June 28, 2022

How to take custody of your bitcoin

Bitcoin allows you to be your own bank. It's a money technology breakthrough that lets any regular person hold and control a scarce asset that is also digital.

Joe Lupo
Joe Lupo

Operations

How to take custody of your bitcoin

Table of contents

How to take custody of your bitcoin

Bitcoin allows you to be your own bank. It's a money technology breakthrough that lets any regular person hold and control a scarce asset that is also digital. It accomplishes this by way of self-custody, which means that you personally hold the private key to your bitcoin and are the only one with access.

Why self custody matters

As long as you self-custody your bitcoin, you don't need a bank, exchange, or third party custodian to grant you access to your funds. You are in complete control at all times.

This means you can use bitcoin without asking permission from a third party, without transaction limits, and without being locked out on bank holidays.

This uncensored access is vital to the bitcoin ecosystem. Bitcoin was designed to be permission-less money – that is, no one can tell you how, when, or how much you can spend. You are in complete control of your money. As you should be.

What's the difference between personal risk and counterparty risk?

Risk is a part of being alive – there's no way around that. Self custody is not risk free. However, the type of risk is fundamentally different from the risk of leaving your coins under someone else's control.

When you take custody of your private keys, you take on the risk that you might lose your keys, which would mean losing access to your bitcoin forever.

However, when you let other people manage your keys for you, you take on something called counterparty risk, which means you take on the risk that they might lose your keys, or use your keys to take your money. If this sounds unlikely, consider that the third biggest exchange publicly threatened to confiscate their client's money if they run into problems.

We believe that, while self-custody entails risk, it may be minimized once people understand how to responsibly manage their private keys.

What is a bitcoin wallet?

A bitcoin wallet provides you with two codes: A public key and a private key. The public key is the code that people use to send money to that wallet. It doesn't need to be kept secret. However, the private key is what you use to unlock the wallet and spend the bitcoin in it.

You may be surprised to learn that these codes can still work even if they're written down on a piece of paper. Once the codes are generated, they don't need to be stored in software or hardware at all.

However, if you want the convenience of being able to use a phone or computer to monitor your wallet balance, send, or spend your bitcoin, you will need either a wallet app for your smartphone or a hardware wallet device.

What's the difference between wallet apps and hardware wallets?

Wallet apps

If you search in the Google Play store or the Apple App Store for a crypto wallet, you'll find dozens of options. These apps store your private keys on your phone. This is convenient because it means that you can access your bitcoin whenever you have your phone with you. The downside is that if your phone is hacked, or if the app you used was created by scammers, your coins can be lost.

The pros and cons of wallet apps

Wallet apps are incredibly convenient but pose some security risks as they are connected to the internet. These risks can be reduced by using security features like two-factor authentication, where you need to unlock your phone and enter a PIN to move funds out of your wallet app. However, using a wallet app is always going to entail too many risks to secure large amounts of bitcoin. Wallet apps should only be used for small amounts of bitcoin that you intend to spend or send to friends.

What's the best wallet app?

There are many options for wallet apps, but it is important to be careful when selecting which one to use. If one in particular looks like it might be a good fit for you, do some research to make sure the developer has a good reputation and the app enjoys an active community of users. As you do this research, we recommend taking advice from online resources that are focused on bitcoin rather than cryptocurrency in general.

Hardware wallets

A hardware wallet is a miniature electronic device that stores your private keys offline. This ensures your funds stay under your control and are inaccessible through the internet. Hardware wallets are designed to protect against hackers and bad actors, while letting you spend your bitcoin in a few steps.

The pros and cons of hardware wallets

The downside of hardware wallets is that they are less convenient when you want to spend bitcoin. However, for large amounts of bitcoin, we strongly believe this inconvenience is worth the extra security. Moreover, the inconvenience really is minimal – if you want to spend bitcoin from your hardware wallet, you simply connect your hardware wallet to your computer, unlock the it with a special code, and make your transaction.

Hardware wallets do pose their own set of risks however. A hardware wallet comes with a "passphrase" that can be used to recover your bitcoin in case you lose the device itself. But, if you lose this passphrase and your hardware wallet, you will lose access to your bitcoin forever. That's why you should write down your passphrase and store it safely in a separate location from your hardware wallet. Some people like to record their passphrases on steel plates so that they are more likely to survive natural disasters.

What's the best hardware wallet?

A few years ago there were only a few options for hardware wallets, but recently there has been an explosion of new products. While this gives you more choices, it also makes choosing a hardware wallet seem harder. How do you know which ones are safe?

