In the bitcoin space, we have a mantra, nay a war cry, “Not Your Keys, Not Your Coins”. It’s a simple digestible message; if you don’t hold custody of the keys that can sign the transaction to move the funds as recognised by the bitcoin network and recorded on the blockchain, you do not own that bitcoin. You may have a claim to it, but the third-party service you are using is the owner of those funds.
The ability to self custody funds as small as that needed to buy a single piece of chewing gum to as large as the entire GDP of a small island nation is revolutionary. Despite the value we hold, we all get the same rules, the same protections, the same clearing times, and we use the same network.
Once you get over your fears and learn to self custody, you truly begin to feel the magic of the bitcoin network become a reality, and it starts to empower you to take ownership of not only your funds but other parts of your life, be it security, health and more.
Self custody is a core tenant of bitcoin; it’s one of the aspects that makes it unique; it’s what makes it revolutionary technology. When you have access to such a powerful tool, there will be people and even entire industries that want to keep you from using it.
Hotkey self custody is only half the journey
In bitcoin, there is an option to self custody using a hot wallet; these wallets generate and hold private keys hot on the device, so you can sign and send funds all from that application with no need to request additional verification.
Hot wallets are convenient and easy to use for day-to-day transactions but are not ideal for long-term storage. When using a hot wallet on a device like a smartphone or a laptop, you’re constantly connecting to the internet and requesting data packets. If one of those packets can exploit a vulnerability in your device, it’s open season on those keys.
You also increase your risk of phishing scams or doxing your keys should you keep them in a browser or computer because you like to “copy and paste” them into your wallet.
In bitcoin, you can migrate your funds into cold storage, something other coins do not have, as wallet providers and hardware manufacturers select the coins they offer custody solutions for based on economic incentives. In most cases, you need to trust the company behind the coin for storage options, creating a single point of failure.
In bitcoin, there are several cold storage software and hardware solutions, all competing for customers, which ensures they continue to improve their products.
Bitcoin is built to be hodl’d while crypto is built to interact with smart contracts and services like DEFI, so as a user, you’re encouraged to keep your funds hot in case you want to use them; these networks are actively urging their users to put funds at risk.
To self custody, an altcoin is to risk dilution
If you are using a cryptocurrency that does offer native support for cold storage or third-party support through hardware and software manufacturers, you might feel a bit safer. Your tokens aren’t hot on a device; they’ve been safely tucked away with a signing device.
Sure your keys are now safe, but what about the value those keys claim? When you take self custody of an altcoin, you’re pulling the funds out of the system; they now lay dormant and cannot be exchanged on the market without taking several steps.
Meanwhile, other users in the network may be staking their coins or using DEFI to earn yield and ensuring that more of the inflation funnel into their wallets, the wallets with hotkeys signing over rights to their funds to validators or smart contracts.
So you’re doing the right thing in taking risks off the table, but you’re not being rewarded for it, the same way banks rip off savers. If you’re not risking your capital, you’re losing it to inflation. Once you release those funds after holding, they will not have the same claims over the network that they did before, as altcoin inflation reduced your purchasing power.
In bitcoin, we know the hard cap is 21 million, so your claim over the network will remain the same regardless of the time that passes by and how long you store it, you can’t be diluted.
Staking funds isn’t self custody
In bitcoin, it’s all about taking your chips off the table and removing as much risk as possible while you wait to deploy your capital in a constructive manner or enjoy the long-term purchasing power appreciation without having to put capital at risk.
In crypto, the way to get ahead in the system is through taking on risk; staking coins has become a popular method of locking funds away in a crypto network, especially as more proof of stake networks come online.
While proof of stake is an inherently flawed model, that’s a story for another day.
I’ve seen many marketing pushes around staking, that like bitcoin, you can lock your funds away and enjoy a return without risk, a claim that is far from the truth. When you stake coins, even using a hardware key signer, you lock your funds into a smart contract or with a validator, which all come with risk.
Lockup periods
Certain networks require their staked assets to come with locked periods during which you cannot access your staked assets. If the price of your staked asset drops substantially and you cannot unstake it, that will affect your overall returns. You may have more coins, but those coins’ loss in value can mean you’re sitting with a negative return.
Validator risk
Running a validator node to stake a cryptocurrency involves technical know-how and resources to ensure that there are no disruptions in the staking process. Nodes need to have 100% uptime to ensure that they maximize staking returns.
What’s more, in case a validator node (mistakenly) misbehaves, you could incur penalties that will affect your overall staking returns. In the worst-case scenario, validators could even have their stake “slashed,” at which point a share of the staked tokens would be lost.
If you delegated your coins to the wrong validator, you could be on the hook for their mistakes or, worse, delegated coins to a rogue validator that was pocketing the yield and giving you no return.
Validator costs
In addition to the risk of running a validator node or using a third-party service to stake, there are costs involved in staking cryptocurrency; running a validator isn’t free, so those validators tend to skim off some of the yields to pay for costs and enjoy a healthy profit.
The other option would be to go and compete with them by running your own validator node will incur hardware and electricity costs, which isn’t something most people would have the know-how to do effectively.
When you compete as a validator, you’re competing with the inner circle of founders and venture capital seed capital, an advantage you’re tiny Capex can never compete with; the validators market is not a fair fight.
