Storing cryptocurrencies is easy in theory. The basic way of holding bitcoin involves using private key and public key pairings however private keys are difficult to memorize and store therefore many wallet services provide 12-word mnemonic phrases which enable them to recover their accounts. This list of words can be written down and saved offline in what is known as 'cold storage'.
Cold storage in this way is good for individuals. It allows them to keep their wallets safe from hackers while still being able to receive payments. The problem arises when you consider what could happen if a malicious actor were to gain access to the mnemonic. If a thief gets access to the mnemonic then the funds can be stolen in an irreversible transaction.
This problem is compounded when several people have control over the same wallet. Every individual can make transactions from that wallet which increases the chances of the funds being stolen or lost either by accident or intentionally. Bitcoin custodian accounts are designed to mitigate this risk.
Custodial wallets are services which hold a person's bitcoin on behalf of the user. Full control of the wallet is given to the custodian who can make transfers without getting approval from the user. Quality custodial services use a mixture of technical, legal and procedural measures to keep the currencies safe however there is no cryptographical block that keeps them from confiscating a customer's funds. For this reason, a high amount of trust is required when dealing with bitcoin custodian accounts.
The greatest advantage of using a custodial service is the security it offers. Many people who are new to cryptocurrency are not technologically savvy enough to secure funds on their own therefore they make use of a trusted third-party. Even if the service were to somehow lose the funds, they are usually insured and able to pay back their clients.
The drawback to using bitcoin custodian accounts is the lack of control. Putting your bitcoin in the hands of another person opens you up to the chance of malicious actors or hackers making off with your funds. There is also the possibility that the custodial service may pack up and disappear with its clients' funds in what is known as an exit scam.
The High Cost of Custodial Services:
Leaving bitcoin with a custodian is 15 times more expensive than storing gold with a third party. Keeping gold bars in underground bunkers costs about 0.1% per year however keeping physical gold safe is a simple security issue. Keeping bitcoin safe requires technical know-how and cyber-security the likes of which the world has never seen before.
Custodians for bitcoin must employ multiple levels of cyber security for the funds to be safe from hackers. The custodians must also remain vigilant at all times and rebuff any attempts to probe their firewalls. All this costs a lot of money for the investment in programmers, software development and computer hardware.
The demand for bitcoin custodial accounts is so high among institutional investors that they are willing to pay high premiums anyway. The price of each cryptocurrency has risen to such high levels that most investors aren't even feeling the pinch.