Self-Custody - Bitcoin Explained

"Not your keys, not your coins."

This phrase captures Bitcoin's most important principle: if someone else holds your private keys, they control your Bitcoin — not you.

Custodial vs Self-Custody

🏦 Custodial (Exchange)

The exchange holds your keys. You have an IOU.

Easy to use
Can trade quickly
They can freeze your account
They can get hacked
They can go bankrupt (FTX, Mt. Gox)
You need their permission to withdraw

🔐 Self-Custody

You hold your keys. You own your Bitcoin.

Nobody can freeze your funds
Nobody can deny you access
Exchange hacks don't affect you
True ownership
You're responsible for security
Lose your keys = lose your Bitcoin

💰 Think: Cash vs Bank Account

Custodial is like keeping money in a bank — convenient, but the bank controls access. Self-custody is like cash in your safe — you're in full control, but you're responsible for not losing it.

Why Self-Custody Matters

Historical Failures

Event	Year	Lost
Mt. Gox (hack + mismanagement)	2014	850,000 BTC
QuadrigaCX (CEO died with keys)	2019	~190M USD
FTX (fraud + bankruptcy)	2022	~8B USD
Celsius (bankruptcy)	2022	~4.7B USD

All these users thought their funds were safe. They weren't in self-custody, so when the custodians failed, so did their access to "their" Bitcoin.

Types of Self-Custody Wallets

💻

Software Wallet

Hot Wallet (Connected)

App on phone/computer. Convenient for spending.

Security:

Examples: Sparrow, BlueWallet, Electrum

🔒

Hardware Wallet

Cold Wallet (Air-gapped)

Dedicated device. Keys never touch the internet.

Security:

Examples: Coldcard, Trezor, Ledger, BitBox

📄

Paper/Steel Wallet

Cold Storage (Offline)

Seed phrase on paper or stamped in metal.

Security:

Examples: Seedplate, Cryptosteel, hand-written

🔐

Multisig Wallet

Multi-Key Setup

Requires multiple keys to spend (e.g., 2-of-3).

Security:

Examples: Sparrow, Unchained, Casa

Getting Started

1. Choose a Wallet

For beginners: BlueWallet (mobile) or Sparrow (desktop). For larger amounts: hardware wallet like Coldcard or Trezor.

2. Generate Your Seed Phrase

The wallet creates 12 or 24 words. This IS your Bitcoin. Write it down on paper — never digitally.

3. Secure Your Backup

Store seed phrase in a safe location (fireproof safe, bank deposit box). Consider steel backup for fire/flood protection.

4. Test Recovery

Before depositing significant funds, practice restoring your wallet from the seed phrase.

5. Withdraw from Exchange

Send a small test amount first. Once confirmed, send the rest to your self-custody wallet.

Security Recommendations

Do:

Write seed phrase on paper, store securely offline
Test wallet recovery before depositing large amounts
Use a hardware wallet for significant holdings
Consider multisig for large amounts
Keep backup in separate physical location

Don't:

Never store seed phrase digitally (no photos, no cloud, no notes app)
Never enter seed phrase on a website
Never share your seed phrase with anyone
Never buy a pre-initialized hardware wallet
Never use a seed phrase someone gave you

The golden rule: Anyone with your seed phrase can take your Bitcoin. Treat it like a password to your life savings — because it is.

Common Concerns

"What if I lose my seed phrase?"

Then you lose your Bitcoin forever. This is why proper backup is critical. Consider multiple copies in different secure locations.

"What if someone finds my seed phrase?"

They can take everything. Consider a passphrase (extra word) for additional security, or multisig where multiple keys are required.

"Isn't an exchange safer? They have security teams."

Exchanges are bigger targets. Mt. Gox, FTX, and dozens of others have proven that even large exchanges fail. Your security only needs to protect you — not millions of users.

Start small. You don't need to move everything at once. Begin with a small amount, get comfortable with the process, then gradually take custody of more.