Holding Bitcoin Off Exchanges
An Easy Guide to Bitcoin Storage
Holding Bitcoin Off Exchanges
How you hold your bitcoin is important. There are many ways to do it and they all come with varying degrees of risk.
Let’s discuss the most secure way to hold bitcoin—self-custody.
To do that, we’ll first cover what a cryptocurrency exchange is and why there are risks that come with holding bitcoin on exchanges. Then, we’ll cover what self-custody is and what the benefits and trade-offs of using a self-custody wallet are.
We’ll also cover:
my fav bitcoin wallets
my preferred exchange
What’s an Exchange?
What is a cryptocurrency exchange?
A cryptocurrency exchange is a platform for buying and selling cryptocurrencies. It’s a brokerage similar to that of E*TRADE or TD Ameritrade.
You can buy and sell bitcoin and other crypto tokens and coins on cryptocurrency exchanges. After buying them, you can keep them right there on the exchange in your account, just as you would in a traditional brokerage account.
Key Benefit
easy access for buying/selling
Key Risk
reliance on a third party
Exchanges are for trading bitcoin and crypto. They are, however, inherently risky in that all of your funds are held at the whim of the exchange.
If an exchange goes bankrupt, gets hacked, or experiences technical issues, access to your funds can be limited or made entirely impossible.
Notable exchange failures:
Throughout the history of bitcoin and cryptocurrency, some of the biggest exchanges have gone under. Customers have lost funds or had to file class action lawsuits in order to recoup some portion of what they had on the exchange.
It’s important to note that bitcoin or crypto held on an exchange is just a credit for those coins. You do not own that bitcoin and are trusting the exchange to keep it safe and let you access it.
What’s Self-Custody?
Not your keys, not your coins.
Self-custody is what it sounds like.
Self—you.
Custody—possession.
When you use self-custody, you have complete ownership over your funds.
In bitcoin, in order to achieve self-custody, you must have access to something called private keys. These keys are a cryptographic password used to sign transactions on the bitcoin blockchain. They are equivalent to using a password in order to send, receive, or otherwise access your funds.
If you don’t hold your own keys, you don’t technically own your bitcoin. Just as a bank is the gatekeeper of your money and accounts, an exchange is the gatekeeper of your bitcoin if you hold it on their platform.
If you hold bitcoin on an exchange, they are the owners of your private keys and, in turn, your bitcoin. Exchanges may have insurance policies for use in the event of a bankruptcy, hack, fraud, or other unexpected event, but you are reliant upon them to protect that bitcoin and resolve any mishaps.
Self-custody is immune to external events such as exchange bankruptcies, hacks, and bank runs. Your bitcoin in self-custody can even be offline in some instances.
The only point of failure is you.
Key Benefit
total ownership over funds
Key Risk
you
i.e. self-sabotage
With self-custody, your security starts and stops with you. The wallet platform you use may advise you on security but ultimately it’s up to you.
You may have heard the saying “be your own bank.” Self-custody is the perfect example of how bitcoin enables this. You are in total control of your funds. No outside party can access it without compelling you to give them access.
Bitcoin and private keys are like a bearer instrument. Only the person who has the private keys can claim ownership of the underlying property.
The biggest risk associated with holding bitcoin via self-custody is losing access to your private keys or seed phrase.
For example:
not writing them down
forgetting them
Losing your keys is a risk but it’s also preventable. Consider the following best practice steps when setting up a self-custody wallet.
write down your seed phrase
the seed phrase represents your private keys and is generated when you set up a bitcoin wallet
also called a recovery phrase or backup phrase
these come in 12 or 24 words
the words represent the underlying cryptographic keys and are easier to understand, remember, and use
Example: 24-Word Seed Phrase save your keys somewhere safe
once you’ve written down your seed phrase, put it somewhere safe just as you would do with personal documents
never save them online in a cloud-based platform like Google Drive, Dropbox, or iCloud
saving your seed phrase on a platform that can be hacked or otherwise accessed by bad actors defeats the purpose
repeat steps 1 and 2
it never hurts to have a backup
A rule of thumb for seed phrases—keep it safe, keep it private.
