What is a non-custodial cryptocurrency exchange, why is it so crucial to use one, and what are the risks associated with custodial platforms?
With hundreds of cryptocurrency exchange platforms now in existence and big name brands such as PayPal now offering the ability to “buy” Bitcoin without ever letting you see that Bitcoin, it is increasingly difficult to identify a reliable one.
A key aspect to consider when signing up for a platform, be it wallet, exchange, or brokerage service, is whether the platform is custodial or non-custodial. The answer to this question will tell you whether you can spend or transfer your cryptocurrency independently, in effect, whether you truly own your cryptocurrency.
Most exchanges, brokerage services, and platforms that allow you to buy, sell, and store digital assets are in fact custodial cryptocurrency services. A custodial service is essentially a third party that offers to store your assets within their system. People who store digital assets with a third party often don’t understand that they aren’t in control of their cryptocurrencies.
A custodial platform is one in which an entity other than you controls your crypto assets. This means that the platform can conduct payments on your behalf and has control over the unique keys that let you move or spend your cryptocurrency.
What are the consequences of a third party holding the keys to your assets?
A little known issue that can arise from the use of a custodial platform is loss in the instance of hard forks.
In 2017, Bitcoin Cash emerged as a cryptocurrency that was derived from a “fork” – a fork is caused by differences in the opinions of miners approving transactions to add to the central blockchain ledger. When this occurs, two new sets of rules emerge for miners, causing the cryptocurrency to split. A hark fork signifies the birth of new currency, while a soft fork merely indicates a change in the transaction rules for miners.
Subsequently, Bitcoin Cash increased its size of blocks to scale operations and process a greater volume of transactions. In 2018, Bitcoin went through another fork, resulting in the creation of Bitcoin Cash ABC and Bitcoin Cash Satoshi Vision.
While custodial wallet providers may jump the gun and make decisions on your behalf that affect both your existing cryptocurrency and your entitlement to newly minted coins produced by hard forks, non-custodial platforms, enable you and only you to decide what you do with your assets.
Apart from having the freedom to control every last satoshi of your Bitcoin and not having to worry about third party services manipulating or losing your information, non-custodial platforms like Xcoins can save you from falling victim to hacks and do not jeopardize your assets in the event that the company goes bankrupt.
Let’s take Mt. Gox as an example, which was a Bitcoin exchange based in Tokyo. At its peak, Mt. Gox handled over 70% of BTC transactions worldwide but in 2014 had to file for bankruptcy after a major hack, resulting in the loss of 850,000 Bitcoins, which was worth approximately $450 million at the time. By using a non-custodial platform like Xcoins, you avoid many of these risks altogether as long as you take proper precautions and make sure you secure your private keys safely and back them up properly.
The most important rule in the crypto world remains not your keys, not your coins. Here at Xcoins, we ensure that the very second your coins are purchased they are transferred to your own wallet, be sure that you choose that wallet carefully.
We know this can be confusing and that’s why we provide 24/7 live support so we can be right there with you every step of the way.