Why Bitcoiners Should Consider Storing Bitcoin Off-Chain

Keeping BTC off chain

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Now before you get tripped up by the title thinking, oh, I’m going to shill some DEFI wrapped Bitcoin gambling, let me calm you all down and state that if you are going to hold Bitcoin, self custody on the main chain wallet, be it single sig or multi-sig is still the best way to store Bitcoin long term. No one denies that, but when you get into the weeds of Bitcoin and start to take control of your money, you have to deal with inevitable trade-offs that aren’t precisely ideal for small Bitcoiner like me.  

I know the idea of bagging 100 million satoshis (aka 1 Bitcoin) seems like a long road, but if you’re part of the DCA army, you’ll know nipping at that elephant can quickly see you stacking some serious sats. 

As I have realised on my sacking journey, I need different Bitcoin for different things I want to do effectively. Now everyone’s financial situation is different. I am not here to give anyone financial advice, only to give you some ideas of the options available and why you may want to adjust the way you stack and the way you store your sats. 

Long term storage 

I am a hodler at heart, the vast majority of my Bitcoin sits in long-term storage, and you cannot beat a cold storage wallet for this. Any Bitcoin that lands in that wallet probably won’t see the light out day for many years to come and is all about preserving my savings over time. 

Sure, you can add some additional layers of security like a multi-sig wallet and securing your private keys in a physical but let’s not get into the weeds with those options yet; that’s a story for another day.

My issue with stacking on the main chain is creating too many UTXOs, which will make it far more expensive to move than Bitcoin should I choose to do so in the future. So the option is to leave it on an exchange and take a third-party risk which I am not too comfortable with or using second-layer solutions. 

Think of your main-chain wallet as a storage vault; you don’t want to open up the vault every time you want to store a few pennies. When you hold on to the main chain, at least for me, I would prefer to drop a sizable amount of sats. 

Additionally, I also need to set up a new address to limit my transaction history, which is a bit of a pain, but hey, let’s not make ourselves targets for chain analytics tools. 

Medium-term storage, trading and DEFI – Liquid

So now that we have that out of the way, I’ve started to experiment with Liquid Bitcoin (L-BTC), a second layer solution championed by Blockstream and a federation of exchanges. Yes, the chain is centralised; I get that it makes inevitable trade-offs, and I don’t recommend using this as your primary source of storing Bitcoin, but I do think it’s a lot better than leaving it on an exchange. 

I find L-BTC is an excellent option for those looking to stack but want to keep their weekly stacks or monthly stacks off exchanges and give you a little more freedom. 

L-BTC also allows you to do atomic swaps into stable coins; if that’s your kind of thing, perhaps you want to do some on-chain trading, or you want to arb between different Liquid supporting exchanges, then this is a reliable method of doing so without being punished by on-chain fees and waiting times.

L-BTC is also starting to expand into the DEFI space, with the likes of HODLHODL supporting the token as a way to set up P2P contracts for lending and borrowing Bitcoin.

Since Liquid Bitcoin can be pegged out to main-chain Bitcoin, when you feel you have too many sats sitting on this layer, you can always peg out, burn that L-BTC and claim the Bitcoin backing it and move it to the main chain wallet. Consolidating on Liquid before moving to the main chain also means less UTXO creation, so your principal balance won’t be as data-heavy when moving on-chain.

I see L-BTC as more of a savings or investment account where I can go earn a yield if I would like, my capital does have slightly more risk, so I have to be compensated for that either in savings in fees or return on my money. 

Day to day Bitcoin payments – Lightning

Then we get to one of my favourites, the one I use the most, and that’s lightning. Yes, it’s still clunky and experimental, and I wouldn’t recommend you keep any significant amount of satoshis in your lightning wallet. Still, if you want Bitcoin to pay for purchases, tipping, playing games or settling bets with your mates, lightning is the way to go.

Lightning is still building out its ecosystem, and I am sure there will be more to come in the form of lightning DEFI. We’ve already seen routing nodes building profitable channels and liquidity markets for unused Bitcoin to earn a return, and I can see this expanding to help people put their idle sats to work.

Lightning Bitcoin channels can always be closed, and you can send those satoshis back to the main chain, but please ensure you don’t lose it all to mining fees. Lightning is also a great way of consolidating small amounts of sats in a wallet you own before you move it to the main chain.

I see a lightning wallet as my Bitcoin debit card, it’s already funded with cash, and I can pay an invoice link or a QR code with instant payments.

We all have our own Bitcoin needs.

There’s no pressure to venture outside the main chain if it works for you; by all means, don’t let me distract you from the way you stack sats, we all have our level of risk we are comfortable with, and gaols we would like to achieve. 

So now that you know what the options are, would you consider using any of the off-chain Bitcoin services or are you a main-chain purist? Let me know in the comments below. 

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

4 Responses

  1. more sad insanity in the world … but what else is knew … “The longest war in US history—one most Americans couldn’t justify or didn’t know was still happening, and one financed by trillions in credit and debt monetization—ends 50 years to the day after the launch of the fiat monetary experiment. There are no such thing as coincidences.”
    (https://twitter.com/gladstein/status/1426961993349599240)

    … ‘Rise of cryptocurrencies can be traced to Nixon abandoning gold in 1971’
    https://www.theguardian.com/business/2021/aug/15/rise-of-cryptocurrencies-can-be-traced-to-nixon-abandoning-gold-in-1971

    FYI

    1. You sure are staying up to date with what’s going on in the Twittersphere, I love it, these wars and coup are funded by OUR stolen productivity, the only way we can say no to this is to secure our wealth in something they cannot take through tax and inflation

  2. For me, I’m a pretty much a main chain cold storage kinda guy! At least for now – have used lightning before and it is great for sending sats instantly and with very low fees, you still need to pay a set up fee to create a payment channel but it’s superb for sending and settling international payments! Liquid is something I’ll be exploring more but I feel like waiting until the taproot upgrade comes and enhances the second layer.

    1. Yeah I don’t think its for everyone, but I do think fewer people will be able to touch the main chain with the number of sats they have so lightning and liquid will eventually have to take up the load

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