Cryptocurrency Security - Self-custody
Learn how to securely own and transact with your digital assets
Please buy a cryptocurrency hardware wallet! I recommend a Ledger Nano X and have a referral code for you to use here
Horror stories about people losing access to their Bitcoin. This poor sap threw out a laptop hard drive with 7,500 Bitcoins in 2013. Cryptocurrency and blockchain wallets are so secure even the holders have lost coins due to user error (e.g. losing track of their keys, or misplacing a piece of paper with 24 words -seed phrase - written on it), which effectively reduces the overall supply for good!
First let’s take a look at custodial solutions and the reasons people use them, as well as the reasons I don’t.
Centralized exchanges (CEXs) like Coinbase, Binance, Voyager, and Gemini are currently a necessary evil because they allows users to onboard fiat currency (USD) and swap for crypto. Some CEXs are offering attractive reward and referral programs to keep crypto on their platforms. Examples are free bitcoin or other cryptos, discounted/free trading, or paying interest between 1-10% on all crypto held in their custody. CEXs are an effective tool for introducing cryptocurrency to the masses and have big marketing budgets for those customer acquisition costs.
The phrase ‘not your keys, not your crypto’ is popular in the community, meaning if someone else controls your private keys and where your crypto is stored, it’s technically not yours and can be lost. There are many significant issues with CEXs that can hurt investors who leave their crypto there:
They can be hacked - Kucoin hack story
They have single points of failure - Quadriga story
They can lock users out of their accounts - Coinbase customers speak out
A core components of the cryptocurrency ethos is safe, self-sovereign ownership of digital assets and finance without the expensive and centralized banking authorities. The blockchain provides anyone in the Internet-connected world to access capital, democratizes wealth, connects people across continents, and banks the unbanked. I’m an advocate for self-custody for a lot of reasons, but at the end of the day it’s just easier than dealing with many intermediaries (e.g. banks).
Here are things to look out for, processes to establish, and best practices to follow when you decide to self-custody your assets.
Private keys and wallet seed phrase - Every crypto wallet includes private keys and a 12 or 24 word ‘seed phrase’ that can access a specific cryptocurrency wallet. Absolutely nobody should have access to your private keys or seed phrase, which should be written down and stored in a safe or deposit box. If you must give a copy of your seed phrase that can restore a lost wallet to someone, they should be someone you trust with your life, and you should make sure it’s stored in a safe.
Never type your seed phrase and store it on your computer or cloud storage
Never text your seed phrase to anyone
Never take a cell phone picture of your seed phrase
Always write it down with pen on paper and put it somewhere secure (e.g. fire proof envelope in a safe)
Only give another copy to your loved ones and instruct them to follow the above point
Hardware wallet - When performing cryptocurrency transactions, it’s best practice to use a hardware wallet, which is really a ‘key’ to allowing your wallet to send crypto. Hardware wallets have a pin that enables a user to unlock their wallet and access their cryptocurrency. Hardware wallets are often referred to as ‘cold storage’ because long time holders will move their crypto there and never touch it. The two I’d recommend are Ledger Nano X and Trezor.
Source investopedia.com Multisignature wallet - A ‘multisig’ is becoming a popular option for teams of investors or DeFi projects to collaborate on actions that involve moving cryptocurrency in and out of a treasury wallet. This option requires at least 3 people to approve any cryptocurrency transaction before it can be executed. Gnosis Safe is a leader in the Ethereum space.
Web browser - A web browser with highly secure and private browsing is best. You should also remember to log out of applications, use very secure passwords for any crypto exchanges, and never stay logged in to your Web3 wallet extensions like Metamask. Using a VPN can add a layer of security that can anonymize your location too.
Source choosetoencrypt.com Scams - Extremely sophisticated phishing scams and impersonators abound online now, and crypto is no exception. Twitter, Discord, Telegram, Emails, and even direct clones of widely used crypto software will ask for private keys, seed phrase, wallet address, or to send funds with the promise of big returns. The same care used for work computers, email, physical property should be exercised in with crypto. If a website ever asks for your seed phrase, you’re under attack and you should leave immediately. Report the scam site to the team so the web domain hosting company can take action.
Self-custody is worth the time to understand because it unlocks the full potential of cryptocurrency and Decentralized Finance (DeFi). If you have any suggestions around increasing security or would like to share your experience, please leave in the comments section!
Please buy a cryptocurrency hardware wallet! I recommend a Ledger Nano X and have a referral code for you to use here