The Importance Of Self-Custody

The best way to hold your bitcoin is in your own wallet. Self-custody wallets actually store “private keys” that allow you to securely access your bitcoin.

The Importance Of Self-Custody
Photo of a safe - Be Your Own Bank

In the bitcoin community there is a well-known saying, "not your keys, not your coins" and with many companies becoming insolvent, this holds true now more then ever. But lets take a step back and remember the reason bitcoin was initially created in the first place.

Bitcoin came out of the 2008 global financial crisis, and was created as a way to take power away from the irresponsible bankers who have distorted money as we once knew it. Having a third party hold your bitcoin misses the entire point in owning bitcoin in the first place. To fully unlock the raw power of the worlds most scarce digital asset, you must take control and use bitcoin as intended. Essentially you must be your own bank (BYOB). Sounds scary right? Bitcoin actually makes this super simple, but it does come with some pretty big responsibilities. First, know that this means there is no customer service, support line, or person to blame if you forget your password or seed phrase. It is important when creating a wallet that you back these up and store them in a safe and secure place.  Should you ever need to restore your bitcoin wallet, it becomes impossible without your seed phrase. So lets get right into it because once you understand how simple the process really is, its not longer scary.

What is a seed phrase? Simply put, a seed phrase is a 12 to 24 word phrase that, when put together in the exact order given when you first created your bitcoin wallet, it will restore the wallet, and all transactions. This is done through cryptography, and you can test it out by creating a wallet, deleting it and then restoring it again. You can also create a wallet, and use the given seed phrase to add the wallet on a second device.

So back responsibility, you must store this seed phrase in a safe and secure place. If you should need to restore your wallet for any reason, such as your old device with your bitcoin wallet becomes lost, stolen, or damaged, the restore process is very simple. Also note that if the seed phrase is stolen or shared with a third party, they can use it to restore your wallet and steal your funds. This is why we say it needs to be stored in both a safe, and secure place.

Now lets explore the benefits of holding (self-custody) your own bitcoin.

There is no counterparty risk involved within the bitcoin network. When a user stores bitcoin in their own wallet, there is no third party who can seize the user's bitcoin or censor transactions. This only holds true when users self-custody their own bitcoin. Many exchanges, lending services, and third party wallets lend out the bitcoin they hold on behalf of their clients. Often times, these companies only hold fractional reserves, lending out more bitcoin then they actually hold. This is right from the playbook of traditional finance, that has left many customers burned when the third party suffers a loss. This is one of the exact reasons bitcoin was created, and aims to fix. Bitcoin is one of the most scarce assets in the world, with only 21 million for the entire planet to share. Holding your own bitcoin ensures you will never suffer a loss through third party negligence.

Next we will lightly touch on confiscation and censorship, I will simply state a few facts and then let your imagination run wild. Firstly, bitcoin can not be confiscated. Bitcoin does now care about local law enforcement, an order from a judge, or the biggest government agency. When you create a wallet, you are given a seed phrase, and for as long as you are in control of that seed phrase, you maintain ownership of your bitcoin. It may be the first true form of ownership that actually exists in the world today. Think of this, if you memorize your seed phrase (the 12 to 24 word phrase used to restore a wallet), you can for the first time in human history store your wealth in your brain. If you're from a first world country, this may not mean much to you, but remember that nearly 70% of the world lives under some form of a dictatorship.

That brings us to censorship, aside from bitcoin being unconfiscatable, when you self-custody, transactions are cannot be censored. That means, you can send your bitcoin to anyone, anywhere in the world, and there isn't a single entity that can stop you. Likewise, you can receive transfers from anyone, and no one can stop you. This is possible because bitcoin is a peer-to-peer network, with no third parties or intermediaries when used as intended.

Bitcoin offers individuals self sovereignty in a world that is becoming increasingly controlled. It acts as a money should. Bitcoin is apolitical, and does not discriminate. It will not bend to social pressures, policy, or dictatorship. This is due to the decentralized nature of the network, currently running over 240,000 nodes by individuals distributed globally. Further supported by approximately 1,000,000 Bitcoin miners, located throughout the world. Each passing day individuals, companies, nations, and now governments adopt bitcoin. Bitcoin has been growing its user base exponentially since its inception. As of recently, it is said that bitcoin is now growing at a rate, faster then that of the internet.