Bitcoin was the first digital asset the world had ever seen. It's the only digital asset worth buying and holding. Bitcoin isn't just one kind of digital money – it's the only digital money. But there is no physical bitcoin, so when you buy bitcoin, where exactly is bitcoin stored?
There are a couple different ways to answer this question.
The real answer is that bitcoin always stored online, in the bitcoin network. Bitcoin is a digital ledger, so the bitcoin never actually leaves “cyberspace”. Bitcoin always lives on the ledger – it merely changes owners over time. There is no way to “withdraw” your bitcoin to a physical device. When you buy bitcoin, you are simply getting access to keys which allow you to send specific bitcoin that exists on the ledger.
The clearest way to explain this is that it's like a digital safety deposit box.
When you “own bitcoin”, you actually just own the keys to a portion of the bitcoin network. With those keys, you can then send some of that bitcoin to someone else. If someone sends you 0.01 bitcoin, you do not have to make your next transaction exactly that amount. You can send 0.0023 bitcoin to someone and keep the change for yourself.
The bitcoin network is made up of these bitcoin safety deposit boxes, and each time you buy, sell, send, receive, or trade bitcoin, you are receiving, or passing on, ownership of the bitcoin which always remains at the “bitcoin bank”. One of the coolest things about the Bitcoin network in my opinion is that by running your own node, you can verify every single transaction since 2008 to know with 100% certainty that your bitcoin is legit.
So the next question might be, if bitcoin is stored online in these “vaults”, then what's the point of mobile wallets, hardware wallets, and other types of digital wallets? Well, it's all a bit of a misnomer. When someone says, “withdraw your bitcoin from an exchange to hardware wallet”, you are not technically taking bitcoin from the exchange and putting it into a wallet. You are taking ownership of the keys. To own your bitcoin, you need to own the keys to that bitcoin.
Not your keys, not your coins
Bitcoin Axiom
The point of bitcoin wallets is not to actually store your bitcoin. Bitcoin wallets are actually “signing devices”. They basically prove that you have ownership of the private keys to access the bitcoin stored on the digital ledger, and sign transactions for you when you want to send bitcoin. Many wallet manufacturers also have browser-style apps that allow you to interact with your bitcoin, generating receive addresses, labeling transactions, or coin mixing.
Despite the fact that your bitcoin wallet doesn't actually store your bitcoin, we are humans, and we are stuck in the analog mindset. Frankly, it's easier to explain bitcoin using shortcuts like, “Withdraw your bitcoin into cold storage”, even though that's technically incorrect. Maybe the phrasing will change in the future, but for now, even long-time bitcoiners use this language to describe the process of taking ownership of your bitcoin.
These 5 ways to store your bitcoin, could possibly be described as 5 ways to manage ownership of your bitcoin, but you get the point.
5 Ways To Store Your Bitcoin
1. A Bitcoin Exchange
Almost all bitcoin and cryptocurrency exchanges have an option to leave your bitcoin on the exchange. That means after you purchase bitcoin by connecting the exchange to your bank or by wiring funds to the exchange, your bitcoin remains in their custody. You can check your bitcoin balance simply by logging into the exchange with a web browser or phone app.
This service is offered for free and it's clear why. Exchanges are incentivized to have you store your assets with them for a number of reasons.
For one, it means that every time you check your balance, you see their logo. Every time you log in, it creates a daily habit of thinking about bitcoin, and possibly buying or selling it.
They make money on fees, so the more you buy and sell, the more money they make. It's not uncommon for exchanges to have incentives to trade as well, like earning bonuses or competing for prizes. Trading fees are a big part of the business model for these companies. It's why you see so many exchanges engaging in shitcoining, i.e. promoting a large variety of digital assets to their customers. The more you trade, the more they earn.
Leaving your bitcoin on an exchange also provides them with another benefit, in that they have custody of your asset. This means it's money on their books, and they can do whatever they want with it. The bitcoin balance you see in your account isn't “real bitcoin”. It's a promise to pay you bitcoin. You know this because the bitcoin in your account isn't associated with any specific set of UTXOs (bitcoin addresses).
Because exchanges have custody of your coins, it means they can use that money to invest in other types of assets, creating financial derivatives on top of your bitcoin. This is called rehypothecation.
