodial wallet, is a type of cryptocurrency wallet in which the user has complete control over their private keys and funds. In this setup, no third party (like a bank or an exchange) can access the user’s assets.
You are responsible for safeguarding your private keys, and if you lose access, no intermediary can help you recover them. Common examples of self-custody wallets include hardware wallets like Tangem and Trezor and software wallets like MetaMask and Exodus.
Self-Custody Wallet vs. Exchange Wallet
Here’s a table comparing self-custody wallets and exchange wallets:
Feature
Self-Custody Wallet
Exchange Wallet
Control of Private Keys
User controls private keys and owns assets
Exchange controls private keys; users rely on the exchange
Security
User responsible for security (private keys, passwords)
Exchange offers security, but is a target for hackers
Convenience
Requires manual management and technical knowledge
Easy for trading, buying, and selling; user-friendly interface
Risk of Third-Party Failure
No third-party risk; user fully owns assets
Risk of exchange failure, hacks, or regulatory issues
Asset Access
Full control, access at any time
Access dependent on the exchange’s operational status
Best Use Case
Long-term holding, full ownership
Frequent trading, buying, or using exchange-specific services
This table highlights the differences between self-custody and exchange wallets, showing how each suits different preferences.
Basic terms in self-custody
Here are some basic terms related to self-custody:
Hardware wallets
A hardware wallet is a special device designed to store your digital assets, like cryptocurrencies or NFTs securely. It's a physical device, like a small computer, that you can hold. Hardware wallets are built to protect your assets from hackers, cyber-attacks, and even physical damage.
A hardware wallet generates and stores your private keys, which are used to access and manage your digital assets. When you want to make a transaction, you connect your hardware wallet to your computer or mobile device, and it securely signs the transaction without exposing your private keys. This way, your assets remain safe, even if your computer or internet connection is compromised.
Public and Private Keys
Public and private keys are integral to ensuring the security of cryptocurrency assets when utilizing a hardware wallet.
A public key serves as a digital address for receiving cryptocurrency transactions. It does not reveal sensitive information and can be safely shared with others, similar to sharing an email address.
A private key is akin to the password for your email address. It is a distinctive and confidential alphanumeric code that enters your cryptocurrency assets. This key functions as a digital signature when approving transactions, validating your ownership of the assets.
Hot wallet
Hot wallets are cryptocurrency wallets connected to the internet, making them convenient for frequent transactions. These wallets can be desktop applications, mobile apps, or web-based services, allowing users to send and receive cryptocurrencies quickly. The primary advantage of hot wallets is their accessibility; users can easily access their funds from any internet-enabled device, facilitating everyday use and trading.
However, this convenience comes with increased security risks. Since hot wallets are online, they are more vulnerable to hacking, phishing attacks, and malware.
Custodial and non-custodial wallets
A custodial wallet is a crypto wallet where a third party, such as an exchange or service provider, holds and manages its private keys. You rely on the provider for security, transactions, and recovery. This type of wallet is user-friendly but less secure since you do not have full control over your funds.
Non-custodial wallets give you control over your private keys and allow you to manage your funds independently. You are responsible for the security and backup of your keys. This type of wallet offers greater security and control but requires more technical knowledge and responsibility.
Why choose a self-custody wallet? Key benefits
A self-custody wallet offers users enhanced control and security over their digital assets, among other advantages.
Full ownership and control over your crypto
With a self-custody wallet, you are the true owner of your cryptocurrency. No one can freeze, seize, or restrict access to your funds without your permission. This level of control is particularly important in a decentralized financial ecosystem.
Enhanced privacy and security
Self-custody wallets offer enhanced privacy since you don’t need to share personal information with a third party. They also provide better security by eliminating the risk of exchange hacks or mismanagement.
No Third-Party Risk (Avoiding Exchange Collapses)
Mt Gox and FTX have shown that even the most popular exchanges can fail or be hacked. By using a self-custody wallet, you avoid the risk of losing your funds due to third-party failures.
Access to DeFi, Staking, and Web3 Ecosystem
Self-custody wallets are essential for interacting with decentralized finance (DeFi), staking, and the broader Web3 ecosystem. They allow you to connect directly to decentralized applications (dApps) without intermediaries.
How does a self-custody wallet work?
Every self-custody wallet is based on a pair of cryptographic keys: the public key (your wallet address) and the private key. The public key is shared to receive funds, while the private key must be kept confidential to sign transactions.
Seed 'Recovery' phrase
A recovery phrase, seed phrase, or mnemonic seed is a list of words that serve as a backup for your private keys. It's like a secret code that unlocks your vault. A seed phrase is generated when creating a crypto wallet, typically 12-24 words. This phrase is used to restore your wallet and access your assets if you lose access to your device.
Your recovery phrase is the key to recovering your digital assets, so keeping it safe and secure is crucial. If you lose your recovery phrase, you risk losing access to your assets forever. That's why storing your recovery phrase in a secure location is essential. Never share your recovery phrase with anyone; it gives them access to your assets. Remember, your recovery phrase is like a precious gem – keep it hidden and protected!
Under no circumstance will any Tangem representative ask for your recovery phrase via email, customer support, website, or any other form of communication.
Here's how it works in the context of a self-custody wallet:
Wallet Creation: When you set up your self-custody wallet, you are prompted to generate a recovery phrase. This phrase is randomly created from a list of predefined words.
Access and recovery: If you lose access to your wallet (for example, if you lose your device), you can regain access by entering the recovery phrase into a compatible wallet app. This restores your wallet and allows you to access your funds.
