Why it matters
Third-party custody shifts risk from self-management to counterparty evaluation. You no longer worry about losing seed phrases or making technical errors. Instead, you rely on the custodian's solvency, security, and integrity. The tradeoff can be worthwhile, but requires choosing custodians carefully.
How it works
The holder opens an account with a custody provider and transfers bitcoin to addresses controlled by the custodian. The custodian maintains security infrastructure, processes transactions according to the holder's instructions, and handles operational complexity. The holder retains a contractual claim and can request withdrawals.
Example
A holder transfers bitcoin to a custody provider that maintains cold storage, conducts proof of reserves attestations, and has clear withdrawal policies. The holder no longer manages hardware wallets or seed phrases. They trust the custodian's operations and can withdraw to self-custody if they lose confidence.
Related terms
- Self-custody
- Custodial vs non-custodial
- Bitcoin custody provider
- Counterparty risk
- Exitability
- Full-reserve custody
- Segregated custody
- Proof of reserves