While we cannot endorse a specific hardware wallet, you will quickly find that there are three prominent companies that manufacture hardware wallets:

  • Trezor, whose firmware and software are open source (meaning that a software engineer can look at the code and verify that nothing funny is going on), and is known as a pioneer in the bitcoin industry. Their Model T device has a color screen, sleek design, and tamper-proof holograms on the packaging to enhance security. While Trezor is a bitcoin-first device, it also supports other cryptocurrencies.
  • Ledger, which is not open source but has established itself as the most popular solution. It is relatively easy to use and less expensive Trezor. It also supports many cryptocurrencies.
  • Coldcard, which is bitcoin-only and open source. It is more difficult to spend bitcoin from it than others hardware wallets, but that may be good if you are looking for a cold storage solution to keep your bitcoin under lock and key for many years.

While these are three of the more popular options on the market, it's important to do your own research to figure out which one (if any) is right for you.

How much bitcoin should you keep in a hot wallet on your phone

And how much should you keep in cold storage?

The answer depends on your preference, but a good rule of thumb is to use a cold wallet when you are storing any amount of bitcoin you don't feel "comfortable" losing.

If you have $50 worth of bitcoin, it might not make sense to purchase a $50 hardware wallet. A hot wallet will provide reasonable security while offering the convenience of access to your bitcoin from your phone at all times.

A cold wallet is best utilized for larger amounts of bitcoin that you want to store securely for long periods of time.

What is "multisig"? Should you use it?

Multisig (short for "multi-signature") is bitcoin software that allows people to divide the responsibility of keeping their private keys among a few people. A multsig wallet requires multiple private keys to authorize the spending of bitcoin. It ensures no single person is able to send or withdraw funds without the the approval of another. It also helps mitigate the risk of loss, because if only one of the pieces of the signature is lost, the others can still be combined to unlock the wallet. Use cases include shared accounts among family members, escrow accounts, and business treasuries.

We don't endorse specific companies or services, but two leading providers of multisig solutions are Casa and Unchained Capital. If you're savvy with technology and want to set up multisig by yourself, check out Spectre Solutions.

Did we miss any key points about self custody or cool products that help people custody their bitcoin? Let us know!

May 19, 2022

How to take custody of your bitcoin

Bitcoin allows you to be your own bank. It's a money technology breakthrough that lets any regular person hold and control a scarce asset that is also digital.

Joe Lupo
Joe Lupo

Investor Relations

How to take custody of your bitcoin

Bitcoin allows you to be your own bank. It's a money technology breakthrough that lets any regular person hold and control a scarce asset that is also digital. It accomplishes this by way of self-custody, which means that you personally hold the private key to your bitcoin and are the only one with access.

Why self custody matters

As long as you self-custody your bitcoin, you don't need a bank, exchange, or third party custodian to grant you access to your funds. You are in complete control at all times.

This means you can use bitcoin without asking permission from a third party, without transaction limits, and without being locked out on bank holidays.

This uncensored access is vital to the bitcoin ecosystem. Bitcoin was designed to be permission-less money – that is, no one can tell you how, when, or how much you can spend. You are in complete control of your money. As you should be.

What's the difference between personal risk and counterparty risk?

Risk is a part of being alive – there's no way around that. Self custody is not risk free. However, the type of risk is fundamentally different from the risk of leaving your coins under someone else's control.

When you take custody of your private keys, you take on the risk that you might lose your keys, which would mean losing access to your bitcoin forever.

However, when you let other people manage your keys for you, you take on something called counterparty risk, which means you take on the risk that they might lose your keys, or use your keys to take your money. If this sounds unlikely, consider that the third biggest exchange publicly threatened to confiscate their client's money if they run into problems.

We believe that, while self-custody entails risk, it may be minimized once people understand how to responsibly manage their private keys.

What is a bitcoin wallet?

A bitcoin wallet provides you with two codes: A public key and a private key. The public key is the code that people use to send money to that wallet. It doesn't need to be kept secret. However, the private key is what you use to unlock the wallet and spend the bitcoin in it.

You may be surprised to learn that these codes can still work even if they're written down on a piece of paper. Once the codes are generated, they don't need to be stored in software or hardware at all.

However, if you want the convenience of being able to use a phone or computer to monitor your wallet balance, send, or spend your bitcoin, you will need either a wallet app for your smartphone or a hardware wallet device.

What's the difference between wallet apps and hardware wallets?