Rehypothecation means that although you see a balance of 1 BTC in your account, that exchange may take a portion of that value and invest that into other assets. It could be relatively conservative assets like bitcoin futures, or high risk assets like altcoins. There's really no way to know. A bitcoin exchange account is not a bank account. There are no specific reserve requirements for the company and no FDIC insurance.
While most of the time this isn't an issue, there are some potentially massive problems down the road, which is why most experienced bitcoiners will highly recommend that you do not store large amounts of bitcoin on exchanges.
If your bitcoin is on an exchange, you own zero bitcoin
Bitcoin Axiom
Potential Problems With Storing Bitcoin on An Exchange
Exchange Hacks. When your bitcoin is left on an exchange, protecting your bitcoin is only as good as their cybersecurity. There have been many exchange hacks over the years, meaning that funds were stolen from exchange wallets. This is often confused by the normie crowd, which may think bitcoin was hacked. Bitcoin has never been hacked. Exchanges have been hacked, and bitcoin was stolen.
Though security around exchanges has gotten much better in the recent decade, hacks still happen, and that's the thing about hacks: they are always surprising.
In addition to hacks, exchange solvency is another issue. If an exchange goes into bankruptcy, or the owner just turns evil and splits, your funds on the exchange are in their full control. In some cases, they can even use your funds as collateral to pay back investors!
Many people choose to leave their bitcoin on an exchange because they'd rather trust the cybersecurity team of a large corporation rather than themselves. While I understand the thought process here and can sympathize with the hesitation, one of the most basic benefits of bitcoin is true ownership of your money. By leaving your bitcoin on an exchange, you are temporarily giving up rights to your bitcoin.
My recommendation would be to learn the very basics of safe and secure self-custody of your bitcoin. It's much easier these days and will help you better understand the amazing asset you hold.
Phishing. Even if their security is on point, if you don't protect your account properly, you can still get your bitcoin stolen from your account. For example, if your account has a weak password, your individual account could be hacked. Even with SMS verification, you can be SIM-swapped, and still have your funds stolen.
Even if your account is 2FA enabled properly with an authenticator app, there's still the possibility of being social engineered to give up your bitcoin. A fake email asking you to verify your account information could end up with you giving up your login information to a hacker, or a malicious browser extension could end up with you sending bitcoin to them.
Phishing in particular is not exclusive to exchanges, and you should watch out for this stuff even if you have your bitcoin properly secured, but it's still a relevant problem to be aware of when storing bitcoin on an exchange.
Bitcoin Bank Run. The exchange you use to secure your bitcoin may or may not rehypothecate it. You can read the fine print in their terms of service and disclosures to find out, but most likely there's some kind of clause which allows them to. Even exchanges that claim to not engage in the financialization of their bitcoin assets most likely do not have “proof of reserves”, which would prove that they own all the bitcoin for which their users have claims.
If you can't ensure that they have ALL the bitcoin they say they do, in a crisis, there could be an event similar to a bank run.
For example, if there were some kind of unexpected event that caused a large number of users to want to withdraw their bitcoin from exchanges all at once, that would be the time you'd find out that they don't actually have the bitcoin they owe you. If this were the case, even if you had some kind of insurance, or even if there was some kind of lawsuit afterwards, it could be years until you recovered your funds. Mt. Gox was hacked in 2014 and the victims of that hack still have not recovered their funds as the lawsuit works its way through the courts.
Even in the best case scenario, where there was a mass panic, and your exchange did have all the bitcoin, the mempool would be full and you'd be paying super high fees to withdraw your bitcoin. If you were taking out a large sum, then paying $50 to withdraw $10,000 worth of bitcoin wouldn't be a big deal, but withdrawing $500 means you'd be paying a 10% fee to the network. In this scenario, you'd still end up with your bitcoin, but less of it, and you'd be stressed as hell for the next few days as you wait for the mempool to clear and your transaction to be added to a block.
Why not just spend a few hours to learn self-custody, and knock this off your list of things to worry about?
Withdrawal Limits. Sometimes, bitcoin goes up in value rather quickly. This may be a good problem to have, but it's still a problem. If you were to buy $2,000 worth of bitcoin, then bitcoin does a 10x run, you'd now have $20,000. Suddenly, you'd feel unsafe having 20 grand on a mobile wallet like CashApp, and you'd realize it's a smart idea to peel some off your phone wallet and stack it into cold storage.
