This is one of the most important concepts to learn about digital assets. Self-custody is unique to this new market and has always been extremely important for crypto investors. Self-custody gives an investor the ability to take sole ownership of their digital assets by controlling the private key and not relying on any third party. A private key is simply a secret number or code, similar to a password. There’s a common expression in the digital asset space: “Not your keys, not your coins!” Let’s get into exactly what this means.
The safest way to hold your assets is to store them in a ‘cold storage’ or hardware wallet. These devices resemble USB sticks and are secured by a unique multi-word passphrase (randomly generated by the wallet) and passcode. These are your private keys. To protect your assets with a hardware wallet, you have two primary options.
After the initial investment on a centralized exchange, your first option is to send the assets immediately from the centralized exchange to your hardware wallet. You’ll do this by first setting up your hardware wallet using your personal computer, which is very simple to do and only requires a few steps. Then, on the centralized exchange, you’ll choose the asset you want to withdraw (and the amount of that asset) and click withdraw. You’ll be prompted to enter the address where you want to send your asset. You’ll choose the address of the asset on the hardware wallet device and click send.
The ability to self-custody your assets protects you against third party risk like exchange hacks or insolvencies. The entire process to secure an asset by sending it from a centralized exchange like Coinbase to a hardware wallet only takes about 1-2 minutes.
The second main way to secure your assets using a hardware wallet takes place if you want to hold some assets in a desktop or browser wallet like MetaMask to take advantage of DeFi yields or other interesting investment opportunities that we’ll discuss in Chapter 12. What does this process look like?
You can link your MetaMask wallet to your hardware wallet so that it serves as an extra layer of security. Every time you perform any transaction through MetaMask, your hardware wallet will prompt you to enter your private codes to allow the transaction to go through.
Every crypto investor should utilize a hardware wallet. Make sure you buy one as the first step of your digital asset investing journey. This relatively small purchase is an invaluable protection. The two best options are the Trezor4 and Ledger5 wallets, which start as low as $67 for the Trezor Model One. They come with a simple to follow manual for setting up your device and there are also supplemental videos on YouTube if you’re more of a visual learner.
Merging Ease of Use with Self-Custody
Self-custody is one of the most important aspects of crypto. Unfortunately, it can seem like a pain for some investors and traders. The good news is that there are services being built right now that will bridge the gap between ease of use and security, making it much easier to safely secure investors’ digital assets.
Custodia Bank, founded by Caitlin Long, could be one of those options. Custodia is still waiting for its master account application to be approved so that it can offer crypto custody services. You can go to custodiabank.com to learn more about the service and how the bank will custody digital assets for investors. There will be a day when crypto investors will be able to buy and sell digital assets through an easy-to-use custodial platform like Custodia or a Fidelity or Charles Schwab. Just like it was difficult to buy shares of companies in the early days of the stock market, the crypto investing process is currently a bit cumbersome and can seem daunting for some people. The fact that it feels like we have to jump through hurdles to invest shows how early we still are in this exciting new market. It will only get easier with time.
Thanks for reading! If you enjoyed this, check out the other articles and don’t forget to follow me on Twitter @andrewdfarrar for up-to-date crypto content. If you haven’t already checked it out, my book, The Modern Investor, is up for sale on Amazon! It gives a much more complete and entertaining view into the digital asset market. In these crazy times, it’s never been a more important time to learn about this new asset class.