Claiming crypto ownership: What is crypto self-custody?
Khalid Akbary
Mar 11, 2025・6 min read
Cryptocurrencies don’t function like traditional assets. Instead of relying on intermediaries like banks, payment processors, or centralized exchanges (CEXs), users can access their funds anytime through digital wallets. However, not all wallets offer the same level of control.
In terms of asset management, wallets fall into two main categories: custodial and self-custodial. Custodial wallets put a third party in charge of storing assets, handling private keys, and offering recovery options. While this makes transactions easier, it also means users must rely on a centralized entity – leaving their funds vulnerable to insolvency or withdrawal limits. The collapse of major CEXs like FTX underscored these dangers, prompting more investors to explore self-custodial solutions.
But what is crypto self-custody, and how do self-custody wallets compare to custodial options? In this guide, we’ll tell you what you need to know.
What is self-custody in crypto?
Self-custody in crypto means users have direct access to their digital assets without intermediaries. Specifically, they control a crucial cryptographic code called the private key, which grants full access to their self-custody assets and allows them to transfer funds fromto the associated blockchain address. While this approach aligns with cryptocurrency’s peer-to-peer (P2P) ethos, it also places full responsibility on the user. Without third-party involvement, investors have no recourse for insurance claims or protections in the event of theft or a hack.
What is a self-custodial wallet?
Self-custodial cryptocurrency wallets give users direct access to their private keys when setting up a new account. Unlike custodial wallets on CEXs, self-custodial wallets give individuals full control over their digital funds and transaction authorizations.
Typically, self-custodial wallets present the private key as a 12- to 24-word seed phrase, also known as a recovery phrase. This human-readable version of the private key makes it easier to record and store securely. Since 2013, most self-custodial wallets have used a standardized list of 2,048 English words, called the BIP39 Standard, to generate seed phrases. However, not all wallets are BIP39-compatible. If a trader loses access to their wallet, they can restore their balance by entering the seed phrase in a new wallet.
Types of self-custody wallets
All self-custody wallets share a key feature: They provide users with direct access to their private keys during setup. However, there are two main types of self-custodial wallets – hot wallets and cold wallets – each with advantages and security considerations.
Hot wallets
A hot wallet is any self-custodial wallet that stays connected to the internet. Available as mobile apps and browser extensions, these software wallets offer convenience but are also more vulnerable to cyberattacks. While many high-quality hot wallets include encryption protections and security features like two-factor authentication (2FA), their always-online nature makes them a target for hackers.
On the plus side, hot wallets are typically free to download and integrate seamlessly with decentralized applications (dApps). Many traders use them for frequent transactions or web3 activities like non-fungible token (NFT) trading and yield farming.
Cold wallets
Cold wallets prioritize security by keeping private keys entirely offline. In the early days of crypto, investors stored private keys as QR codes on printouts (known as paper wallets), but today, most cold wallets use specialized hardware devices. Companies like Trezor, Ledger, and KeepKey manufacture USB-like devices that store private keys securely.
To transfer crypto using a hardware wallet, users must connect the device to a computer or mobile phone via USB or Bluetooth. While these additional steps make cold wallets less convenient, they offer the highest level of theft protection. Because of this, many investors store the bulk of their long-term holdings in cold wallets for added peace of mind.
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How does a self-custody crypto wallet work?
Whether hot or cold, all self-custodial wallets follow a similar setup process and share core functions, such as sending and receiving digital assets.
Creating a wallet
The first step to accessing a self-custodial wallet is generating the new account's private key. With a hot wallet, download a browser extension on the wallet's official website or a mobile app from The App Store or Google Play. For hardware wallets, users have to download the compatible software with their hardware unit (e.g., Trezor Suite for Trezor devices) and link their devices via Bluetooth or a USB cable.
In either case, users select “Create a New Wallet” and receive a seed phrase – 12 to 24 words that serve as a backup for their private key. It's important to double-check each word and store the phrase securely, such as in a safety deposit box or a fireproof safe, because the seed phrase is the only way to recover the wallet if the device is lost, stolen, or damaged. Without it, access to the funds is permanently lost.
Receiving funds
To receive crypto in a self-custodial wallet, users select the asset and copy its public key address. This address is necessary for incoming transactions, as it directs funds to the correct wallet. Unlike private keys, public keys can be shared safely, making it possible for others to send funds securely. Some wallets also generate QR codes for faster and more convenient transfers.
It’s important to note that every cryptocurrency has a unique public key address. Bitcoin (BTC), for example, must be sent to a BTC address, not an Ethereum (ETH) or Bitcoin Cash (BCH) address. Sending funds to an incompatible address can result in permanent loss.
Sending funds
Transferring cryptocurrencies from a self-custodial wallet works the opposite way of receiving them. Users paste the recipient’s blockchain public key address into their wallet to send crypto. It’s important to always double-check that the address matches the right cryptocurrency network – sending funds to the wrong one could mean losing them for good.
For example, if a user were to send Solana (SOL) from their Phantom wallet to a Coinbase account, they would first copy the Solana deposit address from Coinbase and paste it into the designated Solana section of their self-custodial wallet. After entering the amount to send and confirming the transaction fee (also known as a gas fee), they would finalize the transfer and wait for the funds to appear in their Coinbase wallet.
Storing funds
Once funds are in a self-custodial wallet, they stay there until the owner chooses to move them. The only way assets can be lost is if the private key is compromised. Hot wallets, which remain connected to the internet, are more vulnerable to cyberattacks. In contrast, cold wallets store private keys offline, making them the most secure option. Because of this, many investors use cold wallets for long-term holdings while relying on hot wallets for quick transactions.
How to access and secure a crypto wallet
When setting up a self-custodial wallet, crypto investors typically enter a PIN or password to access their account. The private key is only needed if they lose access to their wallet – such as if their phone breaks or they forget their PIN. In these cases, users must redownload the wallet app or obtain a new device and select "Restore an Old Crypto Wallet" during setup. As long as they enter their seed phrase correctly, their crypto balance will reappear in the new wallet.
Because private keys are critical to self-custodial wallets, investors must take extra precautions when storing them. Instead of writing the seed phrase on a single sheet of paper, some create multiple copies and store them in different secure locations. Others use steel sheets to prevent damage from tears, fires, or smudges that could render paper backups unreadable. For added security, some traders divide their seed phrase across multiple locations so that nobody can access the full phrase if a single storage spot is compromised.
Note: Self-custodial wallet users must be on high alert for phishing scams. Fraudsters often impersonate wallets like MetaMask and claim they need a private key to “fix an issue.” No legitimate wallet provider will ever ask for this information. Any email, text, or message requesting a private key is a scam. Always ignore and block these attempts, and keep private keys securely stored.
Take control of your crypto with CoinTracker
Using a self-custodial wallet is the first step toward protecting your cryptocurrencies from counterparty risks. While these wallets require more responsibility, they give you complete control over your digital assets. They also open the door to web3 opportunities like staking, yield farming, and NFTs.
Remember that self-custodial transactions aren’t automatically reported to tax authorities – you’re responsible for tracking them. CoinTracker’s Portfolio Tracker makes this easy by syncing with your wallet addresses and exchange APIs to generate detailed reports of your crypto activity.
Discover how simple it is to stay on top of your tax obligations by getting started with a free CoinTracker account today.
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.