Bitcoin Storage Tips You Should Know
I frequently ask myself the question “where and how should my bitcoin be stored?” Although this question seems complex, there are simple ways of having it broken down based on available solutions. These will be further explained below.
This involves keeping bitcoin on your own. In this case, you have 100% control over such bitcoin by managing a private key of your own.
This method of storing bitcoin involves using companies like Anchorage or Coinbase have your bitcoin stored for future usage. The private key will be controlled by such company.
There is a popular saying which is used in supporting the method of self-custody. This is “not your keys; not your coins”. It means the bitcoin is not yours when you are not in full control of the private key. On the other hand, when the keys are yours, the coins are equally yours. This implies that you are in full control of your cryptocurrency.
There have been some arguments about self-custody and custodial. These debates have been based on two points:
1 – Trust
Would you rather trust a company to help you store your bitcoins? Do you want to do such on your own?
2 – Attacks
Exchanges have always been prone to hacking and unfavorable government regulations which can force them to have funds frozen at any time. Self-custody methods are not free of problems either. For instance, these methods usually suffer from natural disaster, break-ins, and are vulnerable to mistakes.
In the sections below, I will be explaining the disadvantages and advantages of custodial and self-custody methods.
This is probably the most preferred method when it comes to storing bitcoin. Self-custody gives you complete control over your bitcoins.
With this method, it doesn’t matter what local regulations are being implemented, you will not be affected. It is like being in possession of physical gold. So long as you have stored such bitcoin securely, no one will be able to take it from you. Also, you are at liberty to do anything with it.
With self-custody, you are protected against any form of hacking, unfavorable government regulations and other problems.
There is one major downside to this though. This is the fact that all of your bitcoins could be lost when they are not properly stored. There is one major mistake which is having the backup overcomplicated. In a situation whereby there is failure in your hardware device, a backup is meant to protect your files and data. The number of words that need to be stored in a safe place is between 12 and 24. Also, your coins can be easily taken once another person stumbles upon such backup.
Due to this problem, Bitcoiners are always thinking of a setup that is more elaborate to ensure their bitcoin are fully protected. There is a problem with this though. It is the fact that bitcoin can be lost as a result of human mistake. For instance, an additional backup may want to be added on the backup. The problem is that people who can’t remember passwords may not find it easy accessing their bitcoins.
Furthermore, there is also the backup mistake of having such details written on paper. This can be damaged or lost. A solution to this could be storing the backup on titanium, such as CryptoTag.
It is possible to have a cold or hot wallet. A cold wallet is a bitcoin wallet that is not connected online. Hot wallet on the other hand is connected online. When your wallet is connected online, it is prone to the activities of hackers. This is why cold wallets are recommended. The only time you can make use of hot wallets is when you planning using them on daily basis.
Important steps for self-custody
- Buying bitcoin
- Buying a hardware wallet
- Using titanium to record your backup
- Transferring your bitcoin into the wallet. Please note that it should be an amount you can handle
This is leaving your bitcoin under the management and care of someone else. There are lots of companies you will find on the internet that can carry out this function. Some of them are incompetent while others are tested and proven to deliver. Some of the best will be explained below:
This is a trusted exchange platform that is referred to as “qualified custodian”. It is a registered and licensed company which activities are in line with government stipulations. Its digital assets are being segregated as well as held in trust. This company hasn’t experienced any form of hack in the past. Such is a proof of its advanced security system in place to protect funds of its members.
This is another reputable and qualified custodian. It is the first OCC-approved national bank in United States. To find out more about how secured their system is, visit their official website.
Custodian entities like these are very competent when it comes to helping their members store funds. Their systems are immune to hacking activities, natural disasters and other threats. There is every chance of people experiencing hack problems in the future though with these exchanges. However, expect the amount of losses to be minimal and rare.
Custodial solutions have one major problem. This is the fact that they can be closed by government. When this happens, your bitcoin will be lost forever.
Steps for using custodial services
- Look for a company that is reputable and trusted. Some have been listed above which you can sign up with today.
- Transfer your bitcoins there.
- Manage your passwords with the best tools. Again, ensure to make use of 2-factor authenticator to make your account more secured.
When it comes to how to store coins, I am always concerned about the risks involved. These could be in the form of misplaced passwords, government seizures, natural disaster or any other. For these risks to be reduced, I try as much as possible to ensure they are split between these solutions. Most of my bitcoins are in cold wallet (self-custody) though.
Looking at the bigger picture, I am of the opinion that multisig is the best. It doesn’t just offer self-custody benefits but also ensure the risks are minimized to a great extent. It ensures that you get the chance of distributing x number or private keys to y number of parties. Some popular setups are 2/3 as well as 3/5 keys.
Just as pointed out earlier on, your choice to explore either custodial or self-custodial depends on two major factors. These are trust and the attacks you plan preventing. Whatever the case may be, the truth is remains that private key management doesn’t have any perfect answer.