Buying Bitcoin has never been easier; there are so many options all competing to be your preferred onboarding solution, and I have to say the user experience has improved dramatically over the last five years. I am not saying it’s perfect, not by a long shot, but compared to when I first bought back in 2015, a lot of the complexity around Bitcoin has been removed for the average buyer.
This can be a blessing as it increases rates of adoption and ease of use, but also a curse as it goes against the ethos of Bitcoin. Any convenience provided by a third-party service usually comes with accepting third-party risk. While you may not think of insolvency issues with your bank, with any financial institution, it’s always a possible reality.
Taking control of your funds can seem like a daunting task, but it can also be an empowering moment. A statement of your freedom as you liberate your wealth from all government-controlled systems and take back ownership of your purchasing power.
It may not seem like much, but taking private ownership of your money is a game-changing action and is one of the reasons Bitcoin is such a revolutionary technology.
I need it explained to me like I am five.
When you purchase Bitcoin on an exchange or in a wallet where you DON’T have the private keys to sign transactions, this is NOT your Bitcoin. This is a promise to issue Bitcoin upon your request; you do not have specific access to a specific set of Bitcoin UTXOs, that you claim as your own.
Just like when you go to the bank, you have a deposit balance, but it’s not the exact $100 bill with the barcode you deposited with them. Sure the $100 is represented in your account, but it’s not that exact bill.
Only once you withdraw it into paper money do you own that bill, and it probably won’t be the same bill you gave them. When you hold that paper money, it doesn’t matter what happens to the bank, it could shut down tomorrow, and you’ll be fine since you took custody of your money.
Now with Bitcoin, you can also do the same thing; this is called self custody, and to lock it away on a device you have the keys to sign, we refer to it as cold storage.
Essentially what you’re doing is using a device to generate a set of 24 words known as a private key. That private key is unique to that wallet you created, and only you know the 24 words and the order in which they are used to access that wallet.
When you receive Bitcoin to that specific wallet, the coins remain locked in there. No one else and send it from that wallet—only the person who has access to the private keys to confirm an exiting transaction.
This puts you in complete control over your funds.
The only downside is that this puts you in complete control of your funds if you lose those keys or mess up the order, or cannot remember them. It’s tough, titties Dorthy, Kansas is going bye-bye. Those funds are now lost forever.
Normally when I tell people this, it freaks them out and puts them off the idea of self custody, but just because you can lose your funds doesn’t mean you will.
If you take the appropriate steps and safeguards, then there is no better place for your Bitcoin than in a cold storage device that you control.
Time to go for your cold pursuit.
This is one of several Liam Neeson references I will be sprinkling throughout this post, so watch out. When I mention the idea of cold storage, I often get the following excuses as to why people feel it’s not worth their time, and I’m here to tell you it’s all down to laziness.
The chain fees are too high.
Many of us will never have enough Bitcoin where we would be price agnostic to the on-chain fees. To those performing millions and billion-dollar transfers, on-chain Bitcoin transfer fees are negligible. To the average pleb trying to stack a few hundred thousand sats at a time, on-chain fees will eat up a sizable amount of your stack, and those are sats no one would like to part with if they can help it.
If this is the situation you find yourself in, then you should consider options like pulling off your funds monthly, Bi-monthly or quarterly as you build up a sizable position on an exchange. If the amount of Bitcoin you have on an exchange is valued at a price you’d be sad to see lost, then it’s time to be the commuter and move it to cold storage and start stacking from zero.
If you’re opposed to paying fees, then using an exchange that supports Lightning or Liquid is a far better option, be it limited at the moment. Purchasing Bitcoin on lightning or Liquid allows you to stack Bitcoin in a non-custodial wallet and avoid on-chain fees.
Once you’ve built up a stack on a second layer, you can always resecure that Bitcoin back on the main chain for a one-time fee and lock it into cold storage. You cannot avoid main-chain fees, it’s the fee you pay for final settlement and ultimate security, but you can limit how many times you NEED to pay it.
