Every day crypto continues to grow larger and larger, self-custody become much more important.
Bitcoin and Ethereum offer you a better way to deal with money. They make you the sole owner of your assets, and provide more capabilities, but only if you own the “private keys”. Meaning that you are the only one who can sign the transaction to spend or send your crypto. The private keys are like the password for access to the funds.
Bitcoin makes you your own bank, and Ethereum does that and additionally gives you the ability to lend out and earn yield on your crypto assets. Practicing self-custody has immense benefits, but it comes with serious responsibility. Anyone looking to acquire crypto assets should have a hardware wallet. If you don’t please get one as soon as possible. This should be your number one priority if you own any BTC or ETH.
For this article, let’s assume you are just starting out in crypto and want to buy some crypto.
You learned about crypto one way or another, and now you’re getting involved. The most common place new retail investors will buy and sell cryptocurrencies is on a centralized exchange (CEX). CEXs are based out of single 3rd parties/middlemen, such as Binance.US or Coinbase.
Coinbase currently has ~90 million active users. The name, and recognition is beyond the reason why people opt to use them, new investors like to use a CEX because a CEX gives the user a central place to easily exchange fiat (USD/Euro) for crypto, and convert cryptocurrencies into other cryptocurrencies all in one place online. The primary objective of all CEXs is to give buyers a simple experience.
Users use them to trade, hold their assets, educate themselves, keep up with industry news, set buying and selling limits, and more. These conveniences come with big downsides though. The number one downside is KYC. Users must register with their address, ID check, and comply to new identification standards whenever they change. Other limitations are high fees and limited number of cryptocurrencies they have compared to DEXs.
Coinbase is one leading example of a CEX and the most popular place to buy and sell cryptocurrencies in the US. All you need to do is either connect the account to your bank account and transfer the funds. Using whatever amount of money you decide to buy any crypto you would like to buy listed on Coinbase that is within their transaction limits.
Now that you own some BTC and ETH after purchasing it off Coinbase, what are you going to do? Certainly, not leave it on their to be seized, locked up, or stolen from you. After your funds “clear” from your bank you will move your crypto off the CEX.
CEXs like Coinbase are prime targets of hackers and leaving your assets on there can result in you losing your funds. Aside from that there are more risks to worry about. By keeping your coins on the CEX you risk leaving them up to the terms of the CEX. This can be seen in many scenarios where the exchange changes the withdrawal terms.
By leaving your assets on there you are restricted in the transfer and you can’t move all your crypto out at once. They can rob you out of a portion of your holdings by increasing fees, so you end up losing more of your funds than you should. Ultimately, by leaving your assets in the hands of the exchanges you are choosing to irresponsibly “own” crypto.
What you do after buying crypto is buying a hardware wallet, at minimum. It is actually best to have it before buying crypto.
A hardware wallet is a device that enables you to be the sole owner of your crypto assets. The device generates a “private key” that allows you to sign your transactions. You are in charge of the funds through the device. The device gives you secure access to your digital assets on their respected address on the blockchain (Ethereum, Bitcoin, etc). You are not “downloading” your crypto on the device.
By owning a hardware wallet you empower yourself and become the sole bearer of your assets, which is the entire point of crypto. A hardware wallet thereby makes you your own bank. You decide what happens to the funds. You can send ETH to your online MetaMask wallet and use that to connect with DeFi protocols where your crypto becomes productive.
You do not want to think of your hardware wallet as a tool to engage in DeFi protocols. Your hardware wallet is not a “hot wallet”, thus the meaning of the words “cold storage” for hardware wallets. This is where you store your funds and leave them. If you want to use a wallet for DeFi, look at MetaMask.
MetaMask is a browser extension wallet you use online that directly connects with the protocols like any other wallet and is simple and easy to use. The problem is that it is still centralized, and is not meant for secure storage as it is still a Hot Wallet. MetaMask runs off Infura, which is owned by ConsenSys, an important company which provides a lot of infrastructure for scaling crypto.
Infura is an infrastructure for Ethereum ecosystem applications, it’s how Metamask connects to the Ethereum blockchain. Why is this important? Centralized options like these are not inherently bad, an important distinction to make in looking at the situation and why decentralization is going to continue to become more important as crypto adoption grows.
MetaMask is great to use for web3. It is widely used and easy. If you want to protect it and secure it, best practice is to migrate it. You can migrate and protect your MetaMask to Ledger or Trezor wallets here.
Hardware Wallet Best Practices
These are paramount and key to follow if you’re serious about crypto. Personal security is extremely important in self-custody.
- First and foremost, without a doubt, do not under any circumstance share your seed phrase (recovery words) with anyone. Ideally you want use a metal plate/seed plate to record the phrase. Have backups for the phrase and your password recorded and stored in separate locations.
- When purchasing a hardware wallet it is always best to purchase directly from the manufacturer
- Have designated secure locations where you are storing your seed phrases and hardware wallets. (Don’t put all your eggs into one basket). These should be in locations that are accessible to you, and are hidden and secure. Safes and passcode for access is preferred.
- Have multiple wallets to distribute your holdings across. Store these and the associated seed phrases in separate locations.
- If you want to take extra precaution, ship *any* crypto related item to an address that is not your home or your work and use a discreet payment method.
To start the recommendation is to start with either a Trezor or a Ledger. Ledger is the most popular but a side-by-side comparison should help you decide.
The interface of the Ledger Live is very easy to understand and navigate.
You download this to your laptop and will use ledger live to download the Ethereum “application” or the Bitcoin “application” and any other crypto applications you need so you can access their blockchains and move your crypto off of the CEX.
Here what you’ll receive from Ledger upon buying their Nano X model, their best hardware wallet available.
Trezor interface is also very easy to understand and navigate. They don’t support as many cryptocurrencies as ledger which is the bigger downside.
You download this to your laptop and will use it to download the Ethereum “application” and the Bitcoin “application” and whatever other crypto you own so you can access their blockchains and move your crypto off of the CEX.
After purchasing from Trezor here is an idea of what you will be receiving below.
Starting with that will put you in a good position to get involved in crypto. You can see that crypto today is completely different than it was 10 years ago. Just because you missed the first couple bull runs doesn’t mean it’s over though.
There is a lot of opportunity for what lies ahead for anyone looking to get involved. There is more opportunity ahead with all the growth in DeFi, NFTs, and more web3 developments. Joining crypto in 2022 is a great opportunity while you have the chance to dive into play to earn games and get in early to new protocols. Just make sure you are in charge of your crypto, and not the CEX.
We’re still early.