From cryptocurrency accounting software to crypto wallets, there is a lot of information to navigate. When it comes to storing cryptocurrency assets, cryptocurrency users have long been divided into two different buckets: some people wish to use a self-custody wallet (sometimes called a self-custodial wallet) to secure their own funds and those who prefer to use a third-party exchange or wallet. If you’re exploring the topic of your cryptocurrency custody strategy for the first time or you’re simply looking to learn more about this topic, you’re in the right place.
What Is a Self-Custody Wallet?
Unlike the leather wallet you keep in your back pocket, crypto wallets don’t actually contain the cryptocurrency funds that you’ve purchased. Instead, cryptocurrency wallets work to secure your private keys that are necessary in order to access your blockchain funds. Types of self-custody wallets include mobile/desktop wallets, smart contract wallets and paper wallets.
There are popular exchanges such as Coinbase that provide custodial wallets for crypto users. This means these third-party platforms are responsible for keeping your keys safe. When you initiate a crypto transaction, these exchanges use your private key to seemingly automatically authorize the transaction. Custodial wallets are often preferred as the user doesn’t have to worry about the security themselves. However, other people prefer not to trust a third party and like to take control of their private keys instead.
What Are the Benefits of Self-Custody Wallets?
No matter how you view it, whether a corporation or an individual is controlling a cryptocurrency wallet’s private keys, they have unparalleled access to the assets. Some individuals view third-party control as not having full access to the cryptocurrency ownership. Factor in that custodial wallets can often be eyed by hackers and cybercriminals, exposing your assets to potential threats. By having direct control to your private keys, you know that they won’t ever leave your possession. This peace of mind is priceless to many.
Here are some other benefits of self-custody cryptocurrency wallets:
- The process of paying with crypto is easy and secure
- It’s easy to send, receive, or move secure crypto assets to wallets located around the globe
- It’s secure and easy to exchange one crypto for another
- Store and backup your assets regularly
Self-Custody Best Practices
If you choose to store and keep track of your own cryptocurrency without the use of a third party or a cryptocurrency accounting software, it’s important to know the best practices so your assets remain safe.
Firstly, always avoid keeping large amounts of crypto on your devices as they can become damaged, stolen, or corrupted. This could result in losing your private keys. Next, always make sure to be diligent about protecting your passwords and setting transaction alerts. You should keep crypto that you don’t interact with often in a hardware wallet and always create more than one handwritten copy of your phrases in various locations.
At Founder’s CPA, we believe that self-custody is an important facet for all crypto users to understand and implement. The last thing you want to do is subject your crypto to hackers or other organizations. If you’re interested in learning more about cryptocurrency self-custody or you need a cryptocurrency accountant to help you ahead of tax season, please contact our team today for a free consultation.