What is Self Custody?
When you purchase Bitcoin from an exchange or bank and store it there, they control the private key to your Bitcoin, giving them full control over your assets. The private key is like a password that allows access and management of your Bitcoin, and anyone with this key can make transactions without your consent. Lack of control over your private keys poses significant privacy and security risks, and can result in the loss of all your assets in the event of bankruptcy, hack, or confiscation.
On the other hand, self-custody means that you, and only you, are responsible for safeguarding your private key and managing your Bitcoin. This approach provides greater security and privacy by ensuring that only you have access to your funds. In this article, we’ll explore the reasons why self-custody is becoming increasingly popular among Bitcoin users, and provide context to help you make an informed decision about the best way to manage your assets.
In the current global climate, macroeconomic, political, and social risks are at an all-time high, making it crucial to understand how to safeguard one’s wealth with Bitcoin. With sophisticated self-custody solutions, it’s possible to protect your wealth from hacks, losses, and government interference. In fact, these solutions offer a level of security that goes beyond what’s available with other traditional safe-haven assets, such as fiat currency, real estate, art, and gold.
Debt-laden governments cannot balance public budgets anymore and central banks are actively debasing their respective fiat currencies. Further debt and further currency debasement are unsustainable and may lead to social unrest in the form of violence or the rise of extremist political parties.
Faced with this public-finance nightmare, governments will have to find creative solutions to balance the books. Some will initially increase taxes, but, as wealth moves jurisdictions and the amounts raised through taxation do not fulfill budgetary targets, governments will move on to more extreme measures. These measures may eventually include confiscations and expropriations disguised in a number of ways that will not alarm the public. As an example, in order to tame spiraling inflation, governments may begin taking over certain companies and controlling the market of certain commodities. Other possible measures include seizing second homes and other “unused” real estate. Alternatively, like FDR’s Executive Order 6102 in 1933, the government may forbid the “hoarding of gold” or other assets.
Under the guise of fighting disinformation and other social ills, there has also been a rising tendency for financial censorship. Bank accounts can be blocked or closed for holding incorrect opinions or for voicing discontent too loudly. These measures are currently far more prominent in dictatorial regimes, but they are expanding and intensifying in democratic regimes as well.
It is in this context that protecting one’s assets is becoming an increasingly pressing issue. Individuals need to employ the best possible solutions to secure their wealth. Bitcoin can provide this solution when stored in the appropriate method.
When You Store Your Bitcoin at a Bank, You Don’t Own It.
When a person deposits money into a traditional bank, they hand over control of that money to the bank and receive a statement indicating how much the bank owes them. Similarly, when one exchanges fiat currency for Bitcoin on a centralized exchange, a balance is shown representing the amount of Bitcoin that institution owes its customer. This traditional method of financial custody exposes individuals to a number of risks, which Bitcoin eliminates when stored in the appropriate method.
On one hand, there is the risk of handing control over to a centralized exchange. The past few years have witnessed many scandals involving centralized exchanges going bankrupt, stealing Bitcoin and defrauding their users. There is also a growing risk of hacking. As wealth increasingly finds its way to Bitcoin, the number and sophistication of hackers increases. When holding one’s Bitcoin on a centralized exchange, all a hacker needs to transfer those funds to themselves is to crack a password. Finally, holding Bitcoin on a centralized exchange makes it vulnerable to the government seizure described above.
The Bitcoin Solution
By design, Bitcoin has created an alternative ownership model. In so doing, it has mitigated the risks of holding one’s assets with a centralized exchange or a bank. Bitcoin’s peer-to-peer transactions are recorded on a distributed public ledger called a blockchain. Anyone can create an address on the blockchain to hold Bitcoin. There are two components, or keys, to each Bitcoin address. A pair of keys are generated using elliptic-curve cryptography to manage a Bitcoin account. A private key, similar to a secret password, to control the Bitcoin account and a corresponding public key, similar to a bank account number, which translates into a Bitcoin address to receive Bitcoin into your account.
A corresponding private key then allows the owner of a Bitcoin address to control their assets. The private key acts as a highly-encrypted complex password and consists of a string of randomized numbers and letters. Every public key matches only one private key. The private key is mathematically related to the public key but cryptography makes it impossible to derive from just knowing the public key.
The pairing of private and public keys is not known by anyone else but the user. Any loss of the private key would result in the loss of one’s assets forever. Centralized exchanges do not give users access to their private key. A Bitcoin self custody wallet, instead, handles both the public and private keys associated with a given Bitcoin address. With this, it gives individuals the ability to act as their own bank. This removes the risk of being hacked, defrauded, censored or confiscated. Everything then rests upon the security of that non-custodial wallet.
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