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The difference between Custodial and Noncustodial cryptocurrency services

The difference between Custodial and Noncustodial cryptocurrency services

Wallets

Since the Bitcoin Cash (BCH) fork has recently occurred, it is a good time to discuss the difference between custodial and non-substantial cryptocurrency services. Newcomers to the digital goods economy often get confused when they hear about a blockchain division and may wonder how they should handle the outcome. Individuals should note that the best solution depends a lot on how they prefer to store their cryptocurrencies – in a custodial or unofficial portfolio.

Read also: Follow this branch: a guide to divide BCH and BSV

Control by third parties and sovereigns on private keys

If you've just joined the cryptocurrency space, you may find some parts of the ecosystem confused. One of the most important lessons to learn is the best way to keep your resources safe and secure because nobody likes to lose money. In the early days, about eight years ago, there were very few service providers offering portfolios and exchanges. But now there are hundreds of wallets and purses that offer a storage solution for cryptocurrencies. What some digital currency beginners might not understand is that there is a big difference between safekeeping and non-security services. The recent Bitcoin Cash fork is a good example of why people should understand the differences between the two systems.

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Custodial Wallet Services

Custodial cryptocurrency services include most exchanges, brokering services and platforms that enable the purchase, sale and storage of digital assets. A "custody" activity is basically a third party that offers the protection of resources within one's system. People who store digital goods with a third party must understand that they are not 100% in control of their cryptocurrencies. Coinbase is an excellent example of an exchange and brokerage service that also allows people to store digital resources within their payment system. When you download the Coinbase application that allows purchases and sales, you will notice that it is described as "the world's most famous cryptocurrency portfolio". So it is certain that some users may think that the application is an unofficial portfolio, but this is not the case.

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For example, with the last difficult fork, Coinbase and a multitude of other third-party services have paused customers from sending and receiving BCHs to their portfolios. Unofficial portfolios were 100% operational before, during and after the fork, as these types of portfolios are not controlled by third parties. In another case, Coinbase explained to its customers that the BCH portfolios were recently enabled and that they would disperse BSV funds in the future. Basically, this means that if you archived BCH on Coinbase before the fork, you have to wait to allow them to access the BSV tokens that were connected to your BCH.

Therefore, third-party services that have reactivated BCH transactions have split the previously stored coins, allowing you to re-execute transactions with BCH without worrying about a breeding attack or sending two types of coins.

However, one of the most important slogans within the cryptocurrency community is "If you do not own your private keys, you do not have bitcoins. " And this is true for any cryptocurrency held on an exchange or custody portfolio, as the third-party service has control of your coins to a large extent. Examples of custodial services include Kraken, Coinex, Bitstamp, Poloniex, Bittrex, Bitfinex, Binance and the myriad of other trading and brokerage services platforms that also offer storage space.

Non-continuous portfolio services that provide 100% control for the user

Non-continuous portfolio services are platforms that allow users to own their own private keys. The application will give you a file or you will write a mnemonic phrase that can consist of 12-24 random words. A platform that provides users with the ability to store private keys to a cryptocurrency offers the user 100% control over funds. If you own your private keys, you own entirely bitcoins or any of the other over 2,000 existing cryptocurrencies.

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Understanding private keys is important for financial sovereignty.

So, returning to the example of the BCH hard fork, if you kept pre-fork bitcoin cash in an unofficial portfolio, this allowed you to have a complete ownership on your BCH and BSV. Non-portfolio portfolios include the Bitcoin.com client, BRD, Blockchain, BTC.com, Electron Cash, Copay, Jaxx, Coinomi, Edge and many others because these platforms give users the ability to store their private keys.

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An example of a mnemonic phrase from Electron Cash or a private key.

Individuals who use these types of user-controlled portfolios have the ability to divide their BCH and BSV immediately after division. Because people store their funds in a portfolio they have sovereign control over, they are 100% responsible for security and key security. Non-continuous portfolio holders also need to subdivide their BCHs themselves, unless the wallet software offers a native subdivision solution to the client. This means that if a user sends out some BCHs without first splitting their BSV into an unofficial portfolio, he must face the loss of the BSV after the transaction is sent. To have full ownership of the cryptocurrency private keys by non-portfolio means you are responsible for every action, including the division of coins.

Research and learn about the storage solution you choose

There are many applications and platforms that offer cryptocurrency storage in your wallets, but you need to be careful which one you choose. It is very important to understand the difference between custodial storage (third-party control) and non-custodial (sovereign control) solutions. The difference can be huge when it comes to exchanging hacks, blockchain blocks and other unknowns that occur within the cryptocurrency ecosystem. The best thing to do is to search for the service or application you use to store your cryptocurrency and perform due diligence. Find out if the application you use is a non-commercial or non-commercial solution and decide for yourself if the service is secure and secure enough to hold your precious digital assets.

Do you understand the difference between custody and non-secondary cryptocurrency services? Let us know what you think of this topic in the comments section below.


Images via Shutterstock, Electron Cash, Pixabay, Jamie Redman, Bitcoin.com.


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