Onboarding Notes: Cryptocurrency Self-Custody

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With the recent insolvency of FTX, and the many other bankruptcies and closing down of various centralised platforms, this year has proven to be a stark reminder that self-custody of your own coins is of utmost importance.

As the saying often goes, “Not your keys, not your coins”.

If you are new to self-custody, or cryptocurrency in general, the hope is that this post sheds light on the importance of self-custody, and offers you some insight on how you can get started.

Benefits of Cryptocurrency Self-Custody

​​Self-custody of cryptocurrency refers to holding and managing your own cryptocurrency assets, rather than entrusting them to a third party such as a platform or exchange. With this, you are responsible for the security of your own funds, and have full control over your transactions.

Why the hassle to do self-custody though?

One of its main benefits is increased security. When you entrust your cryptocurrency to a third party, you are relying on their security measures to protect your assets. If the third party is hacked, your funds could be at risk. By self-custodying your cryptocurrency, you can take steps to ensure the security of your own funds, such as keeping them in a cold wallet or a hardware wallet.

Another benefit of self-custody is increased control. When you entrust your funds to a third party, you are subject to their rules and regulations. This can include restrictions on how and when you can access your funds, or limits on the types of transactions you can make. We’ve seen how the lack of control and transparency has served us with FTX, Celsius, Hodlnaut, the list goes on.

Self-custody also offers greater privacy and anonymity. By self-custodying your cryptocurrency, you are in control of your own transaction data and can choose who, if anyone, you share it with.

All the Different Types of Wallets You Need to Know

Now before you get started with self-custody, there are a few terminologies and setups you need to be aware of.

First, it is of your best interest to have both hot and cold wallets in place.

A hot wallet is a cryptocurrency wallet that is meant to be accessed and used for on-chain transactions. This category of wallets is convenient because they allow you to easily send and receive cryptocurrencies, and perform on-chain actions. However as a result, they are also more vulnerable to hacks and wallet draining. As such, you should keep minimal assets on this wallet.

On the other hand, a cold wallet is a cryptocurrency wallet that is meant to have zero on-chain transactions. Cold wallets will typically be more secure than hot wallets and less vulnerable to cyber attacks as a result. This is seen as a ‘vault’ wallet and should only be used to transfer assets to and from other wallets, and never needed to interact with the blockchain.

In general, hot wallets are good for your everyday use and for storing small amounts of cryptocurrency that you might need to access and spend quickly.

Cold wallets are better for long-term storage and for holding large amounts of cryptocurrency and assets that you don't need to access frequently.

There are also differences between software and hardware wallets.

A software cryptocurrency wallet is a digital wallet that is stored on a computer, smartphone, or other device and can be accessed through an app or software program. These types of wallets are easy to set up and use, and they can be accessed from anywhere with an internet connection.

On the other hand, a hardware cryptocurrency wallet is a physical device, similar to a USB drive, that is used to store cryptocurrencies offline. However, hardware wallets can be more expensive and less convenient to use because you need to connect them to a computer or other devices in order to access your cryptocurrencies.

Both cold and hot wallets can be software or hardware. The definition is based on behaviour.

Getting Started with Self-Custody

If you’re just getting started with self-custody, get yourself a software wallet like Metamask. This allows you to own your private keys and interact on-chain.

As shared earlier, you should also create several wallets for different purposes: A hot wallet for regular on-chain use, and a cold wallet for long-term storage.

If you have a sizable amount of cryptocurrency for long-term storage and holding, consider also using a hardware wallet like Ledger. It offers full isolation of your private keys and your computer as a cold wallet.

For a more in-depth and technical understanding of this setup, this Twitter thread is highly recommended:

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