Why Bitcoin Self-Custody Is Easier Said Than Done

Gold bitcoin and padlock

You’re not tech-savvy at all, but someone recently mentioned Bitcoin, and it piqued your curiosity. You’ve heard the word tossed around before, but you never really knew what it actually meant or how it worked, until one day, you clicked on an article that explained the nuts and bolts. Bitcoin forms the basis of a digital money ecosystem. Units of currency are distributed over a large network of computing devices, including laptops and smartphones. You can use Bitcoin to buy goods and services or trade it for a profit.

The best way to learn about Bitcoin is to try it. If you’ve ever wondered how to buy Bitcoin without getting lost in the jargon, start by picking a trusted exchange and take it step by step. Visit a website, choose your means of payment, and get Bitcoin for the price set by the platform.

Among crypto enthusiasts, there’s a popular saying: “Not your keys, not your crypto”. Some crypto platforms, like centralized exchanges, use custodial wallets, which don’t offer genuine ownership. The centralized entity that issued the account holds onto the private keys, even if it keeps your funds safe, so you’re basically trusting them with your assets, much like leaving cash in a safe deposit box. You can take back control of your Bitcoin by using a non-custodial wallet.

What Does Self-Custody Of Bitcoin Mean?

Self-custody is like being your own bank. You control how and when you spend your Bitcoin, but you’re also responsible for storing it in a safe place because if anyone gets hold of your funds, they can use them. Investing in cold storage might prove advantageous. You can use a hardware device – like a USB stick – that keeps your private keys offline, safeguarding them from malware attacks, hackers, and other Internet attack vectors. You can use a web or mobile wallet for small amounts of Bitcoin.

The Mt. Gox incident in 2014 proved just how vulnerable centralized platforms can be. One of the most well-known names in the crypto industry, it handled 70% -80% of the trading volume when it suddenly shut down, as it came out they’d been tied to the disappearance of hundreds of thousands of Bitcoins. Likewise, FTX went bankrupt in 2022 amid rumors that the owners had been skimming and misusing customer money.

Bitcoin self-custody lines up well with the philosophy of decentralization. Other perks include:

You hold the keys: You can transact Bitcoin without permission or the risk of your funds being frozen since you’re in full control of your private keys. Plus, you have direct access to blockchain transactions and decentralized finance (DeFi) applications.
You have more wallet options: There’s a wide range of wallet options to choose from, ranging from hardware wallets to secure software wallets, so think about what’s best for your personal situation.
You enjoy enhanced privacy: You can maintain your anonymity as you don’t have to provide personal information to third-party custodians. Custodial wallets require you to undergo a Know Your Customer (KYC) to prevent financial crimes.

Bitcoin Self-Custody Comes With Responsibility

Self-custody is empowering because it puts you in charge of your Bitcoin and gives you the freedom to skip over any potentially shaky gatekeeper. The trade-off is that you take on full responsibility for private key protection. If you lose your private keys, there’s no way of getting your funds back, so take the time to get security done right. Blockchain transactions are irreversible.

Here are some best practices to keep your Bitcoin safe:

Don’t Let Your Seed Phrase Fall Into The Wrong Hands

Digital wallets are designed to automatically generate a seed phrase upon setup. The seed phrase acts as a master key for your crypto wallet, offering a safety net if your device gets lost, stolen, or breaks down. Both hot wallets and cold wallets can use a seed phrase for recovery. Never store your seed phrase on an electronic device, whether it’s a phone, tablet, or computer, because it’s hackable; if your device is compromised, your Bitcoin is at risk.

Jot down your seed phrase on a piece of paper and keep it somewhere only you know about. Some people choose to engrave their seed phrase onto a durable material, like metal, to create a physical, offline backup that holds out against environmental damage. Paper can be easily destroyed by fire, water, or just plain wear and tear over time. Keep the seed phrase in a family safe, a lawyer’s vault, or another place you can reach in case of an emergency.

Use A Hardware Wallet For Your Larger Stash

A hardware wallet offers better security for long-term storage of large amounts of Bitcoin. It’s not exposed to the same kind of threats that can drain a “hot” (internet-connected wallet), which can include hacking, phishing attacks, and malware, and uses secure element chips and PIN that make physical theft or cloning impossible. A hardware wallet can hold thousands of different coins and tokens. You can diversify your portfolio without sacrificing security.

Don’t Keep All Your Bitcoin In One Account

Last but not least, you should keep your crypto accounts separate to stop one bad move from ruining your portfolio. If one account is hacked, phished, or drained by a smart contract, often disguised as a legitimate tool or investment, your other holdings remain intact. Each crypto wallet can generate an infinite number of accounts from a single seed phrase thanks to BIP-32 and BIP-39 standards. Keep high-risk trades in one account and long-term holdings in another.

You’re less tempted to dip into your long-term savings for short-term trades when your funds are spread out across different accounts. Open your app, look for the “Add Account” or “Create New Account” option, and the wallet will generate a new set of addresses, which are linked to your original seed phrase. Label accounts clearly in your own system so you never get them confused.