Introduction
In the world of Bitcoin, the phrase "not your keys, not your coins" emphasises the importance of self-custody – taking personal responsibility for storing and securing your bitcoin. In this article, we’ll explore the different types of Bitcoin self-custody options for on-chain holdings based on your experience level and the amount of bitcoin you hold.
Disclaimer: The suggestions provided in this guide are general in nature and intended to offer general guidance. Each user must conduct their own research and assess their individual risk tolerance, security needs, and technical capabilities. The pros and cons of each option should be carefully considered before making a decision. The value thresholds mentioned are loose suggestions and may not be appropriate for everyone. For personalised advice, please consider using our Skippy Premium service.
Self-Custody Stages in your Bitcoin Journey
The path to self-custody is often nonlinear, and each individual’s experience is unique. In this section, we explore a typical journey that many Bitcoin users might encounter throughout their lives. Our goal is to illustrate the depths of the rabbit hole and the complexity and context surrounding the various options available to users.
Level 0: Bitcoin Basics – Exchange Storage
Suitable for: Complete beginners
Default Option: Exchange Storage
As you begin your Bitcoin journey, you might start by purchasing bitcoin on an exchange such as Bitaroo. While this isn't self-custody, it's a common starting point.
As you take your first steps into this exciting realm of digital currency, exchange storage provides a familiar and accessible starting point. If you do nothing about your self-custody, you default to your bitcoin being stored on the exchange. Using a reputable exchange allows you to focus on understanding Bitcoin's fundamentals without the immediate pressure of managing your own keys and the withdrawal costs involved.
At this stage, your primary goals are likely to stack some sats [link to glossary], understand how transactions work, and get comfortable with the concept of digital assets. Exchange storage simplifies these processes, offering user-friendly interfaces and the ability to buy and hold bitcoin with ease (or even sell it if you’ll wish to do so). It's like learning to ride a bike with training wheels – it gives you the confidence to get started while minimising the risk of costly mistakes.
However, it's crucial to remember that this is a temporary stage in your journey. As you grow more comfortable with Bitcoin, you'll want to transition to self-custody options to truly embrace the principle of financial sovereignty that Bitcoin offers.
Benefits:
- Easy to use with minimal technical knowledge required
- Customer support provided by the exchange
- Convenient for DCA customers who might want to make a single periodical withdrawal to help keep the costs down
Trade-offs:
- KYC requirements compromise your privacy
- You don't control the private keys
- Vulnerable to exchange hacks or bankruptcies
- Risk of account freezes or closures
Complexity:
- Setup: None (Default)
- Management: Easy
Recommended value threshold: Store here less than you’re willing to lose.
Recommendation: Use a reputable exchange with strong security measures. As you learn more about Bitcoin, aim to move to self-custody options as soon as possible.
Key Concept: Understand the importance of educating yourself on self-custody and plan to take your bitcoin off the exchange.
Need time to get a hardware wallet or to understand the terminology and concepts of Bitcoin? Or maybe you’re in the midst of a move and don’t have the time right now? No worries! Bitaroo’s Vault offers a secure and convenient solution for storing your bitcoin until you’re ready to take the next step.
Level 1: Novice - Software Wallet
Suitable for: Relatively small amounts
Congratulations on taking the next step in your Bitcoin journey! As a novice, you're ready to embrace true self-custody, and a software wallet is the perfect tool to help you do just that.
At this stage, you've grasped the basics of Bitcoin and are eager to experience genuine ownership of your digital assets. A software wallet offers an ideal balance of security and usability, allowing you to hold your own private keys without a significant learning curve. It's like moving from a custodial bank account to a personal safe – you gain direct control over your funds while maintaining relative ease of use.
Software wallets are particularly valuable because they will introduce you to the fundamental concept of private key management. With a standard software wallet, a single private key is used to sign transactions, giving you full control over your bitcoin. This setup allows you to interact with your bitcoin freely, easily sending and receiving transactions, which deepens your understanding of how the Bitcoin network operates.