Your keys might be safe, but the network is not
So you’ve taken self custody of your tokens, and you’re willing to take the risk of dilution from those staking and the uncertainty of your network monetary policy. You are still discounting another massive risk. The risk of the network not existing in a few months or years, you might think it’s unlikely, but countless coins have gone to zero or as good as zero while people have held them in cold storage.
Cryptocurrency networks can be hacked, have bad code, be taken over, be regulated, and be delisted from key exchanges, which can send them into a death spiral very quickly.
When your funds are in cold storage, they require a few steps to access, which can add delays and, should there be a run on your coin, limits the ability to get out of those positions as those who left it on exchanges and hotkey wallets can front-run you.
In bitcoin, cold storage is the safest place to be; in shitcoins, it could be the worst place when your network eventually collapses. If you don’t think your network will collapse, consider that bitcoin is the most secure network meaning everything else is inferior to its security model. It has the most eyes, the most hash power, and the most value locked inside. As long as there are weaker networks around, they will be picked off first before an attempt on bitcoin.
You’re at the mercy of their rules, not your rules
In most cases, when it comes to cryptocurrency, the ability to run a node is far too expensive for the average person. When you can’t run a node, you are forced to trust third-party data providers who run the rules and validate the chain. Their network is either saying you’re too poor to validate the blockchain to too dumb to do it, so let us do it; trust us, we’re the good guys.
When you trust a node, you could be sold false data; it could show data that is not on-chain either by a scammer, corruption of the node software, or an attack on the node. You could see funds in your wallet when it was never there.
Bitcoin doesn’t have this problem if you run it independently from providers, which isn’t very hard as there are several ways to run a node. Bitcoin made inevitable trade-offs to ensure that you can run a node from a simple computer or even set up a custom dedicated device using a Raspberry Pi miniature computer. The ability to run a node means transactions are broadcasted to the network via your device, and you’re not trusting data from 3rd parties.
So if you can’t self custody without trusting data feeds from third parties, are you using self custody at all?
You can’t verify the entire self custody stack
Speaking of nodes, as I mentioned earlier, there are several ways to spin up a node, and you aren’t tied to any of them. You can purchase a pre-built node and trust that company’s device or build your own node by purchasing the parts individually.
You can run node software on your laptop or device of your choosing, or you can use a cloud service provider and leverage a third-party infrastructure to set up your node. Each implementation comes with a certain cost and trade-off, but YOU get to choose the risk you want to take, not have it decided for you.
In addition to node infrastructure, there are also different node software versions you can leverage; you can use the original bitcoin core or any other node software you prefer. All software versions are interoperable and backward compatible, so you’re free to select the one that matches your needs.
If you don’t like the node software avialable, the good news is it’s open-source, so you can compile the code from the source and run your own instance if you don’t want to trust other software providers.
Bitcoin provides you with this level of transparency, so you never need to trust the network stack in any way. You can verify everything yourself. None of this is available in the cryptocurrency space, and everything is either abstracted away from you under the guise of convenience or far too complex, costly or convoluted to do yourself.
Self custody in name only
Taking control over your keys in the bitcoin network means you are the sole owner of the UXTOs that represent the funds in that wallet, and no one can take that away from you. As long as your keys are stored away offline, you know you cannot be stolen from by digital means, and the network cannot dilute your holdings.
You are eliminating third-party risk and exercising personal responsibility for your funds. In crypto, you’re playing pretend; you still carry third-party risk, you still carry dilution risk, network risk, technological risk, regulatory risk, and execution risk.
So ask yourself, if I am taking all this risk and have all this exposure to third-party failure, why would I waste my time to self custody at all?
That’s precisely my point; it is a waste of time to self custody cryptocurrency; you’re only getting security theatre, and you’re not getting added protection. If you like playing pretend with your wealth, by all means, don’t let me stop you.
Still, if you’re seriously considering taking the storage of generational wealth seriously. You know the asset and the tech stack you need to use to secure that value is and always will be, bitcoin.
Bitcoin is not crypto
As a marketer by trade, I think one of the biggest marketing scams is the way people in the digital asset industry push the concept of cryptocurrency. Bitcoin uses cryptography, which is true, bitcoin is used as a currency that is true, but bitcoin and what is considered cryptocurrency are opposed.
All cryptocurrency networks are watered-down versions of bitcoin; they’ve pulled out essential parts of bitcoin. In an attempt to try and make a monetary network more tech orientated, cryptos lost a lot of the security and decentralisation elements to achieve it.
To the untrained eye, bitcoin and cryptocurrency might look like the same thing when in fact, they couldn’t be more different. One fundamental way in which bitcoin show’s it’s superiority when compared to anything that claims to be a competitor is through the self custody aspect.
So if you are considering self custody of an asset over the long term, you may want to re-evaluate the need to do so, unless you’re using bitcoin, the only digital asset that can truly be held in self custody.
Do you take self custody of your stack?
If you’re new to bitcoin and have not ventured down the self custody rabbit hole, what is stopping you? If you’re already self-sovereign, how has the experience been since you took hold of your funds? Let us know in the comments down below, we’re always keen to hear from bitcoiners from around the world.
