Self-Custody of Crypto Assets
Self-custody of crypto assets is becoming increasingly popular as it gives users full control over their cryptocurrency without relying on a third party. This means that users are solely responsible for their private keys, which involves finding a reliable self-custody wallet provider and transferring the crypto assets from a centralised exchange to the new wallet.
The purpose of this blog post is to help educate users on the basics of storing crypto assets, self-custody wallets, and non-custodial wallets, as well as the advantages and disadvantages of each. We will also highlight the importance of using a non-custodial crypto wallet to become a self-custodian of your crypto assets and the difference between hot and cold wallets.
What is Self-Custody?
The self-custody of crypto assets is when users take complete control of their crypto assets. This gives the user full control to send, receive, and store one’s cryptocurrency without relying on any third party. The most important aspect of self-custody is full comprehension of how it works and understanding the risks and benefits; you’ll be your own banker as well as head of security.
The Basics of Storing Crypto Assets
For you to take self-custody of your crypto assets, you need to understand some basic crypto concepts like a blockchain address, public key, private key, seed phrase, and crypto wallets.
Blockchain Address
A ‘blockchain address’ is a unique identifier that represents a destination on a blockchain. It is similar to a physical mailing address in that it is used to receive and send transactions on the blockchain network.
Use case: Alice sends Bitcoin to your provided blockchain address.
Private Key
A ‘private key’ is a cryptographic code that is used in conjunction with a public key to encrypt and decrypt messages in public key cryptography. It is one half of a key pair, with the other half being the public key. Private keys are typically long strings of alphanumeric characters and are created using a mathematical algorithm. They are designed to be kept secret and are used to decrypt messages that were encrypted with the corresponding public key. In order to maintain the security of encrypted communications, it is important to protect private keys from unauthorized access.
Use case: You use your private key to send or spend your crypto.
Public Key
A ‘public key’ is a cryptographic code that is used to encrypt and decrypt messages in public key cryptography. It is one half of a key pair, with the other half being the private key. Public keys are shared publicly and are used to encrypt messages, while private keys are kept secret and are used to decrypt messages that were encrypted with the corresponding public key. This allows for secure communication, as only the intended recipient who has the private key can decrypt the message. Public keys are typically long strings of alphanumeric characters and are created using a mathematical algorithm.
Use case: You share your public key so others can send you crypto.
Seed Phrase
A ‘seed phrase’ is a sequence of words that is used to restore a wallet. It is a crucial aspect of wallet security, as it provides a way to recover your wallet and access your funds if your wallet is lost or stolen. It is important to keep your seed phrase safe and secure, as it is the only way to restore your wallet if it is lost or stolen.
Use case: Your phone breaks, but you recover your wallet using the seed phrase on a new device.
Crypto Wallet
A ‘crypto wallet’ is a digital tool that allows you to manage your blockchain assets and addresses. It is a crucial aspect of using and holding cryptocurrency, as it provides a way to securely store, send, and receive digital assets. Crypto wallets typically include a user-friendly interface and additional features such as built-in exchanges and support for different blockchain networks.
Use case: You download a crypto wallet app to manage your investments safely.
Self-Custody and Non-Custodial Wallets
Self-custody refers to the practice of holding and managing one’s own cryptocurrency assets without relying on a third-party custodian. One of the primary ways to achieve self-custody is by using non-custodial wallets.
Advantages of non-custodial wallets for self-custody:
- Security: Non-custodial wallets give users full control over their private keys, which are used to access their crypto assets. This means that users have complete ownership and control over their funds and are not reliant on a third-party to safeguard their assets.
- Privacy: Non-custodial wallets typically do not require users to provide personal information or KYC (know your customer) details, which can help maintain a higher level of privacy.
- Flexibility: Non-custodial wallets are usually available for free and can be accessed from anywhere with an internet connection. This allows users to easily manage their crypto assets without the need for any intermediaries or additional fees.
Disadvantages of non-custodial wallets for self-custody:
- Responsibility: With complete control comes complete responsibility. Users who opt for non-custodial wallets are responsible for ensuring that their private keys are kept safe and secure. If a user loses their private key or it gets stolen, they will lose access to their funds permanently.
- Technical knowledge: Using a non-custodial wallet requires a certain level of technical knowledge, including understanding how private keys work and how to properly secure them. For new users, this can be a steep learning curve.
- Irreversibility: Transactions made using non-custodial wallets are irreversible, meaning that if a user sends their crypto assets to the wrong address or falls victim to a scam, there is no way to reverse the transaction or recover the funds.
In order to become a self-custodian of your crypto assets it is essential to use a non-custodial crypto wallet. For a small amount of crypto, you may choose to use a web or mobile wallet to store your crypto. You can download the Trust Wallet mobile app and store your crypto there. Other non-custodial wallets include:
However, for larger amounts, you may choose to use a hardware wallet. A hardware wallet is a physical device that stores your crypto and is not connected to the internet. Hardware wallets are considered safe because your private keys are stored offline, and no transactions can happen unless you physically confirm them through your hardware wallet. The most popular hardware wallets are Ledger Nano X or Trezor.
Hot and Cold wallets
Hot Wallets:
These are wallets that are connected to the internet. This means that they are more convenient to use and can be accessed from anywhere, but they are also more vulnerable to hacking and other security threats. Hot wallets are typically used for storing small amounts of cryptocurrency that are needed for frequent transactions, such as buying and selling on an exchange.
- Advantages: The main advantage of hot wallets is that they are convenient to use and can be accessed from anywhere. This makes them suitable for storing small amounts of cryptocurrency that are needed for frequent transactions.
- Disadvantages: The main disadvantage of hot wallets is that they are connected to the internet, which makes them more vulnerable to hacking and other security threats.
Cold Wallets:
These are wallets that are not connected to the internet. This means that they are more secure, as they are not vulnerable to online attacks. Cold wallets are typically used for storing large amounts of cryptocurrency that are not needed for frequent transactions. Cold wallets can be in the form of a physical device, such as a hardware wallet, or a piece of paper with the private keys written on it.
- Advantages: The main advantage of cold wallets is that they are more secure, as they are not connected to the internet and are therefore not vulnerable to online attacks. This makes them suitable for storing large amounts of cryptocurrency that are not needed for frequent transactions.
- Disadvantages: The main disadvantage of cold wallets is that they are not as convenient to use as hot wallets. They may require more technical knowledge to set up and use and may not have as many features as hot wallets.
It is important to remember that self-custody of crypto assets comes with a great deal of responsibility. While it can provide users with greater control and privacy, it also requires a certain level of technical knowledge and diligence to ensure that private keys are kept safe and secure. We hope this article has provided you with some helpful information, with the right tools and knowledge you can become a confident and successful self-custodian of your crypto assets.
If you are new to self-custody or have any questions about storing and managing your crypto assets, it is always a good idea to seek out additional resources and support. Our Live Chat customer support team is always available to answer any questions or concerns you may have.
DISCLAIMER: The information in this blog is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any legal or financial product.