Most novice users start their self-custody journey with a software wallet. Software wallets are easily accessible, are usually free, and can be installed on your computer or smartphone. They provide a user-friendly interface that simplifies the process of managing your bitcoin while still offering the benefits of self-custody.
Moreover, managing bitcoin in a software wallet (also knowns as hot wallet) helps you develop good security habits. You'll learn the importance of backups, the role of seed phrases, and how to safely store sensitive information. These skills are crucial as you progress further in your Bitcoin journey.
Benefits:
- Easy to use and convenient for transactions
- Free to download and use
- Suitable for smaller amounts
- Introduces you to private key management
Trade-offs:
- Vulnerable if the device is compromised
- Reliant on the security of your device
- Less secure than hardware wallets
Complexity:
- Setup: Easy
- Management: Easy
Recommendation: Blue Wallet
Key Concept: Understand seed phrases and their crucial role in wallet recovery.
This is an excellent opportunity for you to practice recovering your wallet since digital wallets often offer better usability than hardware wallets. What? With smaller bitcoin amounts, it’s typically less stressful to experiment with deleting the app and reinstating your wallet.
Why is this important? Simulating this process helps you learn to trust the Bitcoin code. After all, for many of us, this is an entirely new concept. In the world of Bitcoin, you essentially become your own bank; if your funds are lost, no one will come to your rescue. While this can feel daunting for newcomers, mastering it can be incredibly empowering. It fosters a sense of self-responsibility and sovereignty that traditional finance simply does not provide.
Level 2: Intermediate - Hardware Wallet
Suitable for: Users with a good understanding of Bitcoin
As your bitcoin holdings increase, transitioning from a software wallet to a hardware wallet will significantly enhance your security.
A hardware wallet keeps your private keys offline, offering robust protection against online threats, hacks, and malware. This transition allows you to retain control over your funds without complicating the process - after all, you still only need one key (and only one signature) to access your assets. By adopting a hardware wallet, you can safeguard your growing investments while enjoying the peace of mind that comes with knowing your bitcoin holdings are secure.
Pros:
- High security with offline storage of private keys
- Protection against malware and hacking attempts
- Introduces cold storage concepts
Cons:
- Cost
- Less convenient for frequent transactions
- Risk of physical damage or loss
Complexity:
- Setup: Moderate
- Management: Moderate
Key Concept: Understand the importance of keeping your seed phrase backup secure and separate from your device.
Your seed is the valuable asset here, while your hardware device serves as a tool to securely generate and use your seed phrase. It is essential to store your seed safely.
Level 3: Advanced – Enhancing your Hardware Wallet Security
Suitable for: Experienced users looking for additional security
At this stage, you may want to explore advanced security measures. By now, you should have successfully performed at least one wallet recovery and several bitcoin transactions and are reassured that your funds are safe. However, what if someone were to stumble upon your seed phrase during a theft? Or what if bitcoin's price unexpectedly skyrockets? If these concerns resonate with you, you're in the right place.
Level 3 is tailored for experienced Bitcoin users looking to elevate their security strategies. With larger holdings, it is crucial to adopt advanced techniques to protect your assets. This level focuses on passphrases (introduced to the Bitcoin network via BIP39. Please note that there are even more advanced options such as Seed XOR, and Shamir's Secret Sharing, each offering unique advantages and considerations to further enhance your security as you manage your bitcoin holdings, but we will discuss those on a different article.
BIP39 Passphrase
BIP39 passphrases add an extra layer of security to your hardware wallet by requiring an additional phrase alongside your seed. This approach not only enhances protection against theft but also allows for plausible deniability through the use of decoy wallets. However, users must be cautious, as a strong passphrase can be challenging to remember, and if lost, will jeopardise your access to your funds.
Pros:
- Additional protection against theft
- Allows for plausible deniability with decoy wallets
Cons:
- Introduces another critical component that could be lost
- Strong passphrases can be difficult to remember
Complexity:
- Setup: Moderate
- Management: Moderate
Key Concept: Understand the trade-offs between security and complexity/convenience.
