11- Self-custody, types of wallets, and safety tips
“With freedom comes responsibility”.
This powerful quote perfectly captures the Bitcoin ethos.
Being free is, in other words, a double edged sword.
But that’s why we love Bitcoin: we are allowed to buy it, store it, move it, and use it without anyone else’s approval. It’s a “permissionless” system where no entity holds enough authority to dictate what we can or cannot do. And this is wonderful.
However, when no one is “coming for you”, you must take your safety very seriously. In this chapter, you will learn how to preserve your freedom, and how to truly establish your financial self-sovereignty, while keeping two eyes on your security.
We have seen how mistakes can be fatal, in Bitcoin. We know that transactions are final and irreversible. If you screw up, you are on your own.
You can’t just call Bitcoin’s customer service, nor can you get in touch with a representative or an employee: they don’t even exist.
If you lose access to your wallet, and to your seed phrase, there is absolutely no way you would be able to regain your Bitcoin.
But hey, that’s the price we happily pay, in exchange for some sweet freedom.
Wallets: the key to your sovereignty
We are still talking about wallets. Yep. Even as we are getting closer to the final chapters, there is a lot more to be explained.
In the eyes of a novice, the connection just isn’t there but, if you paid attention and studied what wallets are, you will quickly realise how crucial their role is.
They are the most defining aspect of your “Bitcoin freedom”: if done right, wallets give you a true, 100% ownership over your money.
If done wrong, you are basically still in fiat-land.
Transactions are signed and authorized by your private key.
Bitcoin is “moved” to and from your address. These are all managed and protected by the wallet, which is generated and “held together” by the seed phrase.
It’s all intertwined: all of your Bitcoin "operations" are connected to your wallet. So, please–take it seriously.
Now, it goes without saying that choosing the right type of wallet is a fundamental step you need to take as a Bitcoin user.
Let’s talk about the various kinds of wallets, and why, at the end of the day, only one matters.
Custodial wallets (no thanks)
We briefly touched on custodial wallets when talking about centralized exchanges, so let's take it from there.
A custodial wallet is a software where you, the user, are not directly in possession of your seed phrase and its associated keys.
This sounds dodgy, alarming. Well, it is. Let me be very clear: you should stay away from them.
These wallets are pure “anti-Bitcoin”, and there are several problems with them, from ethical reasons, all the way to merely practical ones.
Your seed phrase is quite literally being stolen from you, as you set up a custodial wallet. On the contrary, you are the owner/manager of your keys, with a non-custodial wallet. The choice is obvious.
Why do they even exist, in the first place? Why can’t they simply give me my seed phrase, together with my private key? It’s a matter of compliance, ease of use, accessibility, and user convenience.
You see, seed phrases are “scary” to the average and inexperienced “investor”. Not many are keen on dealing with them, knowing that, if lost or stolen, the consequences are catastrophic.
Let’s solve this minor issue by confiscating, *cough cough*, sorry– “managing” their seed phrase for them.
Exchanges are financial institutions. They operate similarly to traditional banks, and they obey the government.
By having your keys, they are able to prevent you from accessing your Bitcoin, along with freezing your transactions, or restricting your movements upon request from the “higher ups”.
It’s called “legal compliance”. Sure, they sell you Bitcoin, our beloved freedom money, but make no mistakes: exchanges are simply the other side of the fiat system.
By using a custodial wallet, you are quietly surrendering your independence.
And that’s not why you chose Bitcoin, I hope.
The worst case scenario? Imagine your exchange goes bankrupt or it gets hacked. What do you think will happen? Yes mate, you are screwed. And no, that’s not a remote, out-of-this-world possibility.
These things have happened, and they will continue to happen. Just ask FTX, or Mt.Gox.
And what if you forget your account’s passwords, or you entirely lose access to it? That’s right: you can’t use your wallet. And if you can’t use your wallet, what does that mean? Well, you are not able to send or receive Bitcoin!
Yes, the exchange’s customer service may be able to help, but there is no guarantee.
Why take the risk? Why trust a company to hold your Bitcoin for you?
