Unconventional Crypto Custody Advice — Besides “Get a Hard Wallet!!111”
This flies in the face of most crypto advice.
But, hear me out…
Custody is on everyone’s mind right now.
FTX — a top 3 global crypto exchange — went bust in Nov 2022 with a >$10 billion dollar hole in their balance sheet, misuse of customer deposits, and massive fraud…
So what is the average person supposed to do given this betrayal and the risk of more insolvencies?
Most people would say that a hardware wallet is the end-all-be-all answer… and that you should move your assets to one ASAP.
But I’d argue that it’s just one part of a broader crypto strategy.
Remember — you’re playing against elite, state-backed hackers who are also in an arm’s race with forensics agencies such as Chainalysis Inc. and TRM Labs
IMO: A properly regulated custodian with insurance, hidden servers, and armed security would custody far better than the average layperson.
But there are pros and cons, all choices have tradeoffs.
Can you trust a custodian if regulators order them to blacklist or seize assets?
Or in the case of financial or political regime change?
That’s where self custody is beneficial — and it’s a feature unique to crypto, born out of the 2008 GFC.
A hardware wallet or multi-signature wallet offers the optimal security and sovereignty.
But its carries immense responsibilities and technical risk for the average person currently.
Meanwhile… custodians have counterparty risk as the tradeoff.
If they become insolvent like FTX did, you become an unsecured creditor and may never see your assets again.
No central bank bailouts in crypto — a feature, not a bug.
To self custody your crypto at a PRO level requires knowing what you’re really doing:
An airgapped 2nd computer, several (hardware) wallets, hidden private keys written on metal, estate planning, the works…
But one could also use hot wallets on mobile or popular hardware wallet with some risk tradeoff.
In sum: Do it all. Split it and hedge risk.
Self custody some and use regulated custodians for other parts.
Stick to custodians that don’t lend out your coins and hold 1:1 reserves with opaque liabilities and balance sheets.
Top US examples are currently Coinbase, Kraken Digital Asset Exchange, Fidelity Investments, and BNY Mellon.
Always know your counterparty risk.
The reality is that humanity had always had bank failures and had to think about counterparty risk.
Much of the world still deals with it. We’re spoiled in America, but even FDIC has caps.
If you want to be your own bank — which crypto allows one to do — you have to be prepared to take on the responsibility of doing so.
#crypto #security #cybersecurity #bitcoin #ethereum #ftxbankruptcy
