Great power comes with great responsibility. Bitcoin gives you financial sovereignty by allowing you to exercise full control over your own money. With BTC, you don’t have to worry about issues like frozen accounts, currency devaluation, or government seizures. That said, this crypto’s extraordinary power comes with great responsibility.
As an investor, to enjoy the full perks that BTC offers, the first thing you must do is figure out how to keep your crypto secure. Otherwise, you might lose all your crypto shortly after making your first purchase on one of the trusted exchanges on InvestingGuide. The first key to understanding and optimizing the safety of your assets lies in understanding the best custody options today.
Understanding Bitcoin Custody
Bitcoin custody refers to the steps you, as an investor, take to keep your BTC safe. It covers everything, starting with where and how you choose to secure your private keys. Why is keeping your private keys safe a top priority, you wonder? Because they provide access to your crypto.
Think of your private keys as your digital safe’s password. Anyone who has access to your keys has access to your assets. To ensure your crypto is safe, you must store your private keys where they can’t be stolen, lost, or accessed by unauthorized entities.
Keeping your keys where you can’t lose them is crucial because decentralized finance doesn’t come with a “forgot password” option. If you lose your private keys, you won’t have other options besides saying goodbye to your BTC.
Types of Bitcoin Custody Solutions
Bitcoin custody is not one-size-fits-all. Different solutions tailored for different investor needs are available today, and choosing the best option for you is one of the most important decisions you’ll ever make. In general, there are 2 broad categories of custody solutions: hot wallets (require internet connection) and cold wallets (store keys offline).
Here’s an overview of the most popular hot and cold bitcoin custody solutions, their advantages, and drawbacks.
- Self-custody
As the name suggests, a self-custody solution gives you total control over your private keys. It leaves everything to you, including the management, backup, and recovery of your private key and seed phrase. Crypto enthusiasts and experts also refer to them as non-custodial wallets.
There are two primary types of self-custody wallets: software and hardware. A software wallet is a program or app that allows you to store your private keys on your phone or PC. Most are free to use, but the downside is that savvy hackers can compromise hot self-custody wallets. If you plan to hold a sizable number of BTC, consider using a cold, non-custodial wallet.
- Third-party
Also known as custodial wallets, third-party custody solutions are controlled by a different party, not you, the investor. The third parties that deal with these items include crypto exchanges and custodian companies. If handling your private keys seems challenging, you can leave this crucial task to the professionals by storing your BTC in either a hot or cold third-party crypto wallet.
The best thing about using a third-party wallet is that you don’t have to worry about cramming seed phrases, managing private keys, or creating backups. Your service provider will handle that and more. The biggest drawback is that you give a third party full access to your credentials and, subsequently, your crypto.
- Multi-signature
A multi-signature Bitcoin wallet requires multiple private keys during transaction authorization. It’s pretty similar to a joint bank account that requires all key participants to provide their signatures before funds can be withdrawn or transferred.
One of the standout features of multi-sig wallets is that they allow users to set up the required number of keys. For instance, you can set 2-of-3, meaning you or any other person will need 2 out of 3 private keys to access or move BTC in the wallet. If you lose one of your keys, you can still use the other two to access, manage, and control your assets.
Key Factors to Consider When Choosing a Custody Solution
Having discussed the different types of Bitcoin custody solutions, it’s time to address one crucial question: which option is best for you? While choosing the right solution, there are several factors you must consider, including:
- Your needs
Before using any Bitcoin wallet, define and assess your needs and goals. Start by asking yourself what you plan to do, whether it’s holding BTC for a long time or trading frequently. If you’re a HODLER, for instance, you can opt for cold storage, which is safer and more secure. Conversely, hot wallets are best for frequent traders who prioritize getting faster access to their assets.
- Security
Security is paramount since anyone who can access your wallet can transfer your Bitcoin. While looking for a secure custody solution, remember that cold wallets are safer from hackers. But that doesn’t mean hot wallets are bad. You can still use them, but remember to optimize security with additional protocols such as biometric and two-factor authentication.
- Reputation
Research every BTC custody solution’s track record, more so if you plan to use a custodial wallet. Check how long the service provider has been around as well as the company’s ratings and reviews on Trustpilot, Google Play Store, the App Store, etc. Avoid custody solutions from companies with a bad reputation, especially where breaches and customer complaints are involved.
- Ease of use
No matter how secure a wallet is, it will be a liability if it’s unusable. Before committing, check every solution’s interface and how easy navigation is. If you’re a novice, find a wallet with clear instructions on how to undertake the most basic tasks, like setting up and saving your seed phrase. You can shift to more secure and robust solutions in the future, after becoming skilled and knowledgeable.
- Control
Remember that not all custody solutions give you complete control over your keys and assets. If you like managing everything, look for a reputable, secure, non-custodial Bitcoin wallet. But if you’ve yet to understand the intricacies of crypto custody, you should consider starting out with a custodial wallet. Finally, multi-sig wallets are better suited for high-net-worth individuals and institutions that prioritize reduced single points of failure, optimum security, and shared control.
- Cost
Don’t forget about fees and charges. There are plenty of free crypto wallets, but not all solutions are cost-free. If you plan on using a hardware wallet, prepare to spend up to $100+, depending on your chosen solution. Also, before using a custodial or non-custodial wallet, check for charges like storage and withdrawal fees.
Hybrid Approaches
Having discussed the different types of custody options and how to choose the best one, here’s another hack you should consider: hybrid approaches. For optimum security and convenience, consider using a combination of non-custodial and custodial solutions as an individual investor. You can keep a large chunk of your BTC in a cold wallet and use a trusted custodian to hold smaller amounts you might need to access frequently.
Keeping most of your BTC offline and some coins in a hot wallet is the best way to boost security without undermining accessibility. You can also add a multi-signature wallet into the equation and take the safety of your assets to the next level. Hybrid approaches are ideal for different categories of investors, from high-net-worth individuals to businesses with considerable crypto holdings.
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