Oh, and there’s magic in those keys.
Private keys to your bitcoin wallet can be used to restore your wallet anytime from anywhere in the world. You don’t need a specific device to access your wallet.
Just the keys.
That seed phrase is quite literally like a key that unlocks your wallet and your wallet is just a compilation of bitcoin that exists on the global bitcoin network or blockchain. You can tap into that bitcoin whenever you like. You just need the keys.
My Favorite Wallets
Storing bitcoin via self-custody isn’t as complicated as it sounds. In fact, it’s often easier than setting up an account with a cryptocurrency exchange.
Mobile Wallets
If you have a phone or mobile device, Muun and BlueWallet are two bitcoin wallets for beginners and advanced users.
You can download their apps and follow their step by step setup to get started. Something I love about both of these wallets is that they’re bitcoin-focused. They do not provide wallet services for any other cryptocurrencies.
My favorite mobile wallets:
Others for bitcoin + altcoins:
Hardware Wallets
You can take bitcoin security one step further by using a hardware device to store your bitcoin. This is a device, similar to an external hard drive, that is separate from your phone, mobile device, or computer. It’s not just an app you download. It may have an associated app used with it but it’s a physical device.
A rule of thumb for bitcoin storage—the more bitcoin you own, the more advanced your storage strategy should be.
Just as you wouldn’t walk around with $10,000 cash in your wallet, you wouldn’t want to walk around with that much bitcoin on your phone.
If you hit a certain level of holdings and feel you need better protection, that’s the time to look into a hardware wallet for increased bitcoin self-custody.
My favorite hardware wallets:
Two more points:
buy hardware wallets directly from the company
buying secondhand or via an ecommerce marketplace like Amazon or eBay increases the chances of bad actors tampering with that device
these wallets store other cryptocurrencies too
that can be a pro or con but if you’re looking for a bitcoin-focused wallet, try Coldcard
Conclusion
Self-custody is how bitcoin was intended to be held. It’s a safe, secure, and reliable way to hold your bitcoin and sleep soundly at night.
But, remember the risk?
It’s you!
Save your seed phrase somewhere safe. Make a backup. Then, make another. You can try both mobile and hardware wallets.
Ideally, you create a self-custody wallet and receive your first bitcoin from a friend or as earnings from something you’ve sold or a service you’ve provided.
But, sometimes you may want to buy or sell bitcoin quickly. It’s okay to use a cryptocurrency exchange so long as you understand the risks.
Exchange risks include the exchange going under or experiencing issues. They control your funds in the same way a traditional brokerage or bank would. There may also be transaction limits or processing times on exchanges along with know-your-customer compliance measures they require to verify your identity.
My preferred exchange:
I’ve used many exchanges over the years, including Coinbase. As of writing, I’m only mentioning Cash App. I prefer recommending self-custody wallets over exchanges because it is vital to hold your bitcoin in a private wallet. When it comes to exchanges, you also need to see which ones are available where you live.
Why Cash App:
bitcoin-focused
bitcoin is the only crypto they offer
they’re building other self-custody and storage solutions
I was also previously a Cash App customer before they implemented bitcoin buying and selling. Something to consider when using any exchange is that you will most likely be trusting them with personal information such as your name, email, phone number, bank account info, and social security number. Because of this, it’s best practice to limit your use of exchanges to as few as possible.
Another bitcoin-focused exchange to consider is Swan Bitcoin.
Self-custody is the only way that bitcoin can be censorship-resistant. That means no one but you can access it. Your bitcoin in self-custody can’t be seized or accessed in any way without your consent. It is the ideal bitcoin solution.
Exchange use best practice:
buy and move to self-custody
If you’re buying bitcoin on an exchange but plan to hold it long term, make a purchase then transfer it immediately to your self-custody wallet.
Have questions?
Ask me in the comments.
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I am not an investment or financial advisor. All opinions expressed are mine alone. Read the full DISCLAIMER on the About page.
HODL on Garth.
Excellent and straightforward!