A custodial wallet means that someone else keeps your private keys to your digital assets. In this arrangement, the custody of the private keys is entrusted to the service provider, this will usually be an app, platform, or software.

Having your keys held by a company makes it easier for you to complete transactions. You also negate full responsibility for your keys – if you were to forget your password for the site that has your private keys, you should be able to recover it reasonably easily.

Many major custodial wallets hold your assets in hard wallets, securely offline. This means they are generally less likely to get hacked yet you’re not solely responsible for the hard wallet.

However, the ultimate owner of your assets in the event the custodian company goes bust is questionable. In a filing to the US Securities and Exchange Commission, Coinbase said that in the unlikely event, it went bankrupt, “customers could be treated as our general unsecured creditors.”
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It means that if you trust your private keys to a custodial wallet and the owners of the platform are in financial difficulties, they might own your keys instead of you.