Self-Custody: How to Be Your Own Bank
|— Self-custody is the future of finance: if you own crypto, you no longer need to keep your assets with a bank. This means you have total control of your assets – but also huge responsibility.|
— There are various self-custody options, each with pros and cons. It’s up to you to understand each one, and choose the wallet that’s right for you.
— Being your own bank is intimidating – but Ledger offers a solution that ensures you can manage your assets easily, while remaining completely secure.
We get it – self-custody is one of the more intimidating sides of crypto. But it’s nothing to fear! With the right tools and advice, being your own bank is no big deal.
Letting go of the habit of keeping your money with a bank can be daunting. Self-custody of your digital assets appears intimidating at first, and with good reason. Stories of long-time holders losing complete access to their wallets are probably familiar to all of us, and the jargon can be hard to grasp. You are not alone!
Yet the philosophy of crypto is inclusivity and, in fact, crypto-custody isn’t as complicated as it may seem. With a little clarification, anyone can make an informed transition from banks to self custody, and manage their assets with complete confidence. Here, we show you how.
Why You Should Care About Self-Custody
One of crypto’s greatest strengths is that it does not require any financial institution. It is stored and managed entirely by you. Yet, many crypto users are missing this essential point, and consequently not using crypto to its full potential.
Once you learn how to approach cryptocurrency, there are actually many different ways you can hold it. Each option has its own pros and cons, which we’ll break down for you now.
What is a Wallet?
Let’s start by clarifying one thing: despite the name, your wallet is not actually where your assets are stored. Rather, it is the private key for your address on the blockchain, and that’s where your assets are.
The type of wallet you use determines how those keys are stored. The threats they are vulnerable to – and if they are your keys at all. Let’s take a closer look.
Hot wallets are called hot because they’re constantly connected to the internet – you could have a hot wallet on your laptop, for example, or you could keep your assets on an exchange wallet, which is another subcategory.
It’s worth noting that hot wallets can be both custodial and non-custodial. That’s to say that some are accessed using your own private keys (custodial). Others use keys that are kept by the host exchange.
Many people keep their crypto in exchange wallets. For sure, they’re convenient: you can view, trade, buy, and sell cryptocurrency easily, from any device with an internet connection. Using the funds in the wallet, you keep on that exchange. However, all this comes with a caveat.
Exchange wallets are (generally) custodial. This means that you don’t own the private keys fr the wallet and its contents, the exchange itself does. Remember – not your keys, not your coins.
Not having true ownership of your coins has some big consequences: let’s say, for example, the exchange was to go bust – your coins would go with it.
And since exchange wallets are always online, they are targets for bad actors and attackers. So by using this type of wallet, you’re trusting your assets to the security of a third party – which is kind of like….using a bank!
The entire point of crypto is to not rely on a third-party, so holding assets on an exchange can seem like a contradiction.
As the name suggests, a desktop wallet is kept on your personal computer. The good news is that it’s custodial, meaning your assets are secured with your own keys. However, since your computer is likely connected to the internet, your wallet is still susceptible to online hacks and malware that can scan your files for your private keys.
So while this type of wallet allows you proper ownership of your coins, your assets remain vulnerable to digital threats.
By definition, a cold wallet is designed to store your coins offline – it is never connected to the internet and therefore evades some of the main threats to your assets. Although storing your coins offline comes with its own issues, here we discuss how a hardware wallet such as the Ledger Nano can bring you both digital and real-world security.
We can compare this type of wallet to a USB drive that stores your private key. Hardware wallets are a little more complex than that, but these little devices enable you to easily access your assets on the blockchain.
Hardware wallets marry the convenience of a hot wallet with the security of a cold one. In the case of a Ledger Nano, for example, all your transactions are completed within the device itself, meaning that although your keys are easily accessible to you, they will never leave the wallet or be exposed to any sort of online threat.
Using this type of wallet also avoids the problems associated with keeping a written or printed copy of your key, which needs to be exposed each time you access your crypto. Instead, transactions can be carried out at the click of a button, without the key ever leaving the device.
What if you lose the device? No problem – remember, your assets are not in the wallet they’re on the blockchain. So if you lose your device, you’ll be able to restore access to everything you own by entering your Recovery Phrase from a new device.
The Ledger Nano itself is secured by a pin code of up to 8 digits that is set by you. Meaning that even if you lose it, nobody can use it to access your accounts.
And managing your fund day to day is easy, with the Ledger Live interface showing all your coins in one place.
Being Your Own Bank – Other Essentials
We get it. Self-custody can be a scary thing. One potentially wrong move, and your assets are gone with no way to recover them. However, devices like Ledger’s Nano mitigate that risk, leaving you free to explore the world of crypto. Here are a few tips to minimize threats even more.
Keep Your Holdings Private!
One great way to prevent crypto theft is not to tell anyone you have it! If no one knows you own crypto, there’s much less of a chance they’ll try to steal it.
Recovery Phrase Can Never Be Too Secure
When it comes to that all important recovery phrase, there is no such thing as too secure! As we know, your seed phrase needs to be recorded and kept by you in order to guarantee access to your accounts, but a fire or flood could destroy a paper copy.
The good news is that a number of great tools are now on the market to make your phrase iron-clad. Billfodl, for example, is a weather and fire resistant steel wallet that will isolate your back up phrase from water and heat. Tools like these combine perfectly with the Ledger Nano to make your crypto near-impenetrable.
Use a Back-up Device
Losing or damaging your hardware wallet does not mean losing your crypto! Remember, your assets are on the blockchain. Many people choose to link their seed phrase with two devices, meaning that if one is lost or damaged, they can simply access their blockchain address from the other device.
So What Are You Waiting For?
There has never been a better time to take control of your finances! Hardware wallets make self-custody easy and secure, so you can enjoy complete financial freedom with confidence. Forget relying on banks or third-parties to manage your funds – no one to tell you what to do or charge you fees. With Ledger, we can help make sure your money is, well, yours. Our cold wallets can assist you in taking the plunge so self-custody isn’t so scary.
Knowledge is Power.
Trust yourself and stay FREE! Check out this episode of School of Block where we talk you through the intersect between crypto and real world regulation.