What is a custodial wallet?
A wallet where a third party holds the private keys, so your balance is a claim on that company rather than direct control of the asset.
In a custodial arrangement — the default on almost every exchange — the platform holds the keys. What you hold is an entry in its ledger and a contractual claim against it.
Why it matters
This is the difference between owning an asset and being owed one. If the custodian fails, your claim joins everyone else’s in whatever insolvency process applies, and history in this sector is not encouraging on recovery rates or timelines. Custody also means withdrawals can be suspended, accounts frozen, and terms changed. The trade-off is real convenience and recoverable access if you lose your password. Neither choice is correct in general; what matters is knowing which one you have made.