The rapid rise of cryptocurrencies has revolutionized how people think about money, investments, and financial independence.
However, as the crypto space has grown, so have the challenges related to security and asset protection. Choosing the proper storage solution is one of the most critical aspects of safeguarding your digital assets.
While many newcomers to crypto rely on exchanges to hold their assets, seasoned investors often advocate for self-custody as the best way to ensure security and control. Here’s why storing your crypto in self-custody is essential.
1. Ownership and Control
When you hold your cryptocurrency in a self-custody wallet, you are the sole custodian of your assets. This means you possess the private keys to your purse, which is the only way to access and control your crypto. In contrast, storing assets on a centralized exchange leaves your crypto in the hands of a third party, who manages your private keys on your behalf. This might seem convenient, but it also strips you of direct control.
As the saying goes in the crypto world, “Not your keys, not your coins.” If you don’t control the private keys, your crypto is not truly yours. Exchanges can freeze accounts, limit withdrawals, or even be hacked, leaving your funds vulnerable. Self-custody ensures full ownership over your assets, and no third party can interfere with your transactions.
An example is in 2024 when IDF requested Binance to freeze all/selected Palestine accounts.
2. Protection Against Exchange Hacks and Failures
Cryptocurrency exchanges, while often secure, are attractive targets for hackers due to the large volume of assets they hold. Throughout the years, numerous high-profile exchange hacks have resulted in millions of dollars worth of crypto being stolen. One of the most infamous incidents is the Mt. Gox hack in 2014, where around 850,000 Bitcoins were lost, leading to the exchange’s collapse. The hacks are not isolated to the early days of cryptocurrency. See the largest crypto hacks so far.
Even reputable exchanges are not immune to such risks. In addition to hacking threats, exchanges can face internal corruption, mismanagement, or insolvency. In an exchange failure, customers can lose access to their funds or face protracted legal battles to recover a fraction of their assets.
You remove this risk by storing your crypto in a self-custody wallet. Even if an exchange fails or is compromised, your assets remain safe in your wallet, beyond the reach of external threats.
3. Avoiding Third-Party Risk
Relying on third parties to safeguard your assets introduces another layer of risk. If the exchange encounters regulatory issues, legal disputes, or even regional bans, you might suddenly lose access to your account or be forced to comply with new restrictions.
For instance, governments or regulatory bodies may limit withdrawals, restrict certain types of transactions, or even seize funds under certain circumstances. By choosing self-custody, you mitigate these risks and maintain complete control of your crypto, free from the influence of external actors.
It’s hard to believe a third party can close down and announce bankruptcy. Somehow, it would be best if you had almost experienced it before you thought about it. We have experienced this with our funds in the cryptocurrency industry with CRED, Celsius, BlockFi, FTX, Yield app, Midas Investment, Terra Luna, and some minimal decentralized protocols. Most failed companies have their token, which lost value over a short period and started many liquidations.
4. Privacy and Financial Sovereignty
Cryptocurrency was initially designed with privacy and decentralization in mind. However, many exchanges require users to undergo KYC (Know Your Customer) procedures, which involve submitting personal information such as identity documents and financial data. This centralization and data collection can compromise privacy.
Self-custody wallets allow you to operate more privately, as they don’t require personal information. By maintaining control of your private keys and storing your assets independently, you can engage in transactions without the same level of oversight or surveillance that centralized exchanges impose.
For individuals living in regions with unstable financial systems or authoritarian governments, self-custody represents a form of financial sovereignty—the ability to control your money without interference from institutions or authorities.
5. No Withdrawal Limits or Delays
Another significant advantage of self-custody is the absence of withdrawal limits or delays. Centralized exchanges often impose daily or monthly withdrawal caps, especially during market volatility or high traffic. They may also impose temporary holds on withdrawals, which can be problematic if you need to move your funds quickly.
With a self-custody wallet, you have no such limitations. You can move your crypto assets instantly, at any time, without waiting for approval or worrying about delays. This level of flexibility can be crucial in volatile markets where swift action is needed.
6. Security from Government Seizure
While most cryptocurrency holders won’t find themselves in situations where government seizure is a risk, this remains a reality in some parts of the world. Governments in certain countries have been known to seize or freeze bank accounts, especially in politically unstable regions. Holding crypto in a self-custody wallet can protect your assets from arbitrary government action.
Self-custody ensures that you alone have access to your funds, which can be especially important if you’re concerned about political or financial instability in your country.
7. Flexible Wallet Options
Self-custody doesn’t mean you have to sacrifice convenience. There are various types of self-custody wallets available to suit different needs:
- Hardware wallets (e.g., Ledger, Trezor) store your private keys offline, providing robust security against online attacks.
- Mobile wallets (e.g., Trust Wallet, Mycelium) allow you to manage your crypto conveniently on your smartphone while keeping control of your private keys.
- Desktop wallets (e.g., Electrum, Exodus) balance accessibility and security, perfect for users who prefer managing their assets on their computers.
- Paper wallets are another option, where private keys are printed on paper and stored offline for ultimate security (though this requires extreme care regarding safeguarding the physical copy).
Each wallet allows you to control your private keys, ensuring that your assets remain secure and within your grasp.
Conclusion
While storing crypto on an exchange might seem convenient, it comes with inherent risks—hacks, third-party control, and government intervention, to name a few. Self-custody offers a more secure and private way to manage your assets. Holding your private keys empowers you with full ownership and control, protected from external threats and interference.
As crypto continues to evolve, prioritizing the safety and autonomy of your assets becomes even more critical. Self-custody isn’t just about security—it’s about embracing the core philosophy of cryptocurrency: financial independence and sovereignty.
