Crypto allows us to take control of our assets, but with great power comes great responsibility. When it comes to storing your digital assets, you can choose to entrust them to an exchange, choose a custodial service or take self-custody. In this article, we'll be going over:
- What is self-custody
- What are the benefits of self-custody
- What are the trade-offs of self-custody
- How to keep your private keys safe and secure
- FAQs about self-custody
What is self-custody?
You may have heard the terms self-custody or self-custodian wallets. Taking self-custody means managing your crypto or other digital assets without relying on a third-party custodian or intermediary. You act a bit like your own "bank" because it becomes your responsibility to secure your assets. That also gives you greater control and autonomy over your digital wealth.
Self-custody differs from a custodial wallet or a traditional financial institution, where you have little control over how they protect your assets. What makes self-custody attractive is you don't have to worry about the security of a third-party custodian. That makes you solely responsible for keeping your assets safe, and gives you complete visibility and control over your holdings.
Some people may also lean towards self-custody because they value their privacy and don't want their personal information or financial data exposed to third-party custodians.
If you feel a self custody wallet is something you try, we've written a guide on how to set up a non-custodial wallet.
What are the benefits of self-custody?
Now that you've got a grasp on what self-custody means, let's go over some of the advantages of using self-custody:
- Lower fees: Most third-party custodians charge fees for storing your crypto assets. By switching to self-custody, you may reduce or even eliminate these fees altogether.
- More security: Self-custody gives you complete control over your private keys, and therefore complete control over your crypto. We'll go over how to protect your private keys; one example is saving them in a hardware wallet, which will help reduce your risks of hacks and other security breaches.
- More privacy: With self-custody, you don't have to trust third-party custodians with your personal details.
- Lower third-party risks: Self-custody reduces the risks that come with third-party custodians, such as fraud and poor business decisions.
- More control: Self-custody offers one complete control over their assets whereas third-party custodians often impose restrictions.
What are the trade-offs of self-custody?
It's important for every crypto user to make their own decisions and do their own research to figure out what solution best fits their circumstances. While self-custody offers a lot of advantages, it also comes with trade-offs.
- Technical difficulty: It's essential to have a basic understanding of how crypto wallets work and how to manage your private keys. For beginners, the technical aspect of self-custody may be hard to understand. It could lead to mistakes or errors, and potentially the loss of assets.
- Full responsibility: While having complete control of your digital assets sounds alluring, it also comes with increased responsibilities and risks. For example, if you lose your private keys or make a mistake when managing your digital assets, you could permanently lose access to your funds.
- Lack of insurance: Unlike traditional financial services, there aren't many insurance options to protect your digital assets. If your self-custodied digital assets are lost or stolen, you may be unable to recover them.
- Limited support: Being solely responsible for managing your digital assets can be challenging when technical issues arise. While you can fix an issue by researching or connecting with different crypto communities, there may be limited support to resolve problems quickly and efficiently.
How to keep your private keys safe and secure
Picture your private keys like a secret password to your wallet or a combination to your safe; you would never broadcast these across on social media! It's imperative to keep your private keys safe and secure; here are some examples to help you.
- Hardware wallets: A hardware wallet is a physical device allowing you to store your private keys offline. It's considered one of the most secure ways to keep your private keys safe because it doesn't require an internet connection.
- Paper wallets: You're creating a "paper wallet" when you write down your private keys on a piece of paper and store it in a couple of places, like a safety deposit, a personal vault or somewhere secure.
- Pager code: Before cell phones and texting, in the 90s, people would communicate using pager code to send messages on pagers. The numbers would transcribe as letters; you would have to decipher the numbers into letters. Here are a few examples: 12 = R, 17 = N and 8 = B. Some people write the letters of their private keys in pager code to add an extra layer of security.
- Encrypted flash drives: If you're not in the market to purchase a hardware wallet, another alternative is an encrypted flash drive to keep your private keys safe.
We've gone over self-custody, its advantages, trade-offs, and how to keep your private keys safe. If you want to try a self-custody wallet, check out the OKX Wallet, which gives you full control over your crypto. Here's our guide to help you create and manage your OKX Wallet.
Q: What are the benefits of self-custody in crypto?
A: Self-custody gives you:
- Control over your assets
- Privacy over your personal details
- Freedom from the limitations that a custodial platform may impose, like withdrawal limits.
Q: What are the risks of not using self-custody to store my digital assets?
A: Not taking self-custody means not having full control over your funds and abiding by the custodian's terms and conditions. Third-party custodial platforms may be vulnerable and less secure; you may lose your assets.
What types of wallets can I use for self-custody?
A: Several software and hardware wallets are made for self-custody; keep in mind to research and find a wallet that fits your needs.
How do I choose the best self-custody wallet for my needs?
A: Besides doing your research, you should look for security, ease of use, and compatibility with the assets you want to store.
How can I secure my self-custody wallet?
A: You can use a hardware wallet to store your private keys. When choosing a password, be sure to mix it up with letters, numbers and symbols. Back up your wallet in multiple and secure locations. You can also set up a Two-Factor Authentication (2FA), adding an extra layer of security to your wallet.
What happens if I lose access to my self-custody wallet?
A: If you lose your private keys, in most cases you will lose access to your funds, and there will be no way for you to recover them. That's why it's crucial to keep your private keys safe and accessible. If for some reason your self-custody wallet becomes corrupted or damaged, it's essential to back it up.
Can I still buy and sell cryptocurrencies while using self-custody?
A: Yes. Self-custody wallets allow you to buy, sell, hold, send, and receive crypto.
Is self-custody suitable for the long-term storage of my digital assets?
A: Self-custody is suitable for long-term holders, but it's important you take the appropriate security measures to protect your self-custody wallet to make sure you can always access your digital assets. As we mentioned, self-custody gives you complete control of your assets, but it's your responsibility to protect your private keys and back up your wallet.
What is the difference between self-custody and using a custodial service?
A: The key difference between a custodial service and self-custody is that, in the first case, you are putting your trust in a third-party custodial provider and have limited control of your digital assets. But with self-custody, you have complete control of your funds, with no third-party service.
Can I earn interest in my digital assets while using self-custody?
A: Yes, you can earn interest in your digital assets; one way to do that is to explore DeFi protocols, but it's important you do your research and find a suitable protocol that fits your strategy.
How can I prevent my digital assets from being lost or stolen?
A: Double-check when sending and receiving assets to ensure the public keys are correct. Back up your private keys on a hardware wallet and paper wallet. Always be alert for phishing and other scams that may compromise your digital assets. Create an extra layer of protection with Two-Factor Authentication and look into self-custody wallets that offer multi-sig.
THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. IT IS NOT INTENDED TO PROVIDE ANY INVESTMENT, TAX, OR LEGAL ADVICE, NOR SHOULD IT BE CONSIDERED AN OFFER TO PURCHASE OR SELL OR HOLD DIGITAL ASSETS. DIGITAL ASSET HOLDINGS, INCLUDING STABLECOINS, INVOLVE A HIGH DEGREE OF RISK, CAN FLUCTUATE GREATLY, AND CAN EVEN BECOME WORTHLESS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING OR HOLDING DIGITAL ASSETS IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. PLEASE CONSULT YOUR LEGAL/TAX/INVESTMENT PROFESSIONAL FOR QUESTIONS ABOUT YOUR SPECIFIC CIRCUMSTANCES.