If you’re just starting out in your Bitcoin journey, choosing a Bitcoin wallet app is one of your first steps into this new digital frontier.
Think of a wallet as your entry point to the world of Bitcoin. Like a traditional wallet, its main function is to store the cash and currency in your possession. They also let you send, receive, and interact with your cryptocurrency wherever you have an internet connection.
Of course, not all Bitcoin wallet apps offer the same features and functionality.
The most significant debate on which wallet type to choose relates to ownership, known within the industry as custody.
Unfamiliar with custody? Don’t worry, we’re here to help. Let’s take a peek under the digital hood and uncover the basics of Bitcoin wallets as well as the benefits and drawbacks of non-custodial and custodial options.
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Let’s begin with a simple question, “What is a Bitcoin wallet?”
Much like the leather bi-fold in your back pocket or purse, a Bitcoin wallet is a place to store your coins. Instead of cash and cards, though, this wallet stores Bitcoin (BTC). This digital vault is your gateway to Bitcoin network access, offering a place to keep your coins and a way to interact with other wallets.
Now, there are a few types of Bitcoin wallets to choose from:
According to explodingtopics.com, as of 2024, there are about 460 million Bitcoin wallets. It’s worth noting that almost 90% of these wallets (as stated by bitinfocharts.com) hold little BTC or are completely inactive.
Before we move on, let's briefly cover private and public keys.
Without getting into the burdensome details of public key cryptography, your public and private keys offer a secure way to encrypt transaction data on the public Bitcoin blockchain.
How does it work?
Imagine a special mailbox with two unique features: a mail slot and a lock. The mail slot is your public key, open and visible to everyone. Anyone can put a letter in the slot.
Then there’s the lock. This is your private key that only you, the owner, know about. Anyone can send you a message by putting it through the mail slot (encrypting it with the public key), but only the person with the key to the lock (the private key) can open the mailbox and read the message.
Basically, anyone with your public key address can send you BTC, but only those with the private key can access those coins. As you might imagine, keeping your private keys safe and secure is of utmost importance.
This leads us to the topic of custody.
The concept of custody and Bitcoin wallets go hand in hand — and it all comes down to who holds the private keys.
Let’s break down the two types you need to know as a BTC holder looking for a new wallet:
To bring this back to our mailbox analogy, think of a non-custodial wallet as your personal mailbox. You are the only one responsible for keeping your keys safe. If you lose track of them, no one can help you access your messages.
On the other hand, a custodial wallet is like getting a P.O. Box at the Post Office. While you might have access, so does the Postal Service.
If you forget your ID to get inside, they can help verify your identity and get you access. They take the burden of security off your shoulders, but it means placing a huge amount of trust in this third party.
There are also multi-signature (multi-sig) wallets that rely on a group of individuals or entities, each with their own private keys. To approve a transaction, at least two keys are needed.
But, for most users, it comes down to non-custodial vs. custodial.
“Not your keys, not your coins” is an often-repeated phrase in the Bitcoin community.
It relates to the original philosophy behind the world’s most popular digital currency. You see, Bitcoin has roots in decentralization, with no centralized entity having control over the crypto account.
Bringing a third party into the mix through custodial Bitcoin wallet apps butts right up against this idea.
Of course, the choice between custodial and non-custodial solutions often comes down to balancing control and responsibility against convenience and ease of use. Let’s explore a few of the key differences.
With non-custodial Bitcoin wallets, you have full control over your account. That also means you, and only you, are responsible for the safe protection of your private keys.
For some, this is the ultimate benefit of using Bitcoin. You can send, receive, and interact with the public blockchain without dealing with a third party or centralized entity.
Of course, there are also downsides.
Private key loss is an all too common occurrence. In fact, around 20% of the existing Bitcoin supply (representing tens of billions in value, according to NY Times*) is lost or stuck in accounts and can’t be moved.
So, one might think that a custodial choice is the right approach.
But, if you asked those users who stored their funds on FTX, a once popular exchange trusted by thousands, they’d tell you a different story. After the dust settled during the initial fallout and collapse of FTX in 2022, around $8 billion in customer funds (see more on this at theguardian.com) disappeared — and that’s just one example of exchange-related risks.
Unlike regular keys, you can’t just call a locksmith to help you out if you can’t access your non-custodial wallet.
Recovery of a lost private key is close to impossible.
For customers who park their funds in custodial wallets on exchanges like Coinbase, there are ways to verify your identity and recover access if you misplace your login credentials. While this process can be cumbersome at times, there is a light at the end of the tunnel.
Privacy is a big part of what makes BTC unique. Think of it like digital cash. As long as you have BTC in your wallet to make a transaction happen, you don’t need to offer up your personal information to make the payment go through.
With a custodial wallet on an exchange, you often need to provide details, from your driver’s license number to bank account information, just to buy Bitcoin.
Now, it’s worth noting that there are Know Your Customer (KYC) procedures for most crypto on-ramps. That means that to buy BTC, you may still need to meet these KYC requirements. Once you have your assets in hand, though, you can transfer them to a non-custodial Bitcoin wallet app for enhanced privacy.
Keeping funds in a custodial wallet on an exchange also offers some compliance benefits as well. When tax time comes around, most exchanges offer transaction history for easier reporting.
If you only use non-custodial wallets, you’re responsible for tracking every transaction for tax reporting purposes.
Hopefully, you now have a good idea of which Bitcoin wallet option is right for you.
There are no wrong or right choices here; it’s all a matter of personal preference. If a custodial wallet on your favorite exchange is easier and makes your Bitcoin journey feel a bit safer, don’t feel like you’re betraying the decentralized ethos of cryptocurrency.
Alternatively, if you’re a fan of mobile Bitcoin wallet apps that marry convenience with ultimate ownership, then that’s the right choice for you. In the end, it’s all about what makes your life easier.
That’s where Bitcoin Depot comes in.
Not only do we operate the largest network of Bitcoin ATMs in the world, but you can also buy, store, and send BTC all in a few taps through the Bitcoin Depot app. Bitcoin Depot's wallet is non-custodial, so you own your keys and have full control (and responsibility) for your Bitcoin, bringing the best of convenience and self-custody to your mobile device.
If you’re ready to start buying BTC, download the Bitcoin Depot app today (available on iOS and Android) and find the nearest Bitcoin ATM location in your area.
*The information provided above is for informational purposes only. The inclusion of any particular 3rd party site does not imply an endorsement, sponsorship, or partnership between Bitcoin Depot and the sites listed above. While Bitcoin Depot endeavors to ensure the accuracy and relevance of the information provided, we do not guarantee the reliability of any 3rd party’s information.