The problem is, CashApp probably has a $5,000 per week withdrawal limit. So while you previously didn't have to worry about that limit, now you do. It'll take you a full month to withdraw all your funds, and every day in the meantime you'd have all that digital cash on your person as you walk around town. Scary!
Another issue which has happened to users of certain exchanges is that they sometimes change their rules unexpectedly. This happened recently with Binance, where users were allowed to buy, trade, and withdraw a certain amount of bitcoin without giving out certain types of private information. One day, Binance changed the rules, and those users had their bitcoin locked on the exchange unless they handed over identifying information like a government picture ID.
You might be thinking that this is the norm, and it's not a big deal, but they may make changes in the future which you do think are a big deal. If they have control over your bitcoin, ultimately, you don't have many options other than to comply in order to get your property back.
Quick Access To Funds. I've run into this issue myself more than once. When you store your bitcoin on an exchange, it's not your bitcoin. That means using it is subject to the rules of the exchange. If you want quick access to your bitcoin for whatever reason, you might not be able to get it. For example, if you want to pay someone directly from your exchange account, you may need to go through several verifications steps before you can actually send funds. While this is a good way to protect your funds that live on the exchange, it's a real pain in the ass when you just want to send someone some bitcoin.
Instead of just scanning a QR code and seeing the transaction sent to the mempool immediately, now you have to get a 2FA code from your authenticator. If you haven't used your phone to withdraw recently, you may need to click on a link sent to your email. Now you need a new 2FA code. Uh oh – if you triggered some kind of anti-fraud mechanism, you may need to do wait two days for manual verification, or do a face scan. What happens if the face scanning app doesn't work with slow data? Now you're screwed.
As I rant on this, hopefully it's obvious how annoying it is to run into these issues in a time crunch (like standing in line at a farmer's market), so it's good to always have some funds on a hot wallet if you plan to spend some bitcoin in the future.
2. A Mobile Wallet
You could start with a simple bitcoin wallet like CashApp or Strike. This is a custodial wallet, meaning that the wallet holds your bitcoin funds for you. Getting some bitcoin is as simple as connecting your bank account, transferring some money via Plaid (instant transfer), then buying bitcoin. You can sign up, get verified, and own some bitcoin in less than a few minutes.
The downside to this type of bitcoin mobile wallet app is that similar to the situation with exchanges, you do not have full possession of your bitcoin. You don't have the keys! You have a credit for bitcoin. Of course, you can withdraw it at any time, but while the app holds your coins, they are the custodian, and you are subject to their rules.
Other wallet apps help you create a secure, sovereign bitcoin wallet, meaning you have full possession of the funds. My personal favorite is Blue Wallet, but Green Wallet is also very cool (unrelated companies!). Muun Wallet also comes highly recommended. There are tons of wallets, so do your due diligence.
The upside to a mobile bitcoin wallet is that you have your bitcoin with you at all times. The downside… is that you have your bitcoin with you at all times. If your phone is not secured with a passcode or fingerprint, or if you lose your phone and haven't properly backed up your keys, then you could lose your funds forever.
A common way to mitigate this issue is to use a cold storage method for the bulk of your bitcoin stack, then use your mobile wallet for an amount of money you feel comfortable keeping on you, similar to keeping cash in a physical wallet. This is general advice for people living in developed nations with functioning banking systems and generally safe environments. However, more than half of the people on Earth do not live in this type of place.
Mobile wallets are really the way to bank the unbanked. A good mobile bitcoin wallet combines excellent security with ease of use, for fast bitcoin payments. Because mobile wallets are software based, they can have any number of features and be readily available in your pocket, at any time.
If you want to turn your mobile phone into a bank, you absolutely can. This is exactly how people living in the jungles of El Salvador or undeveloped towns and villages in Africa are able to use bitcoin as a store of wealth. Because their local banking systems are not fully built out, it could take several days to reach the nearest bank. For places with double-digit inflationary currencies, it's beginning to make less and less sense to even have a bank account full of cash that's leaking more than 10% value per year. For these people, a bitcoin wallet on their phone could be their bank account.