Wallet apps

If you search in the Google Play store or the Apple App Store for a crypto wallet, you'll find dozens of options. These apps store your private keys on your phone. This is convenient because it means that you can access your bitcoin whenever you have your phone with you. The downside is that if your phone is hacked, or if the app you used was created by scammers, your coins can be lost.

The pros and cons of wallet apps

Wallet apps are incredibly convenient but pose some security risks as they are connected to the internet. These risks can be reduced by using security features like two-factor authentication, where you need to unlock your phone and enter a PIN to move funds out of your wallet app. However, using a wallet app is always going to entail too many risks to secure large amounts of bitcoin. Wallet apps should only be used for small amounts of bitcoin that you intend to spend or send to friends.

What's the best wallet app?

There are many options for wallet apps, but it is important to be careful when selecting which one to use. If one in particular looks like it might be a good fit for you, do some research to make sure the developer has a good reputation and the app enjoys an active community of users. As you do this research, we recommend taking advice from online resources that are focused on bitcoin rather than cryptocurrency in general.

Hardware wallets

A hardware wallet is a miniature electronic device that stores your private keys offline. This ensures your funds stay under your control and are inaccessible through the internet. Hardware wallets are designed to protect against hackers and bad actors, while letting you spend your bitcoin in a few steps.

The pros and cons of hardware wallets

The downside of hardware wallets is that they are less convenient when you want to spend bitcoin. However, for large amounts of bitcoin, we strongly believe this inconvenience is worth the extra security. Moreover, the inconvenience really is minimal – if you want to spend bitcoin from your hardware wallet, you simply connect your hardware wallet to your computer, unlock the it with a special code, and make your transaction.

Hardware wallets do pose their own set of risks however. A hardware wallet comes with a "passphrase" that can be used to recover your bitcoin in case you lose the device itself. But, if you lose this passphrase and your hardware wallet, you will lose access to your bitcoin forever. That's why you should write down your passphrase and store it safely in a separate location from your hardware wallet. Some people like to record their passphrases on steel plates so that they are more likely to survive natural disasters.

What's the best hardware wallet?

A few years ago there were only a few options for hardware wallets, but recently there has been an explosion of new products. While this gives you more choices, it also makes choosing a hardware wallet seem harder. How do you know which ones are safe?

While we cannot endorse a specific hardware wallet, you will quickly find that there are three prominent companies that manufacture hardware wallets:

  • Trezor, whose firmware and software are open source (meaning that a software engineer can look at the code and verify that nothing funny is going on), and is known as a pioneer in the bitcoin industry. Their Model T device has a color screen, sleek design, and tamper-proof holograms on the packaging to enhance security. While Trezor is a bitcoin-first device, it also supports other cryptocurrencies.
  • Ledger, which is not open source but has established itself as the most popular solution. It is relatively easy to use and less expensive Trezor. It also supports many cryptocurrencies.
  • Coldcard, which is bitcoin-only and open source. It is more difficult to spend bitcoin from it than others hardware wallets, but that may be good if you are looking for a cold storage solution to keep your bitcoin under lock and key for many years.

While these are three of the more popular options on the market, it's important to do your own research to figure out which one (if any) is right for you.

How much bitcoin should you keep in a hot wallet on your phone

And how much should you keep in cold storage?

The answer depends on your preference, but a good rule of thumb is to use a cold wallet when you are storing any amount of bitcoin you don't feel "comfortable" losing.

If you have $50 worth of bitcoin, it might not make sense to purchase a $50 hardware wallet. A hot wallet will provide reasonable security while offering the convenience of access to your bitcoin from your phone at all times.

A cold wallet is best utilized for larger amounts of bitcoin that you want to store securely for long periods of time.

What is "multisig"? Should you use it?

Multisig (short for "multi-signature") is bitcoin software that allows people to divide the responsibility of keeping their private keys among a few people. A multsig wallet requires multiple private keys to authorize the spending of bitcoin. It ensures no single person is able to send or withdraw funds without the the approval of another. It also helps mitigate the risk of loss, because if only one of the pieces of the signature is lost, the others can still be combined to unlock the wallet. Use cases include shared accounts among family members, escrow accounts, and business treasuries.

We don't endorse specific companies or services, but two leading providers of multisig solutions are Casa and Unchained Capital. If you're savvy with technology and want to set up multisig by yourself, check out Spectre Solutions.

Did we miss any key points about self custody or cool products that help people custody their bitcoin? Let us know!