If you’re crypto user, you may have heard of the expression “Not your keys, not your coins.” This phrase summarizes the debate among crypto users about which is a superior crypto wallet – personal or hosted. It originates from the idea that if your crypto is stored in a wallet whose crypto key you don’t possess, then you can’t truly claim ownership over those coins.
Difference between Personal and Hosted Wallets
A cryptocurrency wallet is necessary if you want to store, trade, or spend crypto. There are many crypto wallet providers in the market that can help you interact with crypto safely and securely. Some crypto newbies get confused about whether these providers offer personal or hosted wallets.
A personal wallet, also known as a non-custodial wallet is one that allows only one person to know and possess the private key – the owner. Also, the wallet provider does not control your crypto holdings.
By contrast, a hosted wallet, a.k.a a custodial wallet allows a third party to know your private keys without revealing them to you. The provider controls your crypto – i.e. sending, receiving, and storing it on your behalf. Thinks of a hosted wallet as akin to a bank – it stores your cash and will not give you the keys to access the vault, but it has promised to avail the money to you upon request.
The Caveat
Both wallets may look like and function the same way, but the ramifications of using either are polar opposites. For example, the question of who is responsible if crypto funds are lost or stolen falls on whoever held the keys.
However, crypto holdings that have more than one private key present the conundrum of who is liable in case of loss. (Some wallets require more than one party to hold the private keys. One key could belong to you, the other to the hosting service, and the other to a trusted third party. Such wallets are known as multi-signature wallets.) It’s important that before you commit to anyoneany one wallet provider, you clarify if it’s you, or your wallet provider, who controls the keys.
Now, both types of wallets come with their perks, but each one also comes with its cons. Let’s take a look at each’s benefits and disadvantages below.
Pros and cons of personal wallets
Pros of Personal Wallets
You have full control over your crypto funds. You won’t have to submit a request every time you wish to send or spend them
You get to choose your fees – either the default fee or a higher fee depending on how fast you want a transaction to be
Your funds are safe from hacking, phishing attacks, and other vulnerabilities associated with the internet (which is where most hosted wallets are stored)
You are not subject to any Know Your Customer (KYC) procedures. (KYC is the process of verifying the identity of a customer and assessing their suitability for services)
You can store your coins offline, which is a far safer storage option especially for large coin holdings
Cons of Personal Wallets
Losing your private key when you had not backed it up means your crypto funds are lost forever.
Your funds are at risk of being stolen if your device, e.g., mobile or computer, is compromised by a virus or other type of malware
Pros and cons of hosted wallets
Pros of Hosted Wallets
Your wallet provider can help you recover your funds if you make a mistake, e.g., sending funds to a wallet that’s no longer supported, forgetting your login details, and so on
Some wallet providers allow you to transfer funds free of charge to users of the same wallet
You can access your funds more conveniently whenever you want to send or transact in crypto
Some hosted wallets provide a backup fund, like insurance, to compensate customers if your cryptos are lost as a result of a mistake on their end.
Cons of Hosted Wallets
Some wallet providers are known to freeze/ confiscate customer funds as a result of perceived illegality on the customer’s end
You can be subjected to KYC procedures which may reveal too much of your personal information
Some wallet providers will charge you extra fees as a way for them to gain profit
Your wallet is susceptible to hacking, resulting in your KYC information and funds being compromised
Conclusion
Now that we’ve dissected the meaning behind hosted and personal wallets and the perks and shortcomings of both, it’s up to you to determine if “Not your keys, not your coins,” rings true after all. The fundamental difference between personal and hosted wallets is that in one type, you’re in full custody of your crypto, while in the other, the coins are indeed yours, but you don’t have complete control. Before you decide on a wallet, do your research and determine which type of wallet meets your needs.