What You Need to Know About Custodial and Non-Custodial Exchanges

Exploring Exchange Differences for Crypto Traders

Innovation by simplifying traditional digital currency transfer protocols is the singular idea that started Bitcoin. The entire cryptocurrency space still centers around this one idea.

Every new development in blockchain technology streamlines the process of transparent peer-to-peer digital currency distribution. The fundamental simplicity behind each new cryptocurrency development is what makes it an exciting industry.

It’s great cutting intermediaries out of financial transactions theoretically. It’s different in reality because a lot of information security issues are growing as fast as the cryptocurrency worldwide adoption rate.

Traders can purchase crypto coins on two different types of exchanges. There are two types of exchanges, Custodial and Non-Custodial Exchanges.

Non-Custodial Exchanges don’t have custody of their users’ money. On this exchange traders have complete ownership and responsibility for their money. They are individually liable to keep their money secure at all times. Examples of non-custodial exchanges are Evercoin, Shapeshift and Coinswitch.

Custodial Exchanges hold multiple users’ funds. Custodial exchanges technically have custody of their users’ funds and are mostly responsible for keeping it secure. Examples of Custodial exchanges are Binance, Bittrex, and GDAX to name a few.

What are the advantages and disadvantages of the two different types of exchanges?

Advantages of Custodial Exchanges

1. The exchange holds all of the liability to protect the funds from hackers NOT the user.
2. A Custodial exchange almost ensures the crypto investment is a more seamless experience.

Disadvantages of Custodial Exchanges

1. The exchange NOT the user holds the money
2. Custodial Exchanges hold the custody of your private wallet keys
3. Possible unannounced access to your money
4. Information security support requirements are more complicated for the exchange

Advantages of Non-Custodial Exchanges

1. The user holds their own money NOT the exchange
2. The trader has consistent access to their cryptocurrency funds
3. There are less information security support requirements for the exchange

Disadvantages of Non-Custodial Exchanges

1. The user NOT the exchange carries around the burden to protect their funds from hackers.
2. There is a little to no customer service for traders

There is not a one size fits all cryptocurrency exchange applicable for every trader. Each trader should weigh the pros and cons accordingly to their needs. People need to figure out what type of exchange is the most secure for their trading preferences. If a trader has a lot of capital and not a lot of trading experience, they would be an ideal fit for a trustworthy Custodial Exchange.

We’ll be sharing more posts like these on cryptocurrency exchanges as we launch https://www.formosa.financial an institutional grade custodial service for high net worth traders, businesses and their complex needs. Feel free to tweet

Works Cited:

1.) https://blog.evercoin.com/custodial-vs-non-custodial-exchanges-1890996401bd

2.) http://hackingdistributed.com/2017/08/13/cost-of-decent/