To enhance your Bitcoin security while balancing complexity and convenience, assess your risk tolerance and educate yourself on advanced options like BIP39 passphrases. Implement layered security by combining methods, create comprehensive backup and recovery plans, and use decoy wallets for added protection. Stay consistent with security practices, document everything securely, and consider using hardware wallets. Stay updated on best practices, always prioritising effective management of your security measures to protect your assets confidently.
Level 4: Expert – Multi-signature (Multisig) Wallet
Suitable for: Advanced users, businesses, or those managing large amounts
Multisig represents the pinnacle of Bitcoin self-custody security.
As the Bitcoin landscape matures, the need for robust security measures becomes increasingly critical, particularly for those managing significant amounts of digital assets. Enter the multi-signature (multisig) wallet - a sophisticated solution designed for advanced users, businesses, and anyone overseeing very large. This level of self-custody offers flexibility and resilience that protects against theft, mismanagement and loss.
Multisig wallets eliminate single points of failure by requiring multiple signatures to authorise a transaction. This feature allows users to distribute trust across several parties, which aligns seamlessly with Bitcoin’s decentralised nature. With customisable configurations - such as 2-of-3 or 3-of-5 setups - multisig wallets provide a powerful way to enhance security while facilitating collaborative management, making them ideal for organisations or families navigating the complexities of Bitcoin ownership.
However, the advantages of multisig come with certain challenges. Setting up a multisig wallet is more complex than using a traditional (single signature) wallet, and users may encounter higher transaction fees - though this may change with the broader adoption of Taproot technology.
In this guide, we will explore the two primary approaches for implementing multisig: the DIY method, which allows you to maintain complete control, and collaborative custody, where you partner with a service provider (such as Bitaroo Guardian). Each option presents its own set of pros and cons, and understanding these distinctions is essential for maximising the benefits of multisig.
Pros:
- Eliminates single points of failure
- Highly resistant to theft, mismanagement and loss
- Flexible setups (e.g., 2-of-3, 3-of-5)
Cons:
- More complex to set up and use
- Higher transaction fees
Complexity:
- Setup: Difficult
- Management: Difficult
Key Concept: Understand the benefits of distributed trust and how it aligns with Bitcoin's decentralised nature.
The value of multisig at this expert stage is immense. Firstly, it provides a level of security that single-signature solutions simply can't match. By requiring multiple keys to authorise transactions, multisig dramatically reduces the risk of theft, unauthorised access, or loss due to a single point of failure.
Secondly, multisig setups offer unparalleled flexibility in governance structures. Whether you're managing personal wealth, running a business, or overseeing shared funds, you can tailor the key distribution and signing requirements to fit your specific needs. This flexibility allows for sophisticated access control and can even facilitate smooth succession planning for your bitcoin holdings.
Moreover, engaging with multisig solutions deepens your interaction with Bitcoin's more advanced features. It encourages a thorough understanding of Bitcoin scripting, transaction construction, and key management – knowledge that puts you at the forefront of Bitcoin technology.
DIY vs. Collaborative Custody
When implementing multisig, you have two main options:
- DIY Multisig: Set up and manage everything yourself or with your peers.
- Pros: Complete control and privacy
- Cons: Complex setup, lack of technical support
- Collaborative Custody: Work with a service provider like Bitaroo Guardian.
- Pros: Easier setup, technical support, inheritance planning
- Cons: Less privacy, reliance on a third party for one key
Conclusion: Crafting Your Bitcoin Custody Strategy
As you progress through your Bitcoin journey, your custody needs will evolve.
Remember, there's no one-size-fits-all solution. Your ideal setup depends on your technical skills, risk tolerance, and the amount of bitcoin you're securing, both in sats and in dollars. Always prioritise understanding your own security measures, backup procedures and trade-offs for the chosen method.
By taking control of your bitcoin through self-custody, you're not just securing your assets – you're embodying the principles of financial sovereignty that Bitcoin represents.
