Since the creation of Bitcoin back in 2009, the digital currency has become one of the most popular and valuable assets across the world.
Its adoption has grown unprecedentedly, creating BTC billionaires and massive investment vehicles like hedge funds and mutual funds that focus solely on this market. However, even with all of these benefits, there are some clear downsides to leaving your money in an exchange or wallet that isn’t under your control.
One such example would be if Mt Gox had not been hacked back in 2014, a serious financial crisis would have ensued as millions of users lost their holdings. If you are new to Bitcoin trading, learn the precautions to take while investing in cryptocurrency.
In a recent survey, 42% of cryptocurrency owners said they would prefer storing their assets in a digital wallet that they controlled rather than an exchange. This is an understandable concern as exchanges have been the target of numerous cyber attacks and hacks over the past few years.
The process of moving cryptocurrency off an exchange and into one’s personal wallet is called self-custody. In order to do this, one must first purchase bitcoin or another cryptocurrency on an exchange such as Coinbase or Kraken and then move it to a digital wallet such as Copay or Jaxx.
What is Self Custody?
Self-custody is an option for cryptocurrency owners who want the benefits of owning crypto without relying on a third party. This means that you are responsible for the security and integrity of your private keys, but if done correctly, the risks can be minimized.
Here’s how it works: you transfer your cryptocurrency from an exchange or hosted wallet (such as Coinbase) into a device only you can access, such as a hardware wallet or paper wallet. You then send the coins back out of this device by signing off on transactions with your private key.
Why are BTC Investors Shifting Their Holdings to Self-Custody?
With the recent crackdown on cryptocurrency exchanges and the volatility in prices, many bitcoin owners are looking for safer and more secure ways to store their coins. One company that is capitalizing on this trend is Xapo, a bitcoin wallet provider with a cold storage vault and insurance policy.
Xapo allows you to hold your bitcoins offline and out of reach of hackers or government regulations, which some see as the only way to ensure safety.
Another way that people are keeping their bitcoins safe is through Bitcoin Hardware Wallets, which can be accessed with a pin code or biometric authentication device like fingerprint scanning. Not only does this provide an extra layer of security but it also helps avoid having to download a software that could be infected with malware from the internet.
How to Self-Custody Your Bitcoin
If you are a bitcoin investor and are currently storing your bitcoins on an exchange, you may want to consider moving them into a local wallet. If you don’t know what this means, it’s basically just an application that holds your private key.
You can also use a hardware device like the Ledger Nano S or Trezor. These devices hold your private key and work as an offline bitcoin wallet. One of the main reasons people decide to move coins is because they want more control over their assets. This is especially important if someone has large amounts of bitcoin and doesn’t trust exchanges with their coins.
Conclusion
There are a number of reasons that BTC investors may have shifted their holdings from a third party to self-custody. For one, the crypto market is still young and there is no guarantee that these exchanges will be around for the long term.
Secondly, these exchanges are often targeted by hackers and it’s not uncommon for them to lose the private keys of all user wallets. And lastly, Bitcoin holders who want to keep up with the latest developments in cryptocurrency may feel more comfortable investing in crypto and holding their Bitcoin in an offline wallet instead of having it on an exchange where they don’t control the private keys.
These issues were exposed when Binance froze new user registrations while they dealt with an overwhelming amount of account requests.
