Bitcoin is a completely decentralized system, there is no ability to reverse payments, and there is no customer support line where you can ask for help if you get something wrong. When you guard your Bitcoin yourself, only you are responsible for the safety of your funds. Self-custodial also means that no one can freeze your funds, and no one can prevent you from making the payment you want to make. It's a double-edged sword: There are great benefits to self-preservation, but it also comes with responsibility.
If you make a mistake and send Bitcoin to the wrong address, you can't undo it. Then if someone gains access to the seed phrase(s) and there is no customer support to help you, that person now has access to your funds. If you lose your keys and seed phrase backups, there will be no recovery process to restore your wallet. It's a lot like money in that respect: once it's gone, it's gone.
People generally live their lives without existential worry about owning small amounts of money, but protecting large sums of money is a source of worry, and Bitcoin is no different.
Custody and crypto wallets
When it comes to managing your Bitcoin, there are multiple types of wallets you can use. However, not all of them provide you with real ownership of your assets. Here's a breakdown of the types of wallets you'll encounter and how they handle self-custody.
Nursery governors
Custodial wallets are generally offered through centralized exchanges, the same platforms that allow you to buy Bitcoin with fiat currency. These wallets basically work like a bank account. You don't actually have any control over your money. They can freeze your funds, lock and close your account, and deny you permission to make transactions or withdrawals with your own funds. They offer the possibility of making transactions at a very low cost with other users of the same wallet, but at the expense of giving control of your funds to the custodian. They should never be used to store any large amount of money, and any Bitcoin you purchase should be withdrawn to an uncustodial wallet as soon as possible.
Non-custodial portfolios
All non-custodial wallets provide true self-custody: only you can access your assets. But even self-protection wallets come with a set of trade-offs. They can also serve different purposes.
Software wallets, also known as hot wallets, run on your mobile phone or laptop. They leave control of your funds in your hands, but they manage and store the private keys on your device. This exposes them to the risk of compromise by hackers. You should only protect small amounts of money with a software wallet, which you reasonably expect to spend in a short period of time.
A hardware wallet is a special device designed to keep your private keys as secure as possible. These devices are what you should use to store the bulk of your Bitcoin. It keeps the private key offline and inaccessible to any threat from hackers, and allows transactions to be signed in a secure environment. Of special note when using hardware wallets, the vast majority of them have an on-device screen that is used to display information about where the transaction was sent before signing. Always check the address and amounts your device shows when you sign to make sure the money is being sent to the right place.
How to deal with self-custody
Here are some basic steps you can take to ensure that you are interacting with your Bitcoin in a safe and secure manner:
Test your backups
The first thing you need to do when taking charge of your own finances is to create seed words, also known as a seed phrase. This is like the master key for all the accounts you will create using that wallet.
When you first complete your wallet setup, your wallet will generate a random number called a seed or entropy. From there, your wallet will translate this number into 12-24 words called seed phrases, or seed words.
Any wallet properly designed to encourage user safety should require you to verify and prove that you wrote the seed phrase by challenging you on some (or all) of the words in it. If you manage large amounts of money, it's always a good idea to double-check.
To continue, you will need to create an “Account” which will create the first receiving address for your wallet, which looks like this: bc1q653jc5hxawj5lwxgm8tt73qzw6rurmc5d42qd2
It never hurts to be safe and double-check things. After you've set up your wallet, but before you start making transactions, you can reset and reconfigure your wallet. Instead of creating a new seed statement, you can import the statement you just backed up. If the first Bitcoin address is the same, you can be sure that the initial statement is backed up correctly.
Send a test transaction
When it comes to making your first withdrawal from the exchange, it can be a bit nerve-wracking. Is this address correct? Did I make a mistake? One of the scariest things for many people about Bitcoin is its digital nature. Everyone has that image in their mind of a movie scene where a teenage hacker hacks into a government system to further the plot. Most people don't understand the first thing about how computers work, but they do realize that there are many ways in which they can be hacked or compromised.
I don't know about you, but when there's a risk that I know could affect me and I don't understand how that risk exposes me, I get anxious. Just like verifying your seed phrase by restoring the backup before using the wallet, you can send coins to your wallet slowly. If someone compromises how you created your wallet in the first place, they will be able to take any funds you send to that wallet immediately after you send it.
So don't send all your money at once. Send a small test transaction with a small percentage of the Bitcoin you intend to hold in your own custody. Make sure this money actually shows up in your wallet first. To really make sure, you can also make sure that you can spend these coins by sending them back to the next address in your wallet.