Hot Wallets VS Cold Wallets on Mobile
When talking about wallets, there are a few different distinctions to differentiate between what a wallet does and how it's set up. One of those distinctions is “hot” vs “cold”. In general, a mobile wallet would be considered a “hot wallet”, while a hardware wallet would be considered “cold wallet”. This is because you can spend directly from your mobile wallet in any situation, and it's always connected to the internet. A cold wallet remains disconnected from the internet until you are ready to sign for funds.
However, I think that some types of mobile wallets deserve to be set apart, since they are not inherently as insecure as other types of hot wallets.
For example, I think Blue Wallet does a great job of helping users create secure mobile wallets with a lot of advanced functionality. You can connect to your own node, and even make a multisig vault, which includes partially signed bitcoin transactions (pbst).
You could also use Blue Wallet in combination with a hardware wallet like Coldcard, to get the best of both worlds: a mobile wallet with a cold signing device. This would make Blue Wallet no longer “hot”, in the sense that you wouldn't be able to send any funds from the wallet without accessing your hardware signing device (AKA hardware wallet).
Even just the basic settings of Blue Wallet mean that you'll be generating seed keywords that can be kept offline and secure. This is much different than something like CashApp, which is purely custodial, and if someone gains access to your phone, they could withdraw your funds.
Lightning Wallets
Another type of mobile wallet allows you to use bitcoin in a different way. This is a “lightning” wallet, and it's a way to send bitcoin faster and more cheaply. Lightning is a protocol built on top of bitcoin, so you're still using bitcoin, but in a different way. I won't cover exactly what lightning is all about here, but for now, it's enough to know that it's a faster and cheaper bitcoin, and you can use it with your phone.
It does come with some tradeoffs though.
First, you need a specific type of wallet, i.e. a lightning wallet. You cannot send bitcoin to a lightning wallet, and vice versa. Secondly, there are some small fees when you want to open up some types of lightning wallets, and a special procedure to do so. It takes some technical work to get it done. Then, each time you want to pull your funds off lightning and put them back onto the bitcoin main chain, there's a fee for that too. Right now, when network fees are low, it's not a big deal, but that may not always be the case.
Some wallets do “custodial” lightning wallets, meaning you don't have to mess with all the technical stuff. Blue Wallet is great for this. Muun Wallet also manages this in a cool way, abstracting away the complicated stuff. However, this means that you don't have full custody of your funds, which could lead to total loss of your bitcoin if there was some kind of disaster.
Lightning is pretty advanced and is still very early in the development stages, but it does work, and seriously cuts down on transaction fees, as well as increases the speed of transactions for people who frequently interact with bitcoin.
3. A Hardware Wallet
A hardware wallet is my preferred way to store bitcoin because it's simple, straightforward, and super secure if you do it right. I also think it's easy for most people to “get it” right away, unlike some of the more advanced schemes out there. There are many brands of hardware wallets out there, but my personal favorite is the Trezor T. Trezor One is also good, and very cheap, but it doesn't have the touch screen. For bitcoin-only wallets, Coldcard and Bitbox are two of the most recommended, and I really like the Coldcard, but it is a little more advanced.
With a hardware wallet, it will generate your private keys for you (12-24 words) and provide you with a piece of paper to write them down in case of an emergency where the wallet breaks. The cool thing about this process is that as long as you have those 12-24 words generated by the wallet, you have access to your coins. That's your key to your bitcoin. The hardware device could have total catastrophic failure and you can just regenerate the wallet on a new device using those words.
Because those words (your key) can regenerate the wallet, it's important to not share them with anyone. Never store them online. Don't email them to yourself. Don't put them into a password manager. Don't even type them into a word doc and print them out. Those words should never be typed into a keyboard. If someone gets those words, they can take your bitcoin.
Most wallets allow you to access and manage your bitcoin through a desktop app. In the case of Coldcard, it's a bit unique in that it doesn't have its own personal app, and focuses on being a “signing device”. You can create a mobile wallet with Blue Wallet, or a desktop wallet using Specter or Sparrow.
