The Importance of Bitcoin Self-Custody
Bitcoin's recent surge in price has brought more attention to the digital currency from both retail and institutional investors alike, and I can't help but find myself noticing that many of these investors are discounting a fundamental aspect of Bitcoin: the ability to have sole sovereignty over your wealth.
Satoshi Nakamoto makes this concept very clear in the first sentence of his abstract in the Bitcoin White Paper:
"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."
I feel that many investors are choosing the convenience of custodial services for Bitcoin, which essentially allow people to quickly allocate into Bitcoin without the 'hassle' of having to learn how to use wallet software/hardware, instead of taking advantage of what makes Bitcoin so powerful: self-custody.
I suggest you become familiar with the phrase "not your keys, not your coins," as I believe no truer words can be said when it comes to Bitcoin investment. If you trust a third party to watch over your Bitcoin, you are exposing your wealth to significant counterparty risk.
Let's do a thought experiment. Let's say you own one Bitcoin, roughly $18,500 at the time of this article's writing, and you own that coin through shares of the Grayscale Bitcoin Trust. Now, I am not here to disparage Grayscale or make commentary on their services, I have no experience with them, but let's say Grayscale gets hacked somehow, and even coins in cold storage are transferred out of the Trust to an unknown party. An unlikely event, sure, but not an impossible scenario to imagine. For the sake of this article, let's also pretend your coins are among those that are stolen. Perhaps these coins are insured or guaranteed by some other agreement, but what if you have to wait months, or even a year or more, to have your claim processed? Will you receive one Bitcoin as compensation, or just the dollar value lost at the time of the hacking? Will you be compensated for the difference of any appreciation in Bitcoin's price from the time of the hacking? What if either Grayscale or their underwriter, or both, become defunct? Will there be any legal remedies for your claim in such an event?
These are the questions you must ask yourself.
What if the U.S. government seized Grayscale's Bitcoin Trust? Sure, this is unlikely, but these kinds of things have happened before in U.S. history. State actors are seizing Bitcoin at an increasing rate. If seized, your coins could be lost forever. When you store your coins offline in a hardware wallet, no government can touch them.
What makes Bitcoin truly transformative as both a technology and a financial asset is the simple fact that anyone, anywhere can take complete ownership of their share of purchasing power on the Bitcoin network, and nobody can intervene or change that fact - assuming an individual practices adequate safety measures in storing their Bitcoin.
I will do more articles on this subject in the future, as I believe a hack of a major Bitcoin custodian could set Bitcoin back a decade or more. It is also difficult to fully cover this subject in the brevity which I choose to keep these articles to. In the mean time, I want every Bitcoin investor out there to remember that self-custody strengthens the Bitcoin network, and helps to preserve its decentralized nature.
Never trust a third party with your coin.
You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.
Disclosure: I am not a financial advisor and none of my commentary should be considered financial advice. Always do your own research, as investing has much risk involved.