Self-custody means that you, and only you, have full control over your crypto. This means you’re responsible for keeping your assets safe.
Take ownership of your crypto by moving it off centralized exchanges and into a self-custody wallet.
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What is self-custody?
Self-custody means that you, and only you, have full control over your assets. Instead of relying on a third-party, like a bank, you manage your own assets and keep them safe.
In the context of crypto, self-custody means that you hold and manage your own crypto in your own wallet, rather than keep it on a centralized exchange or other custodial platform.
You only truly own your crypto if you control your secret recovery phrase and private keys.
What is counterparty risk?
The greatest benefit of self-custody is that it mitigates counterparty risk.
Counterparty risk is the risk that one side of a financial transaction won’t fulfill its obligations under the terms of the agreement. In other words, it is the risk that a counterparty will default on its commitments.
In the context of crypto, and custodial platforms, counterparty risks include getting hacked, mismanaging or misappropriating your assets, or going bankrupt.
By taking custody of your assets, you can reduce your exposure to counterparty risk, because you control your secret recovery phrase and private keys.
If you’re actively trading crypto, and would like a primer on how to minimize your counterparty risk while trading on a custodial platform, CryptoCred wrote a great article on the subject here: Crypto Trading and Counterparty Risk.
It’s important to note that self-custody also involves risks. You can mitigate these risks by taking appropriate security measures, storing your crypto safely, and managing your secret recovery phrase and private keys effectively.
What are the benefits of self-custody?
Self-custody offers many benefits and advantages over giving custody and control over your crypto to someone else.
Ownership and control
With self-custody, you have complete control over their assets, and can make decisions about how to manage and use your assets. You don’t have to complete paperwork or ask permission.
Security
By holding crypto in your own self-custody wallet, you have greater control of your security. This minimizes the risk of theft or mismanagement by a custodial platform.
With great power comes great responsibility Read more about the steps you can take to ensure your crypto is safe here: What is crypto security? 10 tips to stay safe in crypto.
Privacy
Your self-custody wallet isn’t linked to your identity, so self-custody offers a greater degree of privacy. Blockchain transactions are pseudonymous, and only linked to your wallet’s address.
Lower costs
If your assets are in your custody, you don’t need to pay management fees (like you would with an investment portfolio).
What are the risks of self-custody?
Despite being the better choice, there are a few risks and downsides associated with self-custody. If you’re aware of the risks, you can work to mitigate them.
Technical skill
You have to have a little bit of knowledge to safely manage your crypto. This includes understanding secret recovery phrases and private keys.
Security
If you don’t store your secret recovery phrase and private keys properly, or if your device is vulnerable, you might get hacked. If you fall for one of the many scams in crypto, you run the risk of losing your funds.
More responsibility
With self-custody, you and you alone have the responsibility for your crypto. It’s up to you to figure out the best system for storing your crypto that will keep it safe, and ensure you retain access. This can be trickier than it sounds.
Types of self-custody wallets
The two main types of self-custody wallets are software wallets and hardware wallets. If you’re interested in learning more about wallets, please visit: What is a crypto wallet?
Hardware wallets
Hardware wallets are physical devices that store and manage private keys. You can connect them to a computer to sign transactions.
Hardware wallets provide a high level of security, as they store your secret recovery phrase and private keys offline.
They are not accessible via the internet, which makes them highly resistant to hacking and theft. Examples of hardware wallets include Trezor and Ledger.
Read more about hardware wallets here: Popular hardware wallets.
Software wallets
Software wallets are stored on a desktop or mobile device that is connected to the internet.
Also known as hot wallets, they’re considered to be less secure than hardware wallets, as they are vulnerable to getting hacked.
So why would anyone use a software wallet? They’re way more convenient, especially if you’re moving crypto around frequently, or playing with DeFi and connecting to dapps.
A good rule of thumb is to only store the same dollar value of crypto in a software wallet that you would be comfortable with as cash in a physical wallet.
Read more about software wallets here: Popular software wallets.
Dos and don’ts of managing your secret recovery phrase
Properly managing your secret recovery phrase and private keys is the most important aspect of securely managing your crypto.
Here are a few steps you can follow to manage your secret recovery phrase successfully:
- Write down your secret recovery phrase at least twice, and store it in multiple secure locations. Store copies in secure offline locations such as a safe deposit box, a fire and waterproof safe, or another secure location.
- Never store your secret recovery phrase or private keys digitally. Anything digital can be hacked. This includes in your email, as a screenshot, a text file, or any other digital format.
- If you use a hardware wallet, make sure you write down its secret recovery phrase when you set it up. Otherwise, if your device is lost or stolen, you lose your crypto.
- Use a password manager. A password manager can help you create and store strong unique passwords for all your accounts.
- Enable two-factor authentication (2FA). 2FA adds an extra layer of security to your accounts by requiring a second form of authentication in addition to your password. Because of the risk of SIM-swapping, it’s safer to use an authenticator app rather than SMS 2FA.
- Update your hardware wallet’s firmware. Hardware wallet manufacturers regularly release firmware updates to fix security vulnerabilities and improve functionality.
- Be aware of phishing scams. Phishing scams are designed to trick you into revealing your secret recovery phrase or private keys. Be wary of suspicious emails or messages, don’t click on unknown links, and never enter your private information into a website unless you are 100% certain it is legitimate.
When managing your crypto, it’s important to take security seriously. Follow the steps to protect your secret recovery phrase and your crypto wealth.