Self-Custody: The Key to Securely Storing Your Cryptocurrency
Updated: Mar 6
Why Storing Cryptocurrency on Exchanges can be Risky
Storing cryptocurrency on exchanges can be risky because exchanges are centralized entities that hold custody of users' funds. This means that exchanges are responsible for storing, managing, and securing users' cryptocurrency on their behalf. Unfortunately, centralized exchanges are vulnerable to hacks and other security breaches that can result in the loss of customer funds.
In the past, certain exchanges have experienced security breaches and scam scandal resulting in the loss of funds belonging to their customers. For instance:
Mt. Gox: The world's largest Bitcoin exchange, which suffered a massive hack in 2014 resulting in the loss of 850,000 Bitcoins, worth approximately $450 million at the time.
Bitfinex: Another major exchange that was hacked in 2016, resulting in the loss of 120,000 Bitcoins, worth approximately $72 million at the time.
Binance: The world's largest cryptocurrency exchange, which suffered a hack in 2019 resulting in the loss of 7,000 Bitcoins, worth approximately $40 million at the time.
QuadrigaCX: Quadriga Fintech Solutions was the owner and operator of QuadrigaCX, which was Canada's largest cryptocurrency exchange. In 2019, the exchange filed for bankruptcy after its founder, Gerald Cotten, died suddenly while on a trip to India. It was later revealed that Cotten had sole control over the exchange's funds and that millions of dollars were missing. The case has been described as a fraud and Ponzi scheme.
The Importance of Self-Custody
The risks associated with storing cryptocurrency on exchanges highlight the importance of self-custody. Self-custody is the practice of storing and managing cryptocurrency independently, without the assistance of a third-party custodian.
Self-custody can be achieved through the use of non-custodial wallets, which are digital wallets that allow users to store and manage their own cryptocurrency. Advantages of non-custodial wallets over exchanges include:
Greater control: Non-custodial wallets provide users with complete control over their cryptocurrency, allowing them to send and receive funds without the need for a third party.
Greater privacy: Non-custodial wallets provide greater privacy, as users are not required to disclose personal information to a third party in order to use the wallet.
Greater security: Non-custodial wallets provide greater security, as users are responsible for securing their own private keys, which are used to access and manage their cryptocurrency.
How to Choose and Secure a Non-Custodial Wallet
When choosing a non-custodial wallet, it is important to consider factors such as security, ease of use, and compatibility with your preferred cryptocurrency.
Types of non-custodial wallets include:
Hardware wallets: Such as the Ledger Nano S and Trezor, are considered to be the most secure type of non-custodial wallet, as they store users' private keys offline. By doing so, you can reduce the chances of your cryptocurrency being hacked or compromised, thus enhancing its overall security.
Mobile wallets: Such as Mycelium and Exodus, provide users with greater convenience and ease of use but may be less secure than hardware wallets.
Desktop wallets: Such as Electrum and Bitcoin Core, provide users with greater control over their cryptocurrency but require more technical knowledge to use effectively.
Best Practices for Securing Your Non-Custodial Wallet
To ensure the security of your non-custodial wallet, it is important to follow best practices such as:
Creating a strong and unique password.
Enabling two-factor authentication.
Regularly backing up your wallet.
Keeping your private keys secure by storing them offline in a safe and secure location.
In conclusion, self-custody achieved through the use of non-custodial wallets provides users with greater control, privacy, and security. When choosing and securing a non-custodial wallet, it is important to consider factors such as security, ease of use, and compatibility with your preferred cryptocurrency. Following best practices for securing your non-custodial wallet is also important to ensure the safety of your cryptocurrency.
Storing cryptocurrency on exchanges can be risky, as centralized exchanges are vulnerable to hacks and other security breaches, as demonstrated by past examples. By taking the time to educate yourself on best practices for self-custody and choosing a secure non-custodial wallet, you can mitigate the risks associated with storing cryptocurrency on exchanges.
By following best practices for self-custody and choosing a secure non-custodial wallet, you can take ownership of your financial security and protect your cryptocurrency from potential threats. Remember to always do your own research and stay up-to-date on the latest developments in the ever-changing landscape of the crypto world.