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A Beginners Guide To Crypto Self-Custody

· Education · Stormrake

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In light of recent events concerning the collapse of FTX, the opaque nature of centralised exchanges and the importance of self-custody has been brought to light.
In today's Thunder Trading Update, we aim to educate our readers on how to start your self-custody journey and why it's so important to get started.

Why is crypto self-custody important?

#Bitcoin in self-custody can’t be frozen and has no counter party risk 🔑

— Natalie Brunell ⚡️ (@natbrunell) November 16, 2022

The very genesis of Bitcoin's creation was to remove the trust required to transact with third parties and the core idea was to "become your own bank". Due to the self-sovereign nature of Bitcoin when held in your custody, it's important to not dilute that value by having to hold it with a trusted third party. Now this isn't to say that there aren't good actors in the space, who run well capitalised and properly run businesses but why risk 100% of your capital for the sake of convenience. 

One of the most important phrases every crypto investor must commit to their memory is the age old "not your keys, not your coins". This means if you do not learn how to self-custody your own digital assets, they simply don't exist and could just be numbers on a screen with no Bitcoin backing whatsoever.

Final note on why it's crucial to learn how to self-custody is the phrase, "don't trust, verify". When you hold your own private keys and manage your own wallet addresses, at anytime you can simply jump on to a blockchain explorer or your wallet interface to confirm your balances and holdings. Why trust what your exchange is showing you, when you can simply verify your holdings yourself. This is the beauty of self-custody.

There are two main ways to self-custody cryptocurrency assets, each with their own pros and cons. Depending on whether you consider yourself a crypto investor or trader, will influence which type of wallet may suit you best.

 

The following is a breakdown on where you can self-custody your crypto:

Software wallet - a software wallet can either be a web browser extension, popularised by the likes of MetaMask. It can also be an app downloaded on your laptop or mobile phone, popular versions of software wallet apps include Atomic and Exodus.  They are by far the most convenient type of wallet, especially the web browser wallets as you can interact on-chain with ease, this includes interacting with DEXs such as Uniswap and GMX or lending protocols such as Aave and Maker. 

The drawback of a software wallet, at least one such as MetaMask that interacts a fair bit online, would have to be there weakness to getting compromised. This can be in the form of malware or hackers that might steal the private keys or might trick you into sending crypto to the wrong address. To counteract this, it is better to keep assets on any software wallet to a minimum and have a seperate laptop for your crypto activities rather than mingle everyday browsing activities on the same computer.

Hardware wallet - A hardware wallet is arguably the superior type of wallet that stores private keys in a secure physical device, the most popular of which is the likes of Ledger Nano, Trezor. and ColdCard.  It is believed to be the most secure way of storing any amount of crypto assets. Unlike software wallets, which can be compromised due to malware, hardware wallets can be used securely and interactively. They are immune to computer viruses, as the funds stored cannot be transferred out of the device in plaintext and, in most instances, their software is open source and easy to use.

Most hardware wallets have screens that add another layer of security, as they can be used to verify and display important transaction signing details. For instance, a screen can generate a recovery phrase and confirm the amount and address of the transaction you wish to make. 
More importantly, they keep your funds offline until the point of transfer is made, greatly reducing your risks. 

Just because you're using a hardware wallet for security, doesn't mean you have any less ability to transact online. You can still do all your on-chain activity by connecting MetaMask to your ledger hardware wallet. This gives the security of cold storage with the convenience of MetaMask for interacting with DeFi.

How to self-custody your crypto?

As highlighted above, the two main ways to start your self-custody journey will be either via a hardware wallet or software wallet. You can start by going to MetaMask or Ledger and once you have received your hardware device or downloaded your software wallet, you can follow these steps to kick off your self-custody journey:

1. Follow the prompts to generate your seed phrase

2. Write down your seed phrase on a piece of paper.  Do NOT store it on a computer or phone.

3. Store your seed phrase (now written down) in a secure and private location

4. Send yourself a small amount of crypto i.e. 0.0001 BTC as a test transaction

5. Once the test transaction has been received, proceed to sending yourself the full balance 

Please note that the above steps are a high level guide to an incredibly important process. However, you're not on your own as you have Stormrake in your corner, if you have any questions or concerns, simply email info@stormrake.com or contact your broker. We're more than happy to provide additional resources and make the self-custody process less daunting. 

Once you get started, you'll find the process for self-custody quite intuitive and you will be embracing the cypherpunk ethos in full. Remember, "not your keys, not your coins".

Best of luck on your journey and enjoy becoming your own bank.