After making a test transaction and making sure you have the necessary keys to spend the funds sent to that wallet, you can deposit the rest of your funds into that wallet. After making a small test deposit without seeing such a transaction that you did not initiate, you can have more confidence that your wallet is set up securely.
Never create backup copies of digital statements
The backup for the initial statement is your money. Everyone who has access to your seeds has full access to your funds. There is no customer support line to call, and no chargebacks or insurance coverage for stolen funds in non-custodial Bitcoin wallets. If you screw this up, it's done.
The hardware wallets you actually use to sign transactions are specifically designed to securely hold the private keys your seed generates. When you back up your seed statement, you should Strictly Be on to something analog; A piece of paper, a steel plate with perforated letters, something physical and completely offline.
He should never Do something like take a screenshot or photo of the initial phrase on your phone, or keep a backup to a text document, Google Cloud, or iCloud. People's computers and Internet service accounts are hacked and hacked on a regular basis and on very large scales.
Keeping your keys stored only on a physical medium such as paper, and a secure device such as a hardware wallet, greatly reduces the risk of your coins being stolen by hacking your seed phrase. Your iCloud account can be hacked remotely from anywhere, while a raw password backup on the steel of your vault requires someone to physically break into your vault.
Multisig requires additional backups!
If you are using a multisig wallet, Raw statement backups are not enough to recover your money. The goal of multisig is to increase your security by requiring more than one key signing to spend your money. It usually requires a minimum number of devices that must sign each transaction. For example, it may require 2 signatures out of 3. This ensures that someone compromising or losing a key or two will not result in you losing your money, but it comes with a subtle advantage. It is possible to lose some private keys in multi-sig, but only if you do not keep them everyone From your public keys, you will not be able to find your bitcoin on the blockchain to spend in the future. This is due to how multisig wallets generate the information needed to process transactions.
When you make backups of a multisig wallet, each individual private key backup must also be accompanied by a backup of the public keys (wallets will call this “xpub”) for all wallet addresses included in the multisig. This ensures that you can find your coins on-chain even if you lose access to an account.
Never talk about your stack
Getting involved in Bitcoin can be a very exciting experience, especially when the price is rising. This can also be a liability depending on who knows your Bitcoin holdings. As mentioned earlier, if someone can access your seed phrase, they will be able to access your funds. Bitcoin has the potential to become… enormously value in the future.
Owning Bitcoin is not a fact that you should show off to the world and everyone you know. Obviously, if you are married it will be very difficult to keep a large amount of Bitcoin secret from your spouse. If you have very close friends, this will likely come up or they will notice over time.
But you don't have to tell everyone you meet that you own Bitcoin. And neither should you. As the value of Bitcoin has increased over the years, physical attacks on Bitcoin users in order to steal their funds have become more common. The more people who know you own Bitcoin, the more exposure you have to potential risks like this.
Don't gossip to everyone you meet about your Bitcoin stack.
wrapping
Bitcoin, although it shouldn't be, can be a scary thing to own. It's like money in a way, if you lose it no one can do anything about it. But in other ways, it's not like criticism at all.
People worry about keeping large amounts of cash because if they lose it or someone steals it, it will be gone forever. Bitcoin It can be a backup. If you lose your Bitcoin, you can magically recover it if you have a backup. This is because your bitcoin is not in your wallet, your bitcoin is stored on the blockchain. If you have a copy of your seed phrase, you can regain access to all of your bitcoins regardless of which wallet you use.
You can't just “back up” physical cash. A Xerox copy of money is not cash, and will never be treated as such by anyone. But the initial Bitcoin phrase restores your access to your Bitcoin instantly. It must be so Dilution It's a worry when comparing Bitcoin to something like cash.
Multisig wallets provide an option for defense against theft. When you have a safe full of cash at home, someone can simply break into your house and take it all. With a multi-signature Bitcoin wallet, if you only have one key with you at home, a thief won't be able to take your Bitcoin by breaking in and taking the key you have at home. This is a cash thing Can not be done.
Larger amounts of cash are a great incentive for thieves to target you. But if they don't know you have a large amount of money, they have no reason to target you. Just don't tell them about it. Bitcoin is not a special variable here.
Holding Bitcoin can be scary because of the risks it shares with cash, but when you take the time to learn about the tools available to help you self-hold it, it's not so scary. In many ways, holding your own may be safer than cash.
So stop worrying, have a little patience, and take time slowly to learn the basic things you can do to protect your collection yourself. After a while you won't think twice about it.
