The idea of bitcoinBTC self-custody has become extremely popular due to an overall drop in trust surrounding crypto exchanges. With self-custody, individuals maintain total control over the private keys used to access their crypto, rather than allowing a custodian third party (e.g., exchange platforms or online digital wallet services). With $3.8B lost to crypto hacks in 2022, users want to feel more secure than ever.
However, moving cryptocurrency from trading platforms and out of connected wallets does not automatically mean your assets are safe and secure. Bitcoin custody is more complicated than the seemingly binary “online or offline” storage.
“Crypto security is a three-step dance”, told me Aly Madhavji from Blockchain Founders Fund First. “First, educate yourself on digital assets and blockchain. Second, encrypt; treat your recovery keys like a secret treasure, noted offline and stored securely. Evaluate wallet providers meticulously, considering their track record, user feedback, transparency, and security protocols. Use cold wallets for bulk storage, hot wallets for everyday transactions. Finally, be vigilant; employ multi-factor authentication. Your assets’ security is as strong as your weakest protection.”
Before you commit to one option or another, here are three tips that can help you make the most secure choices for your cryptocurrency holdings.
Choose The Right Wallet For Your Level Of Expertise
In general, you can choose custodial or non-custodial wallets for your bitcoin or other digital assets and cryptocurrencies. Custodial means your wallet management is in the hands of a trusted third party; non-custodial means you’re solely responsible for your wallet’s security. Both have pros and cons, but it’s crucial to be honest with yourself when deciding how to handle your crypto.
If you are new to crypto, you want to seek assistance from a verified company or a simpler, hands-off way to manage your digital currency. Your money is not necessarily inherently less safe this way, despite the lower levels of trust in third parties.
Cyberattacks regularly target custodian companies, but it’s worth noting that these companies have beefed up their security and often give users insurance up to a certain amount, similar to fiat banks. They also remove the burden of responsibility that comes with managing your assets. Think of it like keeping your cash in a lockbox at home rather than having a bank account.
On the other hand, non-custodial or self-custody wallets put all of the control (and responsibility) into your hands. This can improve asset safety but also leave you vulnerable to losing your currency to phishing, hacking or physical damage. Forgetfulness is also a real threat. At least 20% of all available bitcoin is lost in forgotten wallets.
Takeaway: Weigh the pros and cons of self-custody versus third-party custody carefully, and be realistic about how much responsibility you want to take for crypto protection.
Never Keep All Of Your Assets In A Hot Wallet
Digital wallets can be hot or cold, and it’s wise to have both. The good news is that self-custody and custodial wallets have hot and cold options, and many users mix and match according to their needs.
A hot wallet is connected to the internet and generates the necessary keys to access funds. This immediately makes it susceptible to hacking, phishing or theft. However, hot wallets are also the easiest way to complete crypto transactions, so it makes sense for most users to have one.
In contrast, a cold wallet, or “cold storage,” is not connected to the internet for extra security, similar to an air-gapped computer. Cold wallets such as the Ledger Nano X or Trezor devices can be purchased commercially. They typically have software that allows you to access your crypto without using your private keys and offer an excellent alternative to storing your keys on the same device your wallet is on. While you can also use options like an encrypted, regular USB drive or even paper copies of your keys, these can be a bit more difficult to maintain securely over the long run.
Regardless of which type of cold storage you choose, be sure never to put more bitcoin than what you immediately need into a hot wallet. Keeping more than that in a connected wallet opens you up to easy theft.
Takeaway: Maintain both hot and cold wallets, but only use hot wallets when you’re ready to complete a transaction.
Stay Rigorous About Safety Measures
Despite the endless horror stories of people losing crypto, irretrievable data or months of work, humans are still terrible at backing up our devices. It cannot be stressed enough how critical it is to…
Read More: 3 Best Practices For Crypto Security