Recent events have highlighted the importance of controlling your crypto holdings. The bankruptcy of Celsius in 2022 led to users losing their deposits, and a judge recently declared that Celsius owns their funds and those investors “don’t own their accounts.” The FTX collapse followed soon after, with users losing over $8 billion, according to a report by Time.com.
Self-custody of cryptocurrency is holding and securing one’s digital assets rather than entrusting them to a third party, such as a centralized exchange. The practice is becoming more popular as more individuals want to take ownership of their crypto. A post on Reddit showed how the Bitcoin supply on centralized exchanges has declined since the halving, apparently for the first time.
Various factors may contribute to this phenomenon, such as apprehensions regarding security, deliberations on privacy, and a yearning for increased authority and independence. This article aims to provide an in-depth analysis of self-custody, encompassing its advantages and disadvantages, the diverse alternatives accessible, and optimal approaches for individuals seeking to manage their cryptocurrency assets independently.
The benefits and risks of controlling your private keys
Self-custody refers to a person or entity retaining the private keys to their cryptocurrency wallets. This practice contrasts with depending on a third-party service to do so. Keeping your crypto in your private storage offers many benefits. Total control over your assets is one of the most important advantages. In addition, when you hire a third party to keep your keys, you entrust that provider to protect your belongings and funds.
The issue is potentially problematic given the numerous unauthorized breaches of third-party exchanges and affiliated entities, resulting in financial losses for their clientele. However, if you retain your keys, you take complete responsibility for the safety of your belongings, which you may make even more secure by following conventional protection and storage measures.
Self-custody confers the advantage of enabling individuals to maintain authority over their personal information. However, providing personal information is not a mandatory prerequisite for accessing various services offered by third-party entities. Individuals who prioritize their privacy and are reluctant to disclose such information to an external entity may harbor apprehensions. Self-custody lets you control your personal information and eliminates the need to discuss it with other parties.
Self-custody also gives you more control over the transaction fees you need to pay. For example, third-party services like centralized exchanges may add their own additional fees for buying, selling, or trading crypto. Self-custody allows you to choose the software for your wallet and manage the charges connected with your transactions. This may be especially useful if you are involved in many trades and are searching for methods to reduce the expenses associated with those transactions.
Self-custody may also expose a person to a variety of potential problems. The loss of private keys poses a significant threat, resulting in the unavailability of wallet funds. People who are negligent about where they store their keys and how they protect them may be in danger due to this problem.
One of the risks of controlling your private keys includes a lack of understanding by non-technical users. For example, suppose you are not comfortable dealing with the more technical aspects of cryptocurrencies and need to fully grasp how to properly store and preserve your private keys. In that case, there may be better solutions than self-custody for you.
Despite some of the disadvantages of the practice, self-custody is an important concept for crypto investors to understand. In addition, users have greater flexibility and independence due to cryptocurrency’s decentralization.
How investors can take custody of their crypto assets
Investors can only take custody of their crypto assets by storing them in a wallet that gives them control of the private key and seed phrase. Different options exist, from hardware wallets and desktop apps to browser extensions and mobile wallets.
For example, Ledger and Trezor are known for being the largest hardware wallet brands. Ledger also has a mobile and desktop app that allows users to manage their balances and send or receive crypto by connecting to the hardware wallet via Bluetooth (iOS) or USB (Android and Desktop). In addition, they support multiple blockchain networks and ERC-20 tokens (tokens built on Ethereum).
Giddy is a self-custodial cryptocurrency wallet and decentralized finance investment platform. The platform is a mobile application on Android and iOS devices. The private key is divided up and kept in several places that the user controls. Even if one of the private key’s shares is compromised or lost, the remaining shares keep the private key secure and it is still possible to retrieve it.
Binance-owned Trust Wallet is another option for a non-custodial wallet that functions solely as a mobile application. It’s a simple solution for getting into self-custody, and the app can interact with dapps across multiple networks. Like the other wallets, it supports most cryptocurrencies and ERC-20 tokens, allowing users to store thousands of crypto tokens.
Coinbase Custody is a self-custody solution by Coinbase that stores the private key directly in the browser or the mobile device of the user. However, this option is only available to institutional investors with at least $10 million to deposit. So if your pockets are heavy and weighing you down, this solution might be for you.
Final thoughts
Self-custody of cryptocurrency is a powerful way to take control of your digital assets and have greater autonomy in managing them. By holding your private keys, you are responsible for the security of your assets and can choose your transaction fees.
While self-custody does carry some risks, such as the potential loss of your keys and the need for a certain level of technical knowledge, the benefits of greater control and independence make it an important consideration for any cryptocurrency investor. Self-custody will probably become a more appealing option as the blockchain sector develops for people and businesses who want to take control of their digital assets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