Security: The security of your self-custody wallet largely depends on how well you protect your recovery phrase. If it’s lost or compromised, you may permanently lose access to your funds, as there is no way to recover them without this phrase.
Backup: Many users take extra precautions by backing up their recovery phrase in multiple secure locations, like a safe or a vault.
The recovery phrase is essential for managing and recovering your cryptocurrencies in a self-custody wallet.
Passphrase
A passphrase in the context of a self-custodial wallet is an additional layer of security that users can apply to their cryptocurrency wallets. Unlike a regular password, a passphrase is typically longer and can comprise a series of words, making it harder to guess and more secure.
When you create a self-custodial wallet, you often receive a recovery phrase or seed phrase—a series of words allowing you to recover and access your funds. A passphrase can be added to this recovery phrase to enhance security. This means that to access your wallet, you would need the recovery phrase and the unique passphrase you created to access your wallet.
This is useful because even if someone gains access to your recovery phrase, they would still need the passphrase to access your funds. However, it’s crucial to remember that losing your passphrase can permanently lose access to your wallet, as it's an integral part of the security structure.
Overall, using a passphrase adds complexity, which can significantly improve the safety of your digital assets.
Multi-Signature (Multi-Sig) wallet
Multi-Signature, or Multi-Sig, is a security feature that requires multiple private keys to authorize a transaction. Instead of relying on a single key, Multi-Sig setups typically require a predefined number of keys (e.g., 2 out of 3) to approve a transaction, enhancing security and reducing the risk of unauthorized access. This is commonly used in cryptocurrency wallets and smart contracts to improve security and distribute trust among multiple parties.
How to Set Up a Self-Custody Crypto Wallet (Step-by-Step Guide)
Step 1: Choose the Right Wallet for Your Needs
When selecting a wallet, consider your security needs, transaction frequency, and the types of cryptocurrencies you hold when choosing a wallet.
Step 2: Download & Install the Wallet App
Download the app from the official website or app store for software wallets. For hardware wallets, follow the manufacturer’s instructions.
Step 3: Create a New Wallet and Secure Your Recovery Phrase
Set up a new wallet and write down your recovery phrase. Store it in a safe, offline location.
Step 4: Fund Your Wallet with Crypto
Transfer crypto from an exchange or another wallet to your new self-custody wallet.
Step 5: Test a Small Transaction Before Moving Large Funds
Before transferring large amounts, send a small test transaction to ensure everything works correctly.
Self-Custody Best Practices – How to Keep Your Crypto Safe
Always keep your seed phrase private.
Never store your recovery phrase digitally. Use a fireproof and waterproof safe or a safety deposit box.
Use a hardware wallet for large crypto holdings; for significant amounts of crypto, a hardware wallet is the safest option.
Avoid phishing scams and fake wallet apps; only download apps from official sources.
Consider using multiple wallets to spread risk and protect your assets.
Moving from a Custodial Wallet to a Self-Custody Wallet
Step 1: Create a Self-Custody Wallet
Follow the steps above to set up your self-custody wallet.
Step 2: Record Your Wallet Address (Or Addresses)
Ensure you have the correct wallet address for transferring funds.
Step 3: Transfer Funds from Custodial Account to Self-Custody Wallet
Initiate the transfer from your custodial wallet to your new self-custody wallet.
Step 4: Verify the Transfer and Secure Your Wallet
Double-check the transaction and ensure your recovery phrase is securely stored.
How to buy crypto directly in a self-custody wallet
Some wallets, like Tangem, allow you to buy crypto directly within the app using fiat currency.
Frequently Asked Questions
Is coinbase wallet self-custody?
Yes, Coinbase Wallet is a self-custody wallet, unlike the regular Coinbase app, which is a custodial platform where Coinbase holds users' private keys for users. This means users of Coinbase Wallet have complete control of their private keys and the assets stored within the wallet.
What is a self-custodial wallet?
A self-custodial wallet is another term for a self-custody or non-custodial wallet. This system's users are solely responsible for managing their private keys and assets. No third party is involved, ensuring the user has complete ownership and control over their funds.
Is MetaMask a self-custody wallet?
Yes, MetaMask is a self-custody wallet. It is a popular browser extension and mobile wallet that allows users to store, send, and receive cryptocurrencies while maintaining complete control over their private keys.
Is Trust Wallet self-custody?
Yes, Trust Wallet is a self-custody wallet. It allows users to store, manage, and trade cryptocurrencies while completely controlling their private keys, meaning no third party can access the user's funds.
What is the best self-custody crypto wallet?
Finding the best self-custody wallet depends on your preferences, such as the type of cryptocurrency you want to store and its security needs. Popular options include\ Tangem Wallet, Ledger Nano X, Trezor, MetaMask, Trust Wallet, and Exodus.
Is Exodus a self-custodial wallet?
Yes. Exodus is a wallet that allows you to control your private keys and fully own your assets.
Is BlueWallet self-custody?
Yes, BlueWallet can be used as a self-custody wallet, especially for Bitcoin. However, it also offers custodial services if users do not manage their private keys. In its non-custodial setup, users control their Bitcoin and private keys.
Are All Cryptocurrency Wallets Self-Custodial?
No, not all wallets are self-custodial. Many popular wallets, especially those offered by exchanges, are custodial. Examples include Coinbase Wallet and Binance Wallet. However, wallets like MetaMask, Trust Wallet, and Ledger are self-custodial, meaning you hold the keys.
Is a Self-Custody Wallet safe?
Like all self-custody wallets, the security largely depends on how well the user protects their private keys.
