Don't Lose Your Crypto

Louis Sykes
November 16, 2022

From the Desk of Louis Sykes

The collapse of the FTX exchange has been a significant catalyst for market participants to utilize one of Bitcoin's greatest value propositions -- self-custody.

Self-custody is when only you have possession of your digital funds because you control the private key. There's no question; there's no alternative to holding your crypto other than in private cold storage.

Owning your Bitcoin keys voids the necessity for a financial intermediary, completely removing any and all counterparty risk. This is especially important given that crypto exchanges hold a shaky history of being responsible stewards of clients' funds.

When you hold your crypto in hot wallets managed by intermediaries like exchanges, they have all the control. They can freeze your transactions, block withdrawals, set limits on the amount you can transact -- and, in the case of FTX, use your funds for their private self-interest.

We're seeing a massive migration where market participants are waking to the value of self-custody.

This isn't a narrative.

It's backed by data.

Source: Glassnode

Bitcoin reserves on exchanges are at four-year lows. The above chart reflects this data in a different manner; it shows the coin supply not available in self-custody storage versus the coin supply available on exchanges.

Since the onset of the FTX collapse, this mass withdrawal out of exchanges has accelerated, but this trend favoring self-custody solutions has been intact since the COVID lows.

For long-term funds, there's no other alternative. If your long-term Bitcoin bags are still sitting on exchanges despite recent events, you're just asking for trouble at this point.

I can understand that getting a cold wallet can be slightly daunting, so I wanted to walk through how I utilize hard wallets for my personal Bitcoin stack.

This is all my own personal experience and, of course, doesn’t constitute advice or a recommendation.

I use the Trezor Model One, which you can pick up for $70 here. You'll need to make sure you purchase it directly from Trezor; otherwise, it could've been tampered with. Check this resource to ensure your Trezor hasn't been tampered with.

There are many other options, most notably the Ledger Nano series. They all have slightly different functionalities, features, and price points. I've opted for Trezor because it's the most popular self-custody solution.

This is what mine looks like; it's a small device you plug into your PC whenever transferring funds.

A common misconception is that this device holds your crypto. Calling these "wallets" can often be misleading. Instead, your Bitcoin/crypto is stored on the blockchain, while your hard wallet merely stores your keys.

The important aspect of having a cold wallet is ensuring the safety and security of your seed phrase; this is a 24-word password. If you lose your Trezor, you can purchase a new one and sync your wallet using your 24-word seed phrase.

It doesn't matter if you lose your Trezor as long as you have your seed phrase. You need to make sure your seed phrase is kept secure because if someone has your phrase, they can and will steal the crypto in your cold wallet.

To ensure security, you must have your seed phrase written on paper. You cannot store it digitally, whether that be as a photo or written in a digital document.

People lose their crypto all the time because their phones and computers have malware and keyloggers that are designed to find crypto seed phrases.

Because it's so important, it bares repeating.

Keep your seed phrase safe, have a few copies of it written down on paper, and ensure they are in secure locations.

Sure, cold wallets can be slightly cumbersome.

But they're supposed to be. You're not supposed to use this as a daily wallet; we have online, hot wallets for that purpose. The main purpose of self-custody solutions is security, and, as a general rule, security should always trump speed when dealing with crypto.

After all, if they're not your keys, it's not your crypto.

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Thanks for reading, and please let us know if you have any questions!

Allstarcharts Team

 

 

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