Hardware wallets also require a pin, for extra security. Combined with a passphrase (described below), a single hardware wallet can be a very secure device. There are some known vulnerabilities to some of the hardware wallets out there, but they require a very sophisticated, targeted attack. For example, someone would need physical access to your Trezor One to hack the pin and seed phrase, and an advanced hacking program to dictionary hack the passphrase, assuming you chose a weak passphrase. Various other attacks would require $200,000 worth of hacking equipment, or a combination of key logger and physical accesses, or other unlikely scenarios.
That doesn't mean you shouldn't be vigilant about protecting your bitcoin, but most “hacks” are basically phishing attacks where a user carelessly types their seed into malicious software.
A basic hardware wallet is easy to understand:
- Buy the wallet
- Generate and store the keys
- Plug it in to use bitcoin
Wallet Passphrase
One way to make your bitcoin wallet even more powerful as a way to secure your bitcoin stash is to add a “passphrase”. This is sometimes called the “25th word”. It's a custom phrase that most wallet apps give you the option to use. Each phrase you enter creates a new wallet, and this means that one hardware device can create multiple wallets. This is an option on both mobile wallets and hardware wallets.
For example [seed words #1-24 + secretpassphrase1] and [seed words #1-24 + secretpassphrase2] are two completely different wallets.
This setup offers a number of advantages. For one, if there was an exploit specific to a hardware wallet manufacturer, the fact that your privately chosen passphrase would give you an added layer of security not specific to that company. Your passphrase is known only to you, and not part of the BIP 39 wordlist.
Also, because the wallets are hidden and not shown when you log into your default wallet, you can use the default wallet as a decoy. This would be useful in the case of a physical attack where someone holds you hostage to drain your bitcoin funds. If you put some decoy funds into your default wallet, there would be no way for an attacker to know how many hidden wallets you have. This may seem like a far-fetched idea, but it happens.
Finally, creating a wallet passphrase is one last line of defense in the case of seed compromise. You may have hidden your seed in a great location, but even bank deposit boxes can be opened by government order, or by malicious actors within the bank. Someone would need just 10 minutes to take the seed out, steal the funds, and put the seed back. If you stacked funds into this wallet and left it for 5 years, there's a chance that the employee would no longer be at the bank, and there would be no way to prove who stole your funds! A secure passphrase would mean your funds were still protected from this type of attack.
If you do create a wallet passphrase, or multiple passphrase wallets, just make sure to not overcomplicate things. Since these are self-generated, there's no safety net. If you type a capital letter vs lower case letter or make a typo in the phrase when you generate it, there's no way to recover the wallet without guessing correctly what the mistake was.
Shamir Backup (Key Sharding)
Shamir backup, also known as “key sharding” is a variation on a single-key hardware wallet. It's a similar idea, but not exactly the same thing as a multi signature setup, described below. With a Shamir backup, you take one key produced by your hardware wallet, but then from that single key, derive multiple “shards”. Basically, you turn one big key into multiple small keys.
You get to decide how many shards you want to make, and what threshold is required to unlock the main key to your funds. For example, you could design a 3/5 sharding scheme or a 10/16 sharding scheme. The key shards look similar to a normal backup key, in that they are a sequence of words you can write down on paper or etch into steel.
The benefit here is that it removes the single point of failure of misplacing your key. You could distribute your shards in various locations, and not worry about losing one, or even a few shards, depending on how you design the scheme. It also means you don't have to find places to hide multiple hardware wallets, as with multisig.
There are some significant downsides though.
For one, the more complicated your setup, the higher the chances that you shoot yourself in the foot. It's not uncommon for people to outsmart themselves. After 6-12 months of hodling your coins in cold storage you may forget details if you don't frequently practice the recovery steps correctly. The alternative is to constantly check your setup to memorize it and make recovery second nature. This is also a security risk because you'll be frequently accessing secret hiding places, and you may get sloppy if you rush through a complicated process on a busy day.
Plus, you still have the single point of failure of your single hardware wallet. For example, if you chose a low-quality brand and your key was created improperly, or something went wrong with your setup right from the beginning, you are still reliant on that single key. Suddenly, a Shamir backup can still be a single point of failure.
