Unlike typical currency transactions, which require a third-party intermediary (such as a bank or other financial institution) to be involved, cryptographic assets are moved directly from one party to another without using a central authority.
Whether you have a crypto wallet on your exchange or an external one, you may not be able to preserve your cryptocurrency in the event of bankruptcy.
Crypto consumers with custodial assets are often the last ones to get paid in the case of company bankruptcy. If you keep your bitcoins in a non-custodial or self-custodial wallet and you possess the private keys, you will not be affected. Those that use their exchange’s custodial wallet have a different experience.
The exchange will certainly have the power to settle its fees if you are completely dependent on a custodial wallet through your platform in the case of bankruptcy. To avoid bankruptcy, you can normally employ three different preventative measures.
In order to transfer your crypto assets between non-custodial crypto wallets, you can open a custodial wallet and open additional non-custodial crypto wallets at the same time. You can also use decentralized custody or store your crypto using DeFi wallets.
Custodial wallets and non-custodial wallets are the two main types of crypto wallets. Online wallets are known as “custodial wallets” and are those that are controlled and managed by a third party. Your private keys are completely safe with non-custodial wallets, which may be set up online or offline (for example, on a USB drive).
Custodial wallets can be a handy and secure way to store your cryptocurrency, but customers who rely primarily on these wallets may find themselves in a bind if the wallet provider declares bankruptcy. You can create numerous crypto wallets, thus one approach would be to open non-custodial custodial wallets in addition to the custodial wallet provided by your exchange.
Consequently, you can reduce your risk by holding your cryptocurrency in multiple locations. Additionally, you can transfer crypto holdings when you deem it necessary.
Regardless of the wallet type you choose, you will be accountable for both public and private keys. Your public key works as a digital address that identifies you to other users when they wish to send you crypto. On the other hand, the private key is utilized for both signing transactions and safeguarding your valuables.
Aside from custodianship, you have two other alternatives for protecting your assets. According to Saponaro, there is no connection between cryptocurrency bankruptcy and the use of a ‘custodial wallet,’ which he says can be an excellent entry point for newcomers to a field that has previously needed advanced technical knowledge.
You have the choice of using “hot wallets” or “cold wallets” to store your crypto assets when using this non-custodial alternative. Cold wallets, in contrast to online applications, allow you to save your funds on physical media such as hard drives and other off-the-shelf hardware.
As explained by Saponaro, these wallets provide the user with self-custody and autonomy. When it comes to wallets like DiviWallet that don’t have access to the user’s private keys, they provide a comparable function to custodial solutions. MetaMask, Exodus, Trust Wallet, and Wasabi Wallet are examples of non-custodial crypto wallets.
If an exchange or investing platform goes bankrupt, your cryptocurrencies may not be safe. As a result, the customer’s return is delayed (albeit it isn’t assured) because those assets are first used to satisfy legal bills and creditors.
If you want more control over your cryptocurrency, you can employ a variety of storage options, including decentralized custody and DeFi wallets. Your funds can be transferred from the custodial wallet of your exchange to an external wallet if you like.
It all comes down to how much control you are willing to give up over your possessions.
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I'm Carina, a passionate crypto trader, analyst, and enthusiast. With years of experience in the thrilling world of cryptocurrency, I have dedicated my time to understanding the complexities and trends of this ever-evolving industry.
Through my expertise, I strive to empower individuals with the knowledge and tools they need to navigate the exciting realm of digital assets. Whether you're a seasoned investor or a curious beginner, I'm here to share valuable insights, practical tips, and comprehensive analyses to help you make informed decisions in the crypto space.