2.20 Self-Custodial vs Custodial Lightning Wallets

Just like base-layer Bitcoin, Lightning wallets come in two flavours, and the choice matters.

Self-custodial wallets (Phoenix, Breez, Mutiny) put you in control. You hold the keys, you own the channels, and nobody can freeze your funds. The tradeoff is a tiny bit of complexity: opening channels costs a small on-chain fee, and the wallet manages liquidity for you in the background.

Custodial wallets (Wallet of Satoshi, Strike, Cash App, Bitkey Cash) are essentially Bitcoin bank accounts. Instant signup, no setup, no fees to receive — but the company holds your coins. They could freeze your account, lose your money, or be forced by regulators to ask you for ID.

A reasonable rule of thumb: use a custodial wallet for the small amount you spend each week (treat it like cash in your physical wallet), and keep the bulk of your savings in self-custody on the base layer or in a self-custodial Lightning wallet you control.

Never put more on a custodial Lightning wallet than you'd be okay losing if the company disappeared overnight.