To buy Bitcoin on an exchange, you are likely (although not always) required to use their custodial wallet. And that’s fine, but please, for the love of Satoshi, make sure you immediately transfer your money to a non-custodial wallet: one where you are in control.
This is the foundation of self-custody, and I urge you to make it a priority of yours. This is what being a Bitcoiner is all about: “making money” is secondary, whereas “fully owning it" is paramount. Become financially free: learn and practice self-custody.
Non-custodial wallets: hello, freedom
Now we are talking.
I am pretty sure you already figured it out: these are the exact opposite of what a custodial wallet is.
Here, with non-custodial wallets, you are shown–and given, your seed phrase. It’s yours. No one else has it: now, it’s on you.
We’ll soon discuss all of the safety practices you must put in place, when it comes to protecting your precious, your seed phrase.
Now, let me tell you about the two main types of non-custodial wallets.
They are “hot” or “cold” wallets. The difference may appear subtle, but it’s actually massive. Let’s unpack it
Hot?
Alright. Now, as I mentioned, non-custodial wallets are the way to go.
Self-custody is the art of being in complete control of your Bitcoin.
I invite you to reflect on the significance of this practice, for a minute.
We already spoke about how, in the fiat world, you are not the legal owner of the money you earned through your hard work. The bank is. This is one of the reasons you should quit that system.
How would it feel, knowing that, no matter what, NO ONE in the world is able to seize, manipulate, or take your money? That’s very liberating.
Well, this is exactly what happens, once you send your Bitcoin to a non custodial wallet.
It’s yours. 100% yours. No authority in this universe has the power to change that. That’s unless someone gains access to your seed phrase, of course, in which case they’d be able to steal your money. That’s the scary side of freedom, as stated in the opening of this chapter.
Hot wallets have one major (possible) vulnerability: they are connected to the internet, making you susceptible to scams and phishing.
A hot wallet, such as “BlueWallet”, is where your seed phrase and, consequently, your keys, are generated on a device, usually a PC or a smartphone, that is connected to the internet.
This may seem innocuous, harmless. But wait. Danger lurks at any corner, in the perilous world of the internet. You don’t need me to remind you of the plethora of scams, phishing attacks, hacks, frauds that proliferate in the online world.
And you could very well be the victim, if using a hot wallet.
Having your seed phrase exposed like that opens up to a whole lot of potential issues, and you must be very careful.
You may not be aware of it, but your device could be compromised. Let me give you a few examples of what could happen here.
-Your phone could be infected with malware that’s able to screenshot or to copy your clipboard data, resulting in seed phrase theft.
-A virus could access the roots of your phone’s storage and try to brute-force extract your keys from the encrypted files where your hot wallet stored them.
-Phishing/fake apps/fake emails. Don’t think you are immune to them just because you are not a boomer. Scams are so advanced and credible that anyone could fall for them.
-Criminals go to extreme lengths to make you believe they are legit. They will create fake apps resembling the hot wallet’s one, and they will somehow convince you to type your seed phrase. Game over.
-Cloud backup leaks, if enabled, could store your seed phrase in the cloud, making it a very easy target.
These are the shortcomings of a hot wallet. They are light years ahead of those nasty custodial wallets, but still, I wouldn’t recommend you use them for long-term storage.
They are usually fine for users who frequently send or receive Bitcoin, and for those who are not storing their entire stack on it. Bottom line: be very cautious, and only keep a small amount of money on a hot wallet.
Or cold?
Finally, here we are.
Cold wallets are the gold standard, when it comes to self custody.
We are still in the realm of non-custodial wallets, but unlike their “hot” counterpart, these are special, because the seed phrase, together with its keys, is never once exposed to the malicious internet.
Now, this is a big deal. It means that, unless you make a critical error, your seed phrase is guaranteed to be safe and invulnerable to hacks and whatnot.
An example of a typical hardware wallet.
“Trezor” and “Ledger”: these are the most known makers of cold wallets. As you can see in the image above, they are physical devices. They are in fact also known as “hardware wallets”.
Small, light, and practical, they connect to a PC or a smartphone, and they use “companion apps”, which help the user to visualize their portfolio and initiate transactions.
