Custodial vs non-custodial wallet

In a custodial wallet, a third party such as an exchange or payment app holds the private keys and you hold an account with them. In a non-custodial (self-custody) wallet, only you hold the keys.

Custodial services are convenient: you can reset a forgotten password, trade instantly and get customer support. But your coins are only as safe as the company. If the custodian is hacked, freezes withdrawals or goes bankrupt, you may lose access. When Mt. Gox collapsed in 2014, customers waited about a decade for repayments to begin. FTX customers, after its 2022 collapse, were repaid in dollars at November 2022 prices, so they missed the later recovery in crypto prices. The saying "not your keys, not your coins" comes from these events.

Self-custody removes that counterparty risk but makes you fully responsible for backups and security. Many people use both: an exchange for buying and selling, and a self-custody wallet for holding.