It sure feels like many exchanges are going out of business right now. A few months ago, people would have laughed if you’d say that FTX was going to fall over.
Even more, if you mention taking $8 billion of customer funds with it. This is where self-custody comes in.
The Binance token is unstable again and is down around 50% from its peak in November 2021. We’re not saying that a Binance crash is definitely coming, but surely you or a friend has lost crypto on an exchange this year. And this is where self-custody comes in.
Are you really confident that there won’t be a Coinbase crash? Do you think Poloniex will be fine while Justin Sun dumps liquidity into Binance just after he did the same thing to FTX?
Anyway, enough doom and gloom. It’s been a rough year, and we have the plan to help you deal with the fact that exchanges aren’t as stable and trustworthy as we thought they were.
We’ll look at the main types of self-custody and give you some pros and cons of each approach so you can make the best decision for your situation.
Not Your Keys, Not Your Coins – Value of Self-Custody
The basic idea that all of these approaches regarding self-custody have in common is that you hold the keys to your crypto. That means two things:
- Nobody can lose your crypto (unless they steal your keys).
- Nobody can get your crypto back if you lose your keys.
The benefit is clear. You have total control over your funds. But this isn’t like asking Facebook or Instagram for a password reset when you forget which ex-girlfriend’s name you put.
You have total responsibility with self-custody, so you and you alone need to make sure you take good care of your keys.
A lost wallet key leaves you in exactly the same position as SBF spending all your money on mansions and terrible shoes.
Of course, this was before begging the US to extradite him after four days in prison. Turns out not every part of the Bahamas is luxurious after all.
So to start off, you need some keys. You can generate them in any modern crypto wallet. And if you’re a security freak, then you’ll want to flip a coin or roll a dice a few hundred times and write down the results on a piece of paper.
Once you generate your keys, you’ll need a way to create addresses so you can receive crypto. You can do this by hand if you’re a massive math nerd, but we recommend using your wallet to generate these addresses.
Now you have your own private keys. You can send crypto to your new addresses. Now you, and only you, have the ability to spend (or lose) your crypto.
Keep Them Safe and Secure – It’s That Important
Now you have your keys, and you need to do two things:
- Make sure they don’t get lost.
- Make sure that nobody steals them.
These two goals are at odds with each other a little. You could memorize the keys, and nobody would be able to steal them, but then you might forget them and end up losing your crypto anyway.
On the other hand, you could write down the keys on pieces of paper and store them in a few safe places. Maybe even put them in a file and upload it to the cloud. But then only one of those places needs to get hacked, and you lose your crypto anyway.
We clearly need to find some middle ground here.
Modern self-custody wallets will give you a set of “wallet words” when you generate a new wallet with new private keys.
You will need to write these down to ensure you don’t lose them. Once you have these words written down, here are a few options you have to back these up:
- Put the piece of paper somewhere safe
- Invest in a metal fireproof wallet
- Back up your wallet to the cloud with a password
- Store the keys in a digital hardware wallet with a password
The nice thing with self-custody private keys is you can make multiple copies. So you only need to find one backup to be able to get access to your funds.
There is one final step: how do you stop your wallet from getting hacked while you’re using it?
Use An Air Gap
An air-gapped computer is a powerful piece of security that makes it much more complex (not impossible) for you to be hacked.
The idea is that you have a computer that is never connected to the internet. It’s a bootable CD running something like Tails Linux, and you only ever put your private keys into this computer.
Wallets like Electrum have the ability for you to move transactions between computers using QR codes and the webcam. So the way you’d spend funds with this sort of setup looks like this example:
- Create a wallet in Electrum on an air-gapped PC
- Store private wallet words somewhere safe
- Generate wallet words, put them on your main PC
- Use the main PC to generate an unsigned transaction
- Turn on the air-gapped PC, enter private keys
- Use a QR code to send an unsigned transaction to an air-gapped PC
- Double-check and sign transactions on air-gapped PC
- Use the QR code to send the transaction back to the normal PC
- Broadcast transactions from a regular PC
This is a lot of work, isn’t it? If you only have $10 or $100 of crypto in self-custody, then it’s probably not worth going into this amount of detail.
However, if you have enough funds you’re worried about, then you need to take these sorts of steps in order to protect them.
If you’re currently Googling things like “how do I keep my crypto safe” because you’ve had money in one of the many crypto exchanges going under, then you might want to get in touch with our recovery experts.
When an exchange goes under, there’s usually a chance that you can get some of your funds back.
Our Global Fraud Protection team can help find what options you have to ensure you get your crypto returned. We can potentially even reverse any recent transactions. Hence, book a free consultation and let us do our magic.