The Step-by-step Guide to Choosing Your Bitcoin Custodian

In 2022, the cryptocurrency world faced unprecedented challenges, with a staggering $3.8 billion lost to cybercrime, primarily targeting DeFi protocols and centralized exchanges. This alarming figure underscores the critical importance of secure storage solutions for digital assets, especially for institutional investors.

As the crypto landscape evolves, the need for robust custody options has never been more pressing. This article delves into the various facets of crypto custody, from centralized and fiat custody to self-custody, highlighting the significance of choosing experienced and reliable custodians. It also explores the revenue models of these custodians and the essential role of advanced security technologies in safeguarding digital assets.

$3.8B Stolen in Crypto Hacks in 2022

The loss of cryptocurrency due to hacks and the bankruptcy of centralized exchanges such as FTX has made the topic of custody even more important. Institutional investors who do not want to hold their own keys can use a custodian to store their digital assets. However, it is important to note that not all custodians are made equal and that some custodians do fail. In 2023, the Bitcoin custodian Prime Trust was sent into receivership by the Eighth Judicial District Court of Nevada due to a “substantial deficit between its assets and liabilities.” Therefore, it is crucial to look for custodians who have many years of experience without a hack, substantial equity on the balance sheet, and client assets are segregated on the custodian’s balance sheet. 

Introduction

In an era defined by the rapid evolution of technology and finance, cryptocurrencies have emerged as a groundbreaking financial asset class. They promise financial sovereignty, borderless transactions, and unparalleled opportunities for growth. However, as the crypto landscape continues to expand, so do the challenges surrounding the security and custody of these digital assets, writes Yves Longchamp, Managing Director and Head of Research at AMINA Bank.

In this evolving ecosystem there is a need for thought leaders in the industry to talk more  openly and candidly about crypto security and custody. Let’s start by sharing some valuable advice that will look to make your crypto journey smoother and help you find the right partner, one that embodies the pinnacle of best practices in this space.

Understanding the Basics

First thing’s first, let’s break down some important crypto terminology. When we talk about custody, we’re essentially talking about how you secure and manage your digital assets. Think of it as the way to safeguard your most prized possessions.

Now, digital assets are not like traditional bank accounts or physical assets. There are no bank vaults here. Instead, your digital assets are stored on the blockchain, and you access them using private keys. These keys are the linchpin of your security strategy, and their protection is paramount. Understanding how keys, wallets, and other advanced technologies work is essential to foolproof digital asset protection, which is the exact expertise a trusted custodian can provide.

The Cardinal Rules of Crypto Custody

Rule 1: Choose Your Custodian Wisely

Imagine entrusting your priceless artwork to a world-renowned museum. In the world of digital assets, selecting the right custodian is equally critical. Look for a custodian that aligns with high security and regulatory standards and has a proven track record. Such a partner will ensure your assets are treated with the utmost care and due-diligence, ensuring your assets are segregated from its balance sheet.

Rule 2: Seek the Specialized Knowledge of Expert Partners

While institutions wield significant expertise, navigating the complex landscape of cryptocurrency custody is best done in partnership. Custodians bring a wealth of specialized knowledge, cutting-edge security infrastructure, and a depth of experience that is unparalleled. Seek a custodian who seamlessly combines technical prowess with user-friendly interfaces, simplifying your journey.

Rule 3: The Wallet Dilemma

Just as you have an array of investment instruments at your disposal, choosing the optimal wallet type is vital. Two primary categories are hot and cold wallets. Hot wallets, like a well-connected office, offer fast transactions but are susceptible to external breaches. Cold wallets, providing physical protection like a secure vault, are offline and virtually impenetrable. Keeping both a hot and cold wallet is advisable, especially when interacting with the internet regularly. Hot wallets will help you buy and sell instantly, and cold wallets will secure your assets against external risks. Institutions have the luxury of tailored solutions, such as a mix of both wallets, that align with their specific security and operational needs.

Rule 4: Diversify, Diversify, Diversify

Diversification is the cornerstone of crypto security. Just as you wouldn’t pool all your traditional assets in a single basket, spreading your digital holdings across various wallets, particularly secure cold wallets, multiplies your safety net. Look for a custodian offering a comprehensive suite of wallet options, ensuring your assets remain resilient against any eventuality.

Rule 5: Harnessing Advanced Technologies

The crypto landscape is replete with innovative security technologies. Multi-Signature (Multisig) and Multiparty Computation (MPC) stand as the vanguards. Multisig mandates multiple signatures to authorize transactions, rendering it virtually impervious to hacks. MPC, the more intricate sibling, divides private keys into indecipherable fragments, thwarting even the most determined attackers. Seek a custodian that deploys these advanced safeguards to fortify your assets.

Conclusion

As you venture through the complex realm of digital wealth and assets, security remains paramount. Your chosen custodian should epitomize cutting-edge security, unwavering regulatory adherence, and a steadfast commitment to preserving your assets’ integrity.

In this quest for the ideal custodian, consider regulated custodians with a consistent track record and high security standards–– it will ensure that your coins are segregated from the custodian balance sheet. Collaborating with an established custodian allows you to benefit from the latest technology. Use a mix of cold and hot wallets to manage your coins, as this combination provides high security and convenience.

Diversify! Use a wide range of wallet options as you don’t want to pool all your assets in one single wallet. Finally, be sure the custodian is replete with innovative security technologies such as Multisig and MPC.

As you embark on this thrilling digital voyage, remember that your institution’s strength is contingent upon the security it embraces. Choose your custodian carefully, as it is a beacon of security, poised to safeguard your digital wealth with the utmost care and due-diligence.