Crucially, cold wallets are set up offline. Your seed phrase is created, using the “BIP 39” standard, and it never “touches” the internet.
The same goes for your private key, which never leaves the tiny devices, meaning it’s never exposed to online threats.
Anytime the wallet requires a digital signature, which is what initiates a transaction, you will have to manually authorize it by pushing a button on your hardware wallet.
The transaction is signed offline, inside the physical device, and then broadcasted to the Bitcoin network.
This seemingly inconspicuous feature provides unmatched safety, and any Bitcoiner worth their SATs will tell you that using a cold wallet is the only credible way to practice self custody.
Using one of these devices can be somewhat impractical: you must type a PIN, a password and, if you set one up, a “passphrase”.
For this reason, it is advised that you use a hot wallet, if transacting frequently and with smaller amounts, while you should only use a hardware wallet for guarding your long term holdings. A custodial wallet? Never.
Restoring a wallet
Whichever non-custodial wallet you choose to use, one thing remains: you must look after your invaluable seed phrase. We are getting there, don’t worry.
Now, let’s discuss an important topic: restoring a wallet: something that can be done with two very different intentions: either to regain access to your own wallet, in case you lost your physical hardware device; or by a criminal: someone who, for some reason, just learned your 12 sacred words.
We explained this already, but, as the Latins used to say, “repetita iuvant”: repetition is useful.
Your wallet does not belong to a particular device. It only belongs to the seed phrase, which has the power of mathematically generating the same keys and the same address.
This is how you are able to recreate, or restore a wallet.
Let’s say you lost your Trezor wallet. It can happen, of course.
Or maybe, you just lost your phone. You no longer have access to your hot wallet’s app.
Does that mean you lost all of your Bitcoin? No.
Remember: “your” Bitcoin lives on the Blockchain, in the form of UTXOs.
It is only unlockable by a specific private key, which is associated with a particular seed.
Don’t worry. Only because you temporarily lost access to your wallet, that doesn’t mean your money is gone. You can, in fact, recreate that very same wallet, just on a different device.
Just have your seed phrase ready, and you are all good to go.
All you have to do is to buy a new Trezor, or a new Ledger, or whatever you are using, and restore your old wallet.
You simply have to type your 12 words, et voila. Your seed phrase will recreate your old private key, your public key, and your address with its UTXOs. Your money, basically, is still there. Pretty cool, right?!
But please, also know that this is the very same procedure someone has to undertake in order to steal everything from you, in just a matter of minutes.
And you would not be able to do a thing. Nothing. You are done for.
If anyone is able to learn your seed phrase, all they have to do is to restore your wallet on a different device and boom!
They will simply initiate a Bitcoin transaction, and send all of your money to their address. The Bitcoin police won’t be there to assist you, I am afraid.
I wasn’t joking when I said self-custody is scary. It’s all in your hands.
Recording your seed phrase
Sure, the blockchain, the nodes, Bitcoin mining are all fundamental notions you must study, if you want to truly understand how this form of money works. But this may just be the most important lesson, so please, pay attention.
A critical mistake will certainly result in you losing your Bitcoin forever. Or worse, you can be the victim of a violent attack, even.
You know that only 21 million Bitcoins will ever exist.
Want to know something that’s as hilarious as it is tragic? Out of those 21, it is estimated that 4 million coins have disappeared because of user errors. Wow. That’s almost 19% of the total supply. Yep, it’s gone. It’s unrecoverable, and it will never come back.
Well, it’s still there, on the blockchain. But those UTXOs are stuck, because their associated wallets are “dead”, meaning their respective users have lost access to them.
That happens mainly when people forget their seed phrase, or when they can’t restore their wallets.
Please, don’t contribute to this horrific stat. Just follow my advice, will you?
NEVER record your seed phrase in a digital file.
As we know, your 12 or 24 words are randomly generated for you, upon creating a wallet.
From now on, you must be diligent.
Now, depending on which app you are using, this could be the ONLY time you will ever be shown your magic words. You may not get a second chance.
Some wallets will allow you to visualize it again, in