Why bitcoin custody matters
and how you can do it!
Bitcoin custody is important. Maybe more important we currently give it credit for! However, our society has been conditioned to relinquish custody (including bitcoin custody) to “better suited” alternatives. In recent years, the value of bitcoin and other cryptocurrencies has soared. This has made them an increasingly attractive investment for individuals and businesses alike. However, many jump into this industry with a “FOMO” mentality. The issue here is that they refuse to properly educate themselves to understand the asset they are buying. They often ignore the custody aspect. Moreover, they completely disregard the philosophy behind the decision to buy such an asset. There are two problems that come from this:
- They buy a digital pile of steaming garbage 💩
- They do not custody their newly acquired (hopefully valuable) assets 🤲🏼
For the purposes of today we’ll jump into the latter issue. Why and how people would buy “digital steaming piles of garbage” is an issue for another day. Needless to say, proper bitcoin custody practices are important to ensure the safety and security of these digital assets (from now on I’m going to say bitcoin as that is currently the only digital asset worth owning).
How is bitcoin custody different?
One of the main reasons to focus on self bitcoin custody is due to the inherent risks associated with having somebody else hold and control your bitcoin. Bitcoin is decentralized and stored in a digital wallet. This is completely opposite of traditional assets which are typically held in a centralized system or brokerage.
Bitcoin technology not only makes it much easier, it makes it possible for individuals to take control of their assets! Self bitcoin custody is one of the true innovations! In fact, all bitcoin wallets are created equally! You as an individual, for the first time in history, have the same opportunity at digital asset security as the “bank grade” storage as large billion dollar institutions. Your custody is actually probably safer than in an entity with dedicated infrastructure due to the “honey pot effect”.
This is the power of Bitcoin, specifically bitcoin custody.
Why are people hesitant to self bitcoin custody?
The problem is that our existing society isn’t used to taking true ownership of their assets, and that responsibility feels daunting. Therefore, they treat this new tool like any other legacy financial product and hand over ownership, often without realizing what they’ve done. In other words, give up bitcoin custody and think it’s “not the end of the world”.
When you give up custody of “forever products” (where transactions are immutable and unchangeable) you open yourself up to risks. These risks are arise because if a digital wallet is lost or compromised, the bitcoins it contains could be lost forever. There is no central authority or institution that can help recover lost or stolen bitcoins. So if your bitcoin are stored or (mis)handled by a custodian, you are at risk to their governance, security and/or the morality of the individuals in charge with little to no recourse if something were to happen.
Shouldn't I leave it to the pros?
You might be thinking “well they are much better equipped to handle governance and security around bitcoin custody than I am! Two out of three isn’t bad” and you might be right. However, a custodian is almost always a bigger target than you are. This is the honey pot effect.
For instance, it is the same amount of “hacking effort” to try to steal a bitcoin wallet with 1 bitcoin or 1,000 bitcoin. Therefore, bitcoin custodians act as an unintentional honey pots ripe for attackers to push the limits of their digital security and governance practices. Think phishing on your bank account, but without “ctl-z” of banking transactions.
With governance and security risks (hopefully) well understood, you might be wondering “what kind of morality risks could there be? Custodians aren’t aloud to steal customer funds are they? Their terms of service prevent them from doing such a thing, right?”
Bitcoin exchanges can be trusted... can't they?
We have seen history show us that the opposite being true. Regardless of terms of service, regardless of promises made by management, regardless of any policy set in place, we are playing in a brand new arena. We are playing in an arena of irreversible, finite assets. The custodians can’t simply get bailed out like they can in a traditional financial market (like they did in 2008) because of the decentralized nature of bitcoin.
Traditional bitcoin custodians (like banks and hedge funds) take your money, “store it safely”, and then “put it work” (which is basically just corporate speak for investing, or gambling with it). This works in their model because it’s closed loop, highly regulated and generally consumers are bailed out by the government when the custodians make the wrong decisions. However, when you add bitcoin custody into the mix – a new, decentralized, unregulated, global asset, and try to treat it like something it wasn’t designed to be, we have consequences. Big consequences.
Take your power back! Self-custody your bitcoin!
While this may feel daunting and scary, I hope I have convinced you that bitcoin custody is important. I would urge you to think about your bitcoin custody practices. You are capable! If you don’t feel ready, there are tools. In fact, we prepare people for self-custody of bitcoin in free 1:1 consultations at Bitcoin Well. There are countless online tools and videos to watch and learn. Start small, and get comfortable. Taking your bitcoin into your control is one of the single most important and overlooked aspects of Bitcoin. It is a great privilege to have something worth losing, don’t offer that control to somebody else.