5. Collaborative Custody
I'm a huge fan of collaborative custody wallets because it combines the best of many worlds for your average bitcoiner saver. Currently, there are cheap, or even free collaborative custody services you can use to store your bitcoin in a secure and accident-resistant way. Usually arranged in a 2 of 3 multisig setup, you hold two of three keys, and the custodian holds one. That means they cannot spend your bitcoin, but they can help you recover it if you mess up one of your keys.
It can be a huge weight off your shoulders to have an experienced bitcoin company, sometimes even via direct 1-on-1 chat or phone call with an expert, help you set up the wallet scheme, troubleshoot issues, and hold your backups (though you should always back up your stuff anyway).
For example, when I created my first multisig wallet on my own, I didn't realize that I needed to create a backup of the wallet that included the public key and derivation paths. At the time, I had no idea what those things were. Luckily, I didn't have any issues resulting in the loss of my bitcoin, but in a catastrophic scenario, it might have.
If you're unfamiliar with these things, using a collaborative custody setup is a good way to not only ensure that you have those important bits of information stored properly, but also to learn where to find them, what they look like, and why they are important. Collaborative custody could be one step towards self-sovereign multisig!
Even better, this setup is actually quite cheap, or even free. Unchained Capital offers free “vaults”, which are a 2-of-3 multisig. Unchained holds one key, and you own two. It's very simple to set up, or you can pay a one-time fee and get their help setting it up for the first time. They also have excellent support via email, and a robust set of training modules, even for free users of the vaults. I always get responses within 24 hours. They also offer two other options: one where they hold two keys, and you hold one, and one where they hold one key, a private institution holds a second key, and you hold a third.
Casa's Gold Package is also 2-of-3, but one of your keys is actually an app on your phone. So, you'll have one hardware wallet, one phone wallet (app), and then they hold the third key. This costs just $10/month, so it starts to look like a great option even for those with just a little bit of bitcoin. A Netflix subscription alone costs more than that, not even counting all your other subscription services. Their app is really good, and they also have an option to upgrade to a 3-of-5 scheme if you really start collecting a lot of bitcoin.
The main downside to collaborative custody is a loss of privacy. Because these services hold a key to your funds, they can see the balances and transactions you make with the wallet.
4. Multi-Sig Self-Custody
One more option for holding, or “storing” your bitcoin is a multisig setup where you control all of the keys. This allows for a lot more customization of your setup, and a privacy improvement over the custodial version. With self-sovereign multisig, you create the wallet, you control the keys, and you design your security. This can sound pretty daunting to a newbie, but it can be done without knowing any coding at all. Of course, you don't want to jump right in and put your whole stack into a wallet you make on the first day, but it's easier to do this than you think.
The best way to create your own multisig wallet is through free and open source software, and there are many options. The most popular ones are Sparrow Wallet, Specter Wallet, and Caravan.
Caravan is easy to set up and recover, but offers limited functionality. Specter Wallet has a slick user interface and the option to build your own open source hardware wallet as a signing device. Sparrow Wallet has a desktop app and by far the most functionality, including privacy features. All are great options to get started with for building your own multisig wallet.
If you do start making wallets with these applications, I recommend researching support options for each as well. These wallet projects have enthusiastic followings and engaged contributors, so there's a good chance you'll be able to get support when you need it. For example, I was able to troubleshoot Caravan via Github, and Sparrow via Telegram.
The main downside to a wallet like this is that nothing is guaranteed, and you are fully responsible for your actions. Sometimes, there is no do-over button.
For example, one time I had a hardware wallet glitch out on me and I had to reset it. Then I discovered I wrote down my seed wrong, and forgot that I used it in an experimental wallet in Specter. Not a big deal… until I sent some bitcoin to the experimental wallet address, forgetting that I no longer had access to the key. There was a moment where I thought the funds were lost forever!
Lucky for me, I was able to do something called “replace by fee” and resend the funds to a wallet I did control. Plus, even if I lost it all, it was actually a small amount of bitcoin because I was just experimenting anyway. Even so, the situation is a good example of what could have happened. If you're going to do a setup like this, make sure to practice a lot, back up your seeds for each wallet, download your wallet configuration, and ask lots of questions.
What's The Best Way To Store Your Bitcoin?
If you read everything up to this point, you may be thinking that all of these setups sound scary! How can I trust myself? There's way too much to learn and I don't feel secure about my funds.
