What Is Bitcoin Custody?
Bitcoin custody refers to control over the private keys associated with a particular bitcoin address or wallet. There are three main types of Bitcoin custody: self-custody, joint custody, and third-party custody. Each method comes with its own set of advantages and disadvantages.
Given the importance of private keys, it’s important to understand the different types of custody before deciding how to store your bitcoin.
What Is Self Custody?
Self custody gives you complete control over your own private keysWhat Are Bitcoin Keys? Bitcoin keys are randomly generated strings of numbers and letters that are used to send bitcoin and/or verify ownership of a bitcoin address with a digital... and is the most popular method of owning and managing bitcoin. This involves storing private keys in a personal wallet, either hot or cold. Hot wallets are stored on a internet-connected device, while cold wallets are unable to connect to the internet on their own. Self custody can be implemented using various types of wallets such as software wallets, hardware wallets, or paper wallets.
Self custody gives you complete control over your bitcoin but also comes with the greatest amount of responsibility. You are responsible for ensuring that your seed phrase is properly secured. If you lose your private keys or if they are stolen, there is no way to recover your bitcoin.
Self custody can be custody of a single private keyWhat Are Bitcoin Keys? Bitcoin keys are randomly generated strings of numbers and letters that are used to send bitcoin and/or verify ownership of a bitcoin address with a digital... or multiple private keys in a multisigWhat Is MultiSig? Multisig, short for multiple signatures, is a security measure that requires multiple signatures in order to authorize and send a bitcoin transaction. It is a feature in... key arrangement. As long as you control all of the private keys for a wallet or bitcoin addressWhat Is A Bitcoin Address? A Bitcoin Address, or just Address, is a 26-35 character ID for receiving bitcoin. Most bitcoin addresses begin with 1, 3, or bc1 but there..., you are using a self-custody key management setup. Most wallets default to a single sig wallet, you can also use multisig wallets and have custody all of the keys.
Joint Custody
Joint custody involves using multisig to split control of private keys between multiple entities (people, businesses, software, or even AI) to share control over the private keys associated with a particular BTC address, wallet, or seed phraseWhat Is A Seed Phrase? A Bitcoin seed phrase -- also called a recovery phrase, wallet backup seed, or mnemonic phrase -- is a list of 12-24 common English words.... This can be helpful in terms of security, as it reduces the likelihood that all private keys will be compromised. Joint custody can be useful in cases where multiple individuals need access to the funds, such as in partnerships or family trusts. However, joint custody also presents a higher risk of unauthorized access and potential conflict between parties.
For example, you could set up a 2-of-3 multi-sig address with your spouse and a third party such as a trusted friend or family member. This would allow all three of you to jointly control the funds in the address, but it would only require two out of the three signatures in order to spend any of the bitcoin.
One of the most popular services that provides joint-custody of your bitcoin is Nunchuk. They offer the convenience of keeping your bitcoin safe by helping you to set up a wallet with private keys that are stored across multiple devices to prevent the risk of loss or theft.
Third-Party Custody
Third-party custody refers to entrusting private keys to a custodian, such as a centralized bitcoin exchange, bitcoin bank, or wallet service. This option may be convenient for some but comes with the price of privacy, control, and the potential loss of your bitcoin if the custodian is ever hacked, seized by the government, or the custodian decides to steal your bitcoin.
FAQ About Bitcoin Custody
A: Yes, you can keep bitcoin in an IRA. Many banks and financial institutions are adding bitcoin IRA products. Unchained IRA is one bitcoin-native company that offers Bitcoin self custody in an IRA.
A: You can self custody bitcoin simply by sending bitcoin to your own wallet where you control the private keys. All mobile wallets and desktop wallets that we link to are are free, open source, and give you custody of your own private keys. Be sure to make backup copies of your seed phrase.
A: Deciding which method of storing your private keys should come down to a question of trust. If you don’t want to entrust your private keys to anyone else, then self-custody is the way to go. If you would like to decentralize your risk, then using multisig for joint control of private keys could be best suited for you. Finally, if you’re willing to all privacy and some security for convenience, then third-party custodial might be the right choice for you.