I am scared of messing it up.
No one is asking you to move your entire stack in one go; you can move it as you see fit. I always recommend people first create a wallet, remove it, restore it and get used to these actions first.
Once you are familiar with the options, a non-custodial wallet has to offer, then look to transfer a small test amount and see how it moves through the blockchain and lands in your wallet.
Yes, you will pay fees for each transfer you make, just like any banking system; yes, it can be expensive but isn’t a good education often an expensive one?
Have you paid for education before?
- Training?
- School?
- University?
- A short course?
- An online course?
If so, why are you pulling your nose up at paying to learn how to secure YOUR money properly. The fees you pay to secure your money, see it as you investing in learning how to use Bitcoin and becoming more comfortable handling your wealth.
I don’t have a self custody plan.
Some of us don’t like to take the path alone; we would like someone to hold our hand. There are several resources, mostly by wallet manufacturers, that will take you through the process of cold storage as well as 3rd party guides online.
Suppose you’re not the type to learn from YouTube. You can try to reach out to a friend or family member who has taken self custody of their Bitcoin and take them out for a drink.
If you’re not a good researcher and you don’t have a friend or family that could help you, then you may need to turn to a private service provider. Bitcoin concierge services are popping up to meet this demand, such as Unchained Capital and Casa. These services will provide you with self custody guides, tutors, and one on one consultations. All aimed at helping you through the self custody process.
I am only into Bitcoin to sell it.
If you still want to have access to fiat markets, I get it. Not everyone is ready to HODL long-term, and that’s okay. We all have our race to run. 🏃♂️ Sometimes you may need capital in an emergency, and liquidating Bitcoin with markets available 24 hours a day is always going to be attractive for anyone who needs cash ASAP.
If that’s the case, perhaps consider splitting your stack and reducing your exchange exposure and partitioning some of it offline in cold storage.
Alternatively, you could instead purchase your Bitcoin on a side-chain like the Liquid Network or Lightning Network.
This will allow you to take custody of your coins, so to speak, and you can ping it back to a supporting exchange should you want to take advantage of a particular exit price.
I cannot acquire or afford a hardware wallet.
If you’re a small stacker and would instead focus on stacking sats versus wasting opportunity cost on a hardware wallet solution right now, I get it. If you’re just cheap, I get that too. However, if your Bitcoin stack is worth x10 the cost of a hardware wallet, I think it’s time to forget skimping and get a decent solution in place.
If you’re still starting with a stack of sats and feel like a hardware wallet isn’t worth the trouble, perhaps you’re right. However, self custody is not ONLY about having a fancy USB-looking device you use to sign transactions; it can also be a software solution.
Hot wallets are a great way to practice self custody with a stop-gap solution at a low cost. Download your favourite Bitcoin wallet, generate a set of hotkeys and store those keys somewhere safe. Most importantly, somewhere OFFLINE.
Don’t leave your damn keys on an email draft or notes on your phone.
If you do that, I will personally go full Liam Neeson on you and find you and take your coins from you.
Once you have a set of keys, you can always use those keys to restore your Bitcoin wallet to a hardware device or pay the on-chain fees to transfer to a cold wallet where keys can generate offline.
Any self-respecting Bitcoiner opts for self custody.
I know it seems like the pressure is on to self custody, but I don’t feel like there is any specific timeline to get to that point. Self custody is the end goal, and getting comfortable with the practices and ideas take time as it should. It’s a considerable step that should NEVER be taken lightly or rushed.
Don’t let anyone tell you when the right time is to migrate to self custody; proceed at your pace but always remember that this is the end goal for your Bitcoin. It can and will seem scary, and you need to understand the downside of self custody too.
But If you want to eliminate all risks of third parties and take up all the responsibility for your Bitcoin, then cold storage is a must, not a recommendation. Having your Bitcoin tucked away safely will give you peace of mind and ensure you have a good night’s sleep wherever you are in the world.
