Crypto holders have a number of options when it comes to storing cryptocurrency keys. Self-custodial solutions enable holders to retain those keys themselves, rather than entrusting them to other parties, like crypto exchanges or crypto custodial services.
It is empowering, enabling the holder to act like their own Bitcoin bank, but it does have certain requirements and challenges that other solutions do not have because you don’t have the support of an intermediary or third party.
Crypto Investments
Cryptocurrency has become a very popular form of investment with a lot of speculators scouring presales and new tokens to try and find the next crypto to explode. It is also becoming increasingly common as a means of payment and for use in global transactions, with online businesses being especially likely to accept and use the payment. With further regulation likely coming across jurisdictions, its use only looks set to become more widespread.
Business Crypto Use
For businesses, accepting cryptocurrency can be a challenge.
Payment Gateways
Payment gateways exist that take payments from users before automatically converting them to local currency and forwarding them to the business’s account. However, these services can prove expensive and are not available to all users in all jurisdictions.
Custodial Wallets
An alternative is to use custodial wallets. These are commonly found on exchanges and other online services. The exchange retains the keys to the cryptocurrency and displays the user’s balance in their account. While this makes it easier to facilitate quick conversions and sales, it means that the buyer of the cryptocurrency doesn’t actually own their cryptocurrency.
If something were to happen to the exchange, as was the case with Mt. Gox, it could be very difficult for crypto owners to get their funds back. It also means that the user is beholden to the exchange’s demands, requirements, fees, and other factors.
Custodial Services
Custodial services are similar, in these regards, to crypto exchanges. The custodial service holds the keys to the cryptocurrency, and while exchanges usually make the cryptocurrency available 24 hours a day with virtually instant withdrawals and transfers, custodial services can be much more prohibitive.
Users might need to wait several days before they can access the crypto being held. Custodial services should be a lot more secure than crypto exchanges, but they lack daily functionality – they are a better option for the long-term holding of crypto.
Custodial Wallets
A final option is that of a custodial wallet. A custodial wallet holds the key to the wallet owner’s cryptocurrency. The key can be accessed by the holder, but not by others, and this enables the user to be able to send cryptocurrency whenever they want and to whomever they like.
Self-Custodial Wallets
The forms of self-custodial wallet are:
Paper wallet – A paper wallet may not sound technical, but that’s where its advantage lies. A cryptocurrency key is a string of characters that make up a cryptographic key. That string of characters can be written down on a piece of paper and used at a later date. Writing the key on a piece of paper and storing it in a safe prevents any form of hacking or digital theft. But, it has no functionality, on its own, and paper is prone to loss, damage, or physical theft.
Software wallet – Software wallets are the most common form of self-custodial wallets and there are likely thousands of different ones to choose from. Users need to choose wallets that are compatible with the cryptocurrency they hold, but, other than that, there are very few restrictions. A wallet enables the sending and receiving of cryptocurrency, and modern wallets offer a good range of advanced tools and features. Some can even be used to directly buy and sell cryptocurrency, or track crypto portfolio performance. For the business owner, a software wallet offers convenience, flexibility, and security.
Hardware wallet – A hardware wallet is a small device, similar in size to a flash drive, that contains wallet software that, in turn, holds the private cryptocurrency keys for the owner’s crypto. These are cold wallets, which means they do not connect to the Internet, even when the user wants to make transactions. Hardware wallets are secure, but they are not as convenient as software wallets for the daily sending and receiving of crypto transactions, which is generally important to business users.
Security
Self-custodial wallets are more secure than keeping cryptocurrency keys on non-custodial wallets such as those provided by exchanges. The user does need to follow certain security best practices, but hacking and digital theft are rare.
Control
Self-custodial wallets are more convenient than custodial services. You don’t have to give notice to be able to send or receive crypto and software wallets are free. Even hardware wallets are substantially cheaper than managed custodial services, and they also enable the crypto owner to retain greater control of the daily management of their cryptocurrencies.
Privacy
Blockchain records are publicly accessible. While they do not contain personal details like names and addresses, they do contain wallet addresses as well as transaction details. With careful and ongoing analysis, it can be possible to connect wallets to the individuals or businesses who own them. This is also possible with some self-custodial wallets, but it isn’t as easy.
Some wallets offer multiple wallet addresses, dynamically generated addresses, and other features to help further obfuscate payment and crypto details from third parties.
Freedom
One of the major benefits of cryptocurrency is that it is decentralized. Banks and other financial institutions do not hold the keys, either metaphorically or literally. Businesses that do not wish to be at the behest of banks should choose self-custodial wallets to manage their cryptocurrency keys and transactions.
