Bitcoin Self Custody
With all the events of the past week in Canada and the government adopting emergency powers which included freezing individuals' bank accounts who either participated in or funded the peaceful trucker protest, the Bitcoin community commentary was overwhelming about the importance of Bitcoin self custody. The discussion revolved around custodial accounts which can be frozen (bank accounts, credit cards, brokerage accounts, individual retirement accounts, money payment accounts like PayPal, and cryptocurrency accounts maintained on exchanges such as Coinbase, etc.) versus non-custodial accounts like a Bitcoin self-custody wallet which can not be frozen. Needless to say, this is deeply troubling since the government can essentially "financially cancel" someone on nothing more than suspicion of having done something wrong, versus actually charging someone with a crime and having to go to court to prove that. Lyn Alden wrote a great thread on this that I have reproduced below:
Custodial financial services allow governments to freeze accounts first, and then sort out who is guilty or innocent later. Self-custodial financial services force governments to actually charge people with a crime before they can use pressure to freeze their accounts.
1:50 PM · Feb 19, 2022·Twitter Web App
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Replying to @LynAldenContact
Custodial money often can't be withdrawn from a jurisdiction if for whatever reason rule of law breaks down there. Self-custodial money can be withdrawn from a jurisdiction if the individual is able to move their self elsewhere (and sometimes, even if they can't).
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It's not a "right or left" issue, because one merely needs to imagine their least-favorite politician winning the next election, or two or three elections from now. Most people are in favor of rule of law, but the questions are "which law?" and "in which order?"
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Thus, bitcoin and cryptocurrencies aren't really about "avoiding the law" but rather are about putting the onus on governments to act within the law, and giving individuals more mobility options when governments begin to change the law in a way that trends away from liberty.
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Also, from Investopedia:
Should You Trust a Custodial Wallet?
A custodial wallet is a third-party service that allows users to store cryptocurrency, similar to a bank. This allows users to skip over the complication of private key storage, relying instead on the technological expertise of the company offering the service. However, there are tradeoffs. Custodial wallets are often targets for hackers or phishing scams, and they can also be seized or frozen by legal authorities. The best solution is to determine what type of wallet fits your individual risk tolerance and technological skill.
What is self-custody?
Self-custody is actually a pretty simple concept, no different than having a stack of $100 bills in your drawer or home safe, or having gold / silver coins held in the same manner. You control the physical asset at all times. Self-custody for Bitcoin is very similar, but you do have to educate yourself about the technology involved and some of the risks as well as the benefits associated with self-custody. Â
How do you self-custody?
There are a few different ways to self custody Bitcoin, including holding your coins in a hardware wallet (similar to a thumb drive or memory stick) or a software wallet that you download on your phone.
Hardware ("cold") wallet:
There are several hardware wallets available. Here are a few that I found and that are fairly popular:
I have a Trezor Model T, which I have been pretty happy with. There's an app you download to your computer that you can use to manage your coins and initiate transfers. You can also log in without plugging in your Trezor just to check your balances. I prefer the hardware wallet solution to other solutions because it is truly offline and gives me more peace of mind. Â
Software ("hot") wallet:
There are also a number of software wallets available. Here are a few that I found and that are fairly popular. I have downloaded a Trust wallet before and think it's pretty easy to use.
Setup process:
The setup process is basically the same whether you are using a hardware or software wallet. You need to either buy the hardware wallet and download the software used to manage it (also includes firmware updates that need to be done periodically) or download the noncustodial software wallet to your phone or other device. A hardware wallet will normally need to be directly connected to a computer via a USB cable to execute transactions and update firmware. Coldcard does not require a physical connection to operate, which provides a better "airgap" than other hardware wallets. Â
The next step is normally establishing your private key. A private key is a series of random words in a particular order and can be as few as 12 words and as many as 24 words. These words need to be either memorized or written down and stored in a safe place (preferably in a couple of places). I have chosen to use a simple single signature because I don't transact that much with my coins and I'm not as concerned about getting hacked. Multi-signature is another way to transact where a portion of the private key is stored in separate locations and each is required to complete a transaction. This is more secure but does make using your wallet more difficult and is probably best for an advanced user who has plenty of experience using a self-custody wallet. Â
A Bitcoin transaction on the blockchain requires two things, a public key that is visible to everyone and a private key which is only know to you in order to move coins. The transaction is validated by a Bitcoin miner who receives a small fee as well as a "block reward" of newly issued coins for writing the next block. A competition of computing power makes the difficulty of solving the algorithm harder the more hash power there is and easier the less hash power there is, which helps ensure the system is always secure. Recently, Bitcoin's hash power hit an all time high, meaning the system has never been more secure:
Importance of private keys:
If you lose your private key, your Bitcoin is gone forever! It's very important to keep your private keys safe and offline.  Recently the government was able to recover Bitcoin that was stolen several years ago and was allegedly being laundered by a couple of social influencers who may or may not have been the hackers that stole the original coins. While there are plenty of questions about this odd situation, one thing that was surprising was that the private keys were held in cloud storage where they could be easily accessed by law enforcement once they were able to connect that account to one of the overseas wallets that held some of the stolen funds. Â
Benefits:
Total control of your coins; no one can take away your coins without you consenting / providing the private keys
Peace of mind knowing you have no counter-party or censorship risk
Downsides:
Some people are not comfortable with the "risk" of holding their own keys and potential loss
If you lose your keys, your Bitcoin is gone forever!
I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021. To see all my books on investing and leadership, click here. Â
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