Understanding the Different Forms of Bitcoin Custody
The Significance of Bitcoin Custody
Bitcoin is a unique and decentralized cryptocurrency. The product has laid the foundation of the entire crypto industry, which reported a collective market cap of above $3 trillion at the height of performance.
The digital asset has morphed into one of the most popular stores of value across the globe during the last 10 years. The product has been dubbed as digital gold and retains a price of up to $72,000 per unit.
Due to the astronomic value of Bitcoin, investors are always working on a robust custody plan. Bitcoin became a trending topic with the arrival of institutional interest and the filing of multiple Bitcoin spot ETFs in the United States.
This landmark decision paved the way for traditional investors to foray into Bitcoin as a regulated asset class. At the same time, some of the top financial firms in the world started offering Bitcoin as an investment option to their investors.
With the latest changes investors were able to gain exposure to the asset class as a DeFi and regulated product. For traditional investors, Bitcoin is available in multiple spot ETF listings trading on major US stock exchanges.
Investors can look into self-custody options for Bitcoin to invest in the asset class in a direct capacity via firms and third parties. Bitcoin investors have a wide array of investment solutions available that are designed to cater to the different risk appetite of investors.
Bitcoin Reserves on Centralized Platforms
Centralized trading platforms are viewed as a gateway for retail investments in crypto. Therefore, a vast majority of mainstream investors often use regulated exchanges to invest in Bitcoin.
Some of the top crypto trading platforms operating in the United States are Coinbase and Kraken which have maintained a strong regulatory compliance policy. Additionally, these firms are heavily invested in ensuring secure custodial options.
These factors are the biggest contributors that prompt new investors to venture into crypto trading using regulated trading platforms. Centralized platforms do not appeal to retail investors but also appease the concerns about legal compliance for regulatory agencies.
It is due to the implementation of Know Your Customer (KYC) verifications. These checks are obligated by regulators to ensure consumer safety.
Another important security feature on centralized platforms is fiat-payment solutions that allow investors to invest without any hassle and high fees. Investor trust in a centralized exchange is denominated by the total amount of customer funds stored at the trading platform. However, investors may face risks using this approach such as potential insolvency or hack attack.
Types of Bitcoin Self-Custody Options
Private Hot Wallets
Private hot wallets are custodial options that allow investors to perform active trading and storage via internet connectivity. A number of hot wallet custodial options are available in the form of smartphone applications and desktop programs.
Investors may also be able interact with decentralized applications (Dapps) to make regular transactions. However, hot wallets have a higher probability of cybersecurity threat therefore investors are advised against storing their entire portfolio there.
Private Cold Wallets
Cold wallets are storage that is not actively connected to the internet. Therefore, these wallets are present in the form of hardware devices. A good amount of professional investors use cold wallets in order to ensure maximum security for their investments.
In this manner, investors can guard their portfolio against virus attacks, hack incidents, or social engineering scams. However, cold wallets can limit the ability of investors to make active trades.
Top Security Options for Bitcoin Self-Custody
Private Key Storage
Private wallets issue private keys or log-in credentials for investors. Investors are advised against storing their private keys on phones or computers in the form of plain text. In case the hackers are able to invade into a device, it can lead to stolen funds.
Another highly secure private key storage option is a paper wallet. Modern versions of paper wallets allow investors to ingrain log-in details on durable surfaces rather than paper.
Multi-sig Wallets
Multi-sig wallets divide one private key into various parts and assign them to different custodians. Multi-sig wallets are most popular among institutional investors that use them as reassurance for investors by appointing more than custodians.
Custodial Firms and Third Party
Custodian firms and third-party custodial services providers are popular among investors at all levels. A number of trading platforms spent years in perfecting their custodial services and warding off any potential openings for a security invasion. To ensure this, firms undertake audits, insurance, latest security measures, and different programs.
Conclusion
Custodial options are a necessary part of crypto trading. When dealing with high-value digital currencies such as Bitcoin, it is important for investors to research about the pros, cons, and risk exposure associated with different types of custodial options.
