The Guide for Bitcoin Self-Custody

Owning Bitcoin comes with a unique responsibility: securing your funds through self-custody. Whether you’re paying a premium for Bitcoin by purchasing it at spot price or accumulating it more affordably via Bitcoin mining, safeguarding your asset is critical. Unlike traditional banking systems, Bitcoin’s decentralized nature ensures that you, and only you, have control over your holdings. This sovereignty comes with responsibilities, requiring users to adopt appropriate security measures. However, not all self-custody solutions are equal. Your approach should evolve as your holdings grow and your knowledge deepens.

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This guide outlines various Bitcoin custody methods, categorized by complexity and tradeoffs. Whether you’re new to Bitcoin or a seasoned hodler, this article will help you choose the best solution for your needs.

Why Self-Custody Matters

When you hold Bitcoin, you essentially control a set of cryptographic keys that provide access to your funds. Self-custody ensures that no third party—whether a bank, government, or exchange—can access or control your money. It is the foundation of financial sovereignty, but this control comes with a critical task: securing those keys.

If your private keys are lost, your funds become permanently inaccessible. If someone else, either online or offline, gains access to your keys, they can take your Bitcoin. Therefore, the most important aspect of self-custody is maintaining the privacy and security of your private keys, which typically take the form of a 12- or 24-word seed phrase. As a general rule, these words should be kept offline. If stored on an internet-connected device, there’s a risk of exposure to online hacking. By keeping the seed phrase offline and away from cameras, microphones, and windows, you significantly reduce the risk of theft—limiting vulnerabilities to physical theft only.

The Spectrum of Self-Custody Solutions

Self-custody options can be thought of as a spectrum, ranging from simple and accessible to highly secure but more complex. Let’s explore the main options, their pros and cons, and when to use each one.

1. Hot Wallets (Travel-Friendly)

What It Is:
A hot wallet is a software application, often on your phone or desktop, that allows you to store and transact Bitcoin easily. Popular options include BlueWallet and Nunchuk.

Pros:

• Extremely easy to use.
• Free to set up and operate.
• Good for international travel

Cons:

• Least secure, as private keys are stored on an internet-connected device.
• Vulnerable to hacking and malware.

When to Use It:
Hot wallets are not recommended for storing large amounts of Bitcoin due to their vulnerability. They’re best used during travel or for small, everyday transactions—similar to how you might carry cash in a travel wallet. Any funds stored in a hot wallet should be considered highly susceptible to theft or loss.

2. Warm Wallets (Recommended for Beginners)

What It Is:
Warm wallets strike a balance between convenience and security. They serve as “training wheels” for Bitcoin custody, offering users full control over their coins, using an offline device, with added assistance from a company. One prominent example is Bitkey.

Pros:

• Easy to use with intuitive, step-by-step interfaces.
• Enhanced security through multi-signature systems (some keys stored offline).
• Redundancy via social recovery mechanisms.

Cons:

• Partial reliance on a company.
• No seed phrases provided in case the company ceases operations.

When to Use It:
Warm wallets are ideal for users new to Bitcoin custody who want a mix of security and convenience while learning the fundamentals. They’re especially suited for those who want to reduce the risk of losing access to their funds while gaining practical experience.

3. Cold Wallets (For Intermediate Users)

What It Is:
A cold wallet stores Bitcoin entirely offline and uses devices like Coldcard or Passport to sign transactions. These devices store private keys offline and interact with online computers only to transmit transaction data, keeping sensitive information secure.

Pros:

• High level of security and privacy.
• Immune to online hacking.

Cons:

• More complicated to set up and use.
• Losing the physical wallet or recovery phrase results in permanent loss of funds.

When to Use It:
Cold wallets are best for long-term storage of Bitcoin. Consider this your “savings account,” reserved for funds you don’t plan to access frequently. This setup is essential for all serious Bitcoin holders.

4. Multi-Signature Wallets (For Advanced Users)

What It Is:
A multi-signature wallet requires multiple private keys to authorize transactions. This setup is often structured as a 2-of-3 system, where three keys exist but only two are needed to move funds. It’s similar to dual-key nuclear launch systems.

Pros:

• Extremely high security.
• Protects against single points of failure.
• Resistant to physical theft.

Cons:

• Complex to set up.
• Requires both seed phrase backups and a descriptor file for recovery.
• Often involves reliance on third-party services for setup assistance. Unless the user has a certain degree of technical expertise.

When to Use It:
Multi-signature wallets are ideal when Bitcoin constitutes a significant portion of your net worth. They’re also suitable for estate planning and business purposes. Users should have a solid understanding of Bitcoin security fundamentals before setting up multi-signature wallets on their own.

5. Collaborative Custody (Shared Responsibility)

What It Is:
Collaborative custody involves multiple parties managing a set of keys, often within a multi-signature setup. Services like Unchained Capital and Onramp Bitcoin facilitate this approach, ensuring funds remain secure even if one key is compromised.

Pros:

• Highly secure multi-signature structure.
• Reduced technical expertise required.
• Protects against loss through single points of failure.

Cons:

• Reliance on third-party companies.
• Slightly more complex to set up than single-signature wallets.

When to Use It:
Collaborative custody is excellent for users managing large holdings or institutions seeking professional assistance. It’s also ideal for individuals who want the security of multi-signature wallets without the technical burden of managing them independently.

Transitioning Along the Spectrum

As your Bitcoin holdings grow, your custody solution should evolve:

1. Start Simple: Begin with a warm wallet to familiarize yourself with Bitcoin transactions.
2. Step Up Security: Transition to a single-signature cold wallet as your holdings increase.
3. Add Layers: Consider multi-signature or collaborative custody for substantial holdings or estate planning.

Key Principles for Self-Custody

Regardless of your chosen method, follow these key principles:

• Backup Your Recovery Phrase: Store your 12- or 24-word seed phrase on a fireproof, waterproof medium (e.g., Seedor, Billfodl, Seed Hammer) and keep it secure. Never share this phrase with anyone.
  
• Never Store Keys Digitally: Avoid saving your recovery phrase in cloud storage, on your phone, or in any digital format susceptible to hacking.
  
• Test Your Setup: Periodically test your ability to restore funds by wiping and restoring your device.
  
• Diversify Custody: Split your Bitcoin across multiple custody methods to reduce risk.
  

Exploring Collaborative Custody with Unchained, Onramp, or Others

Collaborative custody services offer different approaches to securing Bitcoin:

• Unchained Capital: Uses a 2-of-3 multi-signature setup. You hold two keys while Unchained holds one, offering recovery assistance if needed. This requires technical knowledge but you retain absolute control.
  
• Onramp Bitcoin: Offers institutional multi-signature solutions where you hold no keys. Instead, three institutions hold the keys, eliminating your custodial burden while providing diversified risk. Here you have no direct control of your funds, so it is not self-custody.
  
• Xapo Bank: Provides full custody of your Bitcoin, offering a hands-off experience but with no personal control over your funds. Here you have no direct control of your funds, so it is not self-custody.
• Ankerwatch: collaborative custody, with insurance.

Conclusion: Choose Security That Grows With You

Bitcoin self-custody is not a one-size-fits-all solution. Your approach should align with your experience, the size of your holdings, and your comfort with complexity. Start simple, progress to more secure methods as your stack grows, and embrace financial sovereignty.

For personalized guidance, Abundant Mines offers 1-on-1 assistance to our clients to help them navigate their self-custody journey. Book a call today! Remember, securing your Bitcoin is not just about protecting your wealth—it’s about embracing the freedom that Bitcoin enables. The best time to start securing your Bitcoin was yesterday; the second-best time is today. Take control of your assets and let your custody solution evolve alongside your knowledge and stack.

Disclaimer: The information provided in this blog is for informational and educational purposes only and should not be construed as financial advice. Please consult with a financial advisor or conduct your own research before making any financial decisions.