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If we’ve learned anything in 2022, it’s that we can’t trust our crypto to remain on centralized exchanges. Between the collapse of Celsius, Voyager, BlockFi, and FTX, investors have collectively lost billions of dollars this year. Millions of dollars could’ve been saved if most investors held their crypto in self-custody.
Failure to teach the public about self-custody will be detrimental to the future of crypto. More people will lose their crypto to exchanges and cause further distrust of the asset class. Add to that the increased regulation it will spur in governments attempting to “protect” investors by placing more restrictions on crypto. The government may even attempt banning self-custody outright in favor of “safer” options such as central bank digital currencies (CBDCs). For this reason, the public needs to understand the benefits of self-custody to protect their individual freedoms.
What does self-custody mean?
Custody basically defines who is responsible for managing and protecting an asset. Self-custody, then, means that you as a crypto investor are fully responsible and in control of your assets. Conversely, when you store your crypto on an exchange, they are technically in custody of your assets.
Exchanges are supposed to hold customer assets in reserves, so that whenever you decide you want to withdraw your funds, they can fulfill this request. However, what’s become clear in the 2022 crypto fallout is that exchanges chose to re-invest customer assets into other investment schemes. Consequently, the domino effect of the crypto crash catalyzed by the Terra Luna collapse meant that the investments made by these exchanges went to zero. As a result, customer funds that were supposedly held in custody by exchanges have all but disappeared.
The lesson here is clear: not your keys, not your crypto. This essentially means that, unless you have your crypto stored on a non-custodial wallet that provides you with a private key, you don’t actually own your crypto. Centralized crypto exchanges do not provide you with a private key, because technically they own your crypto until you decide to withdraw it. And in the meantime, the fate of your funds are in the hands of these exchanges.
What crypto self-custody options are available?
I hate to say it, but customers who lost their crypto to these exchanges are partly to blame. Myself included. I lost half of my crypto portfolio to the Celsius collapse. Luckily, the other half of my portfolio was spread among a few self-custody storage wallets. There are several ways to store your crypto outside of exchanges.
You basically have the choice between “hot” and “cold” crypto storage options. Read my article on hot vs cold storage wallets for an overview of exactly what these are. But to summarize, “hot” refers to a wallet that is still connected to the internet. This offers convenience, but opens you up to hacking vulnerabilities. On the other hand, “cold” refers to wallets not connected to the internet. Slightly less convenient when wanting to quickly trade assets, but they offer the most security control.
Non-custodial hot storage examples:
- Metamask
- Exodus
- Trust Wallet
- Coinbase Wallet
Non-custodial cold storage examples:
- Trezor or Ledger hardware wallets
- Air-gapped hard drives
- Paper wallets
Benefits of crypto self-custody
Blockchain technology is all about verifying ownership, and with that, the full ownership and control of your crypto. The level of control that crypto offers means the freedom to do as you please with your funds no matter where you are or what the government mandates. In other words, as long as you have access to your private keys, the government can’t tell you what to do with your crypto. In addition, you can conveniently take your crypto across borders without worrying about customs laws or border control.
An example of this occurred at the start of the Russian-Ukrainian war at the beginning of 2022. After banks limited ATM withdrawals for Ukrainians, at least one citizen was able to flee to Poland with $2000 in Bitcoin stored on a USB stick. It’s likely that many other Ukrainians were able to do the same just before the country closed its borders.
One of the benefits of crypto self-custody is that all of your funds can be accessed using a 12-24 word seed phrase associated with your private keys. Inputting this seed phrase into any crypto wallet will allow you to access your funds, because the record of your transactions is stored on the blockchain.
Furthermore, having your crypto in self-custody protects you from the downfall of centralized entities, such as crypto exchanges. Users of Celsius, Voyager, BlockFi, and FTX, for example, currently have their funds frozen as these companies go through bankruptcy proceedings. Thousands of customers have lost their life savings to these exchanges.
And finally, self-custodial crypto wallets can make estate planning much easier. All your heirs would need in order to access your crypto and NFTs is your seed phrase. Upon your death, you could plan to have your seed phrase released to loved ones.
Of course, self-custody comes with some risk too. While you have more control over the security of your assets, you are ultimately responsible for preventing being hacked or robbed of your seed phrase. Also, if you lose your seed phrase or private keys, no one else can recover them for you.
The Takeaway
Self-custody is one of the original guiding principles of crypto. The ability to transact peer-to-peer, with no intermediaries, and to “be your own bank,” are cornerstones of the crypto ethos. By storing your crypto on exchanges, you’re handing your power back over to centralized establishments. But by storing your crypto in non-custodial wallets, you have full control over the security and exchange of your digital assets. The death of crypto begins and ends with the death of self-custody rights. Understanding the benefits of self-custody will allow the public to push back against governments encroaching on our digital rights through legislation.