Bitcoin is a completely decentralized system, there is no ability to reverse payments, and there is no customer support line where you can call for help if you mess something up. When you take self-custody of your own Bitcoin, you and only you are responsible for the safety of your funds. Self-custody also means that no one can freeze your funds, and no one can stop you from making a payment you want to make. It’s a double-edged sword: there are huge benefits to self-custody, but it also comes with responsibility.

If you make a mistake and send Bitcoin to the wrong address there is no undoing it. Then if someone can access your seed phrase (seed words), there is no customer support to help you, that person now has access to your money. If you lose your keys and your seed phrase backups, there is no recovery process to get your wallet back. It’s very much like cash in that regard: once it’s gone, it’s gone.

People generally go through life with no existential anxiety over having small amounts of cash but protecting significant amounts of money presents 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 offer you true ownership of your assets. Here’s a breakdown of the types of wallets you will encounter and how they approach self-custody.

Custodial Wallets

Custodial wallets are generally offered by centralized exchanges, the same platforms that allow you to buy Bitcoin with fiat currency. These wallets work essentially just like a bank account. You do not actually have any control of your money. They can freeze your funds, lock and close your account, and deny you permission to make transactions or withdrawals with your own money. They do offer the potential to transact very cheaply with other users of the same wallet, but at the cost of giving control over your money to the custodian. They should never be used to store any significant amount of money, and any Bitcoin you purchase should be withdrawn to a non-custodial wallet as soon as possible.

Non-Custodial Wallets

Non-custodial wallets all offer true self-custody: only you have access to your assets. But even wallets that offer self-custody come with a range of trade-offs. They can also serve different purposes.

Software Wallets, also known as hot wallets, run on your mobile phone or your laptop computer. They do leave control over your funds in your own 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, what you reasonably expect to spend in a short time period.

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. They keep the private key offline and inaccessible to any threat from hackers, and…

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