Fellow humans,
I am no expert in bitcoin custody, but I am learning some valuable lessons along the way. Below are some terms I might use in this letter to explain my points.
Custody, storage, and wallets have the same or similar meaning — which I’ll go into detail below
Private keys, seed phrase, and recovery keys have the same meaning — which is basically a password to unlock bitcoin for sending or spending
I cannot overstate the importance of obtaining and securing private keys
Hardware wallet is a small electronic device where bitcoin can be “stored” with high security (technically bitcoin is always stored on the blockchain)
If a hardware wallet is lost or destroyed, private keys can be used to restore funds
In other words, private keys are more sensitive and important than a hardware wallet.
Bitcoin custody varies in complexity, and should be perceived as a journey, not a destination. As long as we’re taking proper steps, no matter how small, our bitcoin should be safe.
There are two types of bitcoin custody — online and offline. Online is synonymous with hot, and offline is synonymous with cold.
Online/Hot Storage (not recommended)
Without private keys, we are using online storage, which means we don’t have full control over our bitcoin.
For example:
We buy bitcoin on Coinbase
We take no further steps
Our bitcoin is in online storage, we have no private keys, and our bitcoin is vulnerable to a hack or exchange insolvency
Online storage is best for small amounts of bitcoin and/or people who trade bitcoin.
In this scenario, Coinbase has custody of our bitcoin, similar to our bank having custody of our dollars. Even though it’s our money, we don’t have control. Bank runs are one example of how this type of custody could end terribly.
Best case scenario — we want to send or spend our bitcoin, and Coinbase allows us to execute the transaction in a timely manner. Worst case scenario — Coinbase is compromised by hackers or some other unfortunate event, and our bitcoin is gone forever.
Bottom line, if we store our bitcoin online, we are opting out of one of Bitcoin’s best features — complete control over our money.
Offline/Cold Storage (highly recommended)
With private keys, we are using offline storage, which means we have full control over our bitcoin.
For example:
We buy bitcoin on Coinbase
We transfer our bitcoin from Coinbase to a Trezor hardware wallet, Coldcard hardware wallet, or Ledger hardware wallet, and secure our private keys
Our bitcoin is in offline storage, practically untouchable, and nobody else on this planet has access to our bitcoin (unless our physical private keys are compromised)
Hardware wallets are best for long-term storage and/or significant amounts of bitcoin.
One example of a private key is 24 random words. I recommend engraving private keys into a metal plate, and securing them in a high-quality safe. I don’t recommend a safety deposit box. What if the bank is closed? What if a bank employee accesses the box without our knowledge? Too many unknowns = too much risk in this scenario.
Private keys should be treated as such — private.
The only way somebody else, including government and law enforcement, can access our bitcoin is by finding our physical private keys. Private keys can be secured and hidden anywhere. True financial freedom.
Bottom line, if we properly store our bitcoin offline, we are opting in to one of Bitcoin’s best features — complete control over our money.
Bitcoin custody ease-of-use will always evolve and improve, but some things will never change — offline storage is better and safer than online storage. If you need help getting started, setting up a hardware wallet, or have other questions, let me know by commenting or replying to this email.
Until next time,
Salvatore Norge
Current bitcoin price — $57,844 per coin
loving these helpful tips and how straightforward you put it!