Security Vs. Custody, Explained
Should you hold crypto yourself, or trust someone to hold it for you?
When it comes to handling cryptocurrency, is it better to protect it yourself, or trust someone else to protect it for you? This question is similar to whether or not you should keep your cash stored under your mattress or in the bank. The difference between these two choices is what’s known as security and custody. Join us as we delve into the nuances of this important choice, and the pros and cons of each one.
Security — Protect it by yourself
The first option we’re going to go over is whether or not you should hold your cryptocurrency yourself. In the traditional finance world, practically everyone keeps their money in a bank or other financial institution. This is because it is both impractical and unsafe to store large amounts of cash in one’s own home. If someone breaks in or there is a fire, your life savings could be completely lost in seconds. Conversely, if a bank branch is robbed, your savings are still protected by the overall assets of the bank as well as insurance programs like the FDIC in the USA.
However, this paradigm has been disrupted as a result of cryptocurrency. Thanks to the way assets are secured on a blockchain (and are not physical paper notes like cash), it is now entirely reasonable for an individual to keep their crypto assets secure while not needing to rely on a third party.
Unfortunately, the reality is not quite that simple. In order to secure one’s digital assets, a certain degree of preparation and knowledge is required. In other words, it’s not for everyone. If the right precautions are not taken, assets can be permanently lost, destroyed, or stolen. In fact, some estimates suggest that as much as 25% of the total bitcoin supply has been permanently lost or otherwise rendered unusable.
Here are a few examples of wise precautions that you can take to keep your assets secure. Just keep in mind that this list is just a few suggestions and is not exhaustive or absolute.
One option for securing your own cryptocurrency is by holding it in “cold storage.” In simple terms, this means storing your private keys (the code that gives you the ability to spend your assets and prove your ownership of them) in a way that is completely disconnected from the Internet. For many, this means making use of a device such as a hardware wallet, or even a low-tech solution like a paper wallet. Some companies have even released innovative metal wallets that are designed to withstand potential disasters such as fires and floods, but they come with their own costs.
If you decide to make use of a physical means of storing your private keys such as a paper or metal wallet, precautions must be taken so that it is not lost or stolen. Some good examples could include using storing your keys, hardware wallets, paper wallets, and so on in a personal safe or a safety deposit box.
The downside of cold storage, in contrast to a savings account or cryptocurrency wallet, is that your assets will not accrue interest over time. Relative to the interest rates at a bank, one may not see this as a disadvantage, but compared to Celsius Network and a number of other interest-providers in the crypto space, missing out on over 10% in interest income a year can add up.
No matter which means you choose to store your holdings, make sure you understand what you are doing first so as to minimize the risk of loss.
Custody — Let someone else hold it for you
In today’s financial world, depositing money into a bank account is not like putting cash into a box with your name on it; in fact, most of the money “held” in a savings account isn’t held at all. Instead, you are adding your dollars to your bank’s growing pool of deposited assets, and the bank is promising to give you the same amount of money back at a later date on demand. Generally speaking, banks are able to fulfill their obligations and will allow you to make withdrawals without issue, though fees typically apply.
On the surface, most banks seem to offer depositors a healthy combination of convenience and security, and keeping your money in a bank does come with a few benefits. Most importantly, it keeps your cash safe from theft and disaster.
However, there are a number of downsides to this paradigm. First, a bank may not always be able to give you your deposits back in full, or at all. This is because most (if not all) banks engage in what’s known as fractional reserve lending. It means banks lend out more money than they actually have. This puts them at great risk in the event that a major financial catastrophe happens. If you were just an individual account holder, it may be possible that in a nightmare scenario you could be completely cut off from your money. In extremely rare cases, governments can even take funds that are stored in banks to repay their own debts, as was seen in the 2013 Cyprus banking crisis.
Another issue with the banking model is theft through fraud, identity theft, or hacking. While the modern banking system may seem secure to the common observer, the truth is banks frequently are the victims of hackers, fraudsters, and identity thieves. In some cases, banks will have a policy that states that if you are the victim of fraud that you will not be held responsible for any charges made. However, this is not universal and many countries in the world will hold the account holder liable for all losses even if the loss occurred due to a lapse in the bank’s own security system.
Enough about banks — what does this have to do with cryptocurrency?
There are many options for custody-style storage of cryptocurrency assets. A classic example of this is Coinbase. If you buy bitcoin or another crypto asset on Coinbase.com and leave it in your Coinbase wallet, what has happened is essentially the same as with a traditional bank. Coinbase.com owes you a certain amount of cryptocurrency, but you do not directly control it until you withdraw it.
Much like with a bank, there are some advantages and disadvantages to this. The most important advantage of using a custody setup with cryptocurrency is that you are not responsible for securing the assets from hackers. This can be extremely important if you are new to cryptocurrency, or simply do not want to spend all of the time and effort needed to learn how to properly secure your assets.
The risks with using a custody-style arrangement would be if Coinbase were to suddenly go out of business, what would happen to your digital assets? Most companies that want to be trustworthy in the crypto sphere will provide a detailed explanation as to what will happen to deposited assets in the event that the company goes under.
The Celsius Model
Celsius uses a hybrid storage model that provides members with unparalleled returns on crypto deposits with significantly less risk than a bank or competing crypto wallet. Funds deposited into Celsius Network are held with our custodian, BitGo. Assets held under BitGo’s management are insured for up to $100 million, and it is widely known as the single most secure and trusted crypto storage and custody provider.
Not only do we keep assets secure, but we also give our community total access to their assets at all times. We never require lockup periods or have any limitations on withdrawals. Not only that, but we cover your withdrawal fees that are paid to the network and never charge our members any fees to access their own funds. Coinbase sure doesn’t do that. They also don’t pay interest, either.
Which way is best?
Like most things in life, there isn’t a one-size-fits-all answer. Instead, you’ll need to consider for yourself what is most important. Is maintaining immediate and direct ownership over your assets the most important, or would you prefer to allow top experts to keep your assets protected from nefarious actors? Perhaps you might even find that a combination of both approaches is ideal, keeping some assets secured by yourself, and others in a custody arrangement so that no single catastrophic event can wipe out your savings. If you do take the custody approach, it is critical that you ensure that you understand who you are doing business with, how robust their security practices are, and if they have any history of being hacked. If you decide to secure it yourself, make sure you know what you are doing and that you are taking all necessary precautions.
No matter what you decide, just make sure that you are making a well-informed decision based on facts and evidence, not just doing what’s the quickest and easiest.
What’s your take? Is it better to secure your own assets, or trust the experts to hold it for you? Let us know in the comments below.
About Celsius Network
Celsius Network is a democratized interest income and lending platform accessible via a mobile app. Built on the belief that financial services should only do what is in the best interests of the community, Celsius is a modern platform where membership provides access to curated financial services that are not available through traditional financial institutions. Crypto holders can earn interest by transferring their coins to their Celsius Wallet and borrow USD against their crypto collateral at interest rates as low as 4.95% APR.
Download the Celsius Network app and start earning interest on your crypto today ➡️ celsiusnetwork.app.link