I have a couple of thoughts on this.
For one, part of the appeal of bitcoin is self-sovereignty. Being able to actually own your money and not just rent it from a bank who is lending out your funds for profit is a benefit of bitcoin. With ownership of your money comes responsibility. You will have to learn a little bit about bitcoin and be responsible with it so you don't lose your money, because if you mess something up, it may not be recoverable.
However, those who put in the work will be rewarded. Bitcoin is the most liquid fixed cap asset in the world, and it's the world's only chance at a global, non-government money. Buying bitcoin is a hedge against the crumbling legacy financial system, and a bet on the ingenuity of mankind. There's no better way to store your wealth. It's worth the work in my opinion, and as a secondary benefit, I think you'll start to gain an appreciation of the power of bitcoin as you actually use it.
All methods of storing bitcoin come with pros and cons.
- Exchange custody is hands-off, but you give up ownership of your coin.
- Single sig is simple to set up and manage, but is a single point of failure.
- Multisig is robust, secure, and foot-gun resistant, but adds complexity.
- A mobile app is versatile and simple, but adds attack surfaces.
Nothing is perfect. You'll need to decide which setup is best for your situation, your comfort level, and the amount of money you're storing on bitcoin.
For me? Personally, I prefer a collaborative custody setup, geographically distributing my keys and using more than one wallet manufacturer, but I think a single sig hardware wallet with a passphrase is an excellent choice for most people to start with.
Can Bitcoin Actually Ever Go Mainstream With Self Custody?
Can bitcoin become a global store of value when it takes so much work to get started?
To be perfectly honest, I think the idea of self-custody of bitcoin is going to be a big hurdle for normies to get over. The truth is that average people just want something easy, similar to how banking works right now.
Even for me, sometimes I think about how much work it takes to secure my bitcoin versus securing money in a bank account, and the difference is stark. Your average person just wants to go about their daily lives and not think about whether their 3rd key in a 3/5 multisig quorum is still secure.
I have to wonder how people dealt with securing their money in the past though. Our current system of digital bank accounts with 24/7 access to your money is something that's only emerged in the last few decades. Before that, people have been buying and storing gold for millennia. How did folks deal with the pressure of knowing their entire life savings was buried in the backyard or stuffed under the bed?
I also think about all the other complicated things we are responsible for. Learning how to drive, then buying, storing, and maintaining a car is not a simple task. Yet billions of people do it every year because it's just part of modern life. They need that car, so they learn how to use it properly.
So, can people self-custody money? Absolutely. Yes, they can, especially if there's an incentive to do so. If bitcoin proves to be a reliable store of value over the next decade or two, people will make the effort.
In the meantime, self-custody will get easier. Hardware wallets will get smarter. User experiences will get smoother. There will be better storage solutions and more contingency plans. Just think of how technology has changed regarding internet access from the '90s versus today. Holding bitcoin is going to get easier over time.
At the same time, the nature of banking is changing. Bitcoin exchanges are getting banking licenses. Banks are starting to offer bitcoin custody. Eventually, I think most normies will keep their bitcoin at a bank in a “bitcoin savings account”, then spend fiat from their checking account. If you need some liquid cash, just sell some bitcoin, spend fiat, and the bank will send you a tax form each year.
Ideally, this hypothetical Bitcoin Bank would be in a multisig quorum of some kind, maybe with the bank owning two keys, and you owning one, or vice versa. Maybe your phone could be one key, and you keep one hardware wallet, then the bank has one key. Or the bank has one key, then one key is with a qualified bitcoin custodian, and you hold one key.
Perhaps various types of custom multisig schemes could be a paid service and a source of revenue for banks. Wouldn't it be cool to hold your family money in a multisig wallet, with one key for mom, one for dad, one for grandparents, one at an attorney's office, and one at the bank? Then you'd need 3 of 5 to move the funds.
The cool thing about these setups is that since you have ownership of one of the keys in the quorum, you can always check to see that the funds haven't moved, and that the bank isn't doing anything sketchy with your coins. Plus, no matter what services banks offer in the future, sovereign bitcoin will still be available to those who want to self-custody.
Bitcoin is for everyone
Swan Bitcoin Ad Campaign [Tomer Strolight]
Is Bitcoin Safe?
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