Custodial wallet
TL;DR
A custodial wallet is a wallet where a third party (usually an exchange) manages the private keys on behalf of the user.
Custodial wallets (Binance, Kraken, Bitvavo, Coinbase) hold your keys. Pros: convenience, recovery if lost, no own setup. Cons: counterparty risk (Mt. Gox, FTX, Celsius showed what can go wrong), KYC, and the exchange fully controls spending. Bitcoin community rule: 'not your keys, not your coins'.
Example
A user buys 1 BTC on Bitvavo. Technically they own an IOU — Bitvavo owns the BTC. An exchange hack or insolvency could (partly) wipe it. Fix: withdraw BTC quickly to your own wallet.
Frequently asked questions
When is custodial acceptable?
For small daily-trading amounts or as a temporary convert-parking. For longer holdings: always self-custody.
Related terms
Further reading
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