Definition
Crypto custody is how the private keys that control crypto assets are stored and protected. Whoever controls the keys controls the assets, so custody is handled either by the owner (self-custody) or by a third party such as an exchange or specialist custodian.
How it works
Self-custody uses software or hardware wallets, and the owner must protect the private key or recovery phrase: if it is lost, the assets are usually unrecoverable, and if it is stolen, transfers are usually irreversible. Third-party custody removes that burden but adds counterparty risk, since the custodian's solvency, controls and legal structure matter.
Safeguards include keeping most keys offline (cold storage), requiring several approvals through multi-signature or multi-party setups, segregating client assets from company assets, and arranging independent audits or insurance. Each safeguard has limits, and insurance may exclude some losses.
Illustrative example
Illustrative: a holder keeps 10 coins of a token, 8 on one exchange and 2 in a hardware wallet. If the exchange suspends withdrawals, 8 ÷ 10 = 80% of the holding is out of reach until it resumes, while the 2 coins in the wallet stay under the holder's control as long as the recovery phrase is safely backed up. Moving 3 coins from the exchange to the wallet would cut the exchange exposure to 5 ÷ 10 = 50%, but the holder would then carry more key-management responsibility.
What to watch for
Self-custody puts the full burden of backups, device security and phishing defense on you, while third-party custody depends on a provider you cannot fully inspect. Legal protection of customer assets in an insolvency differs by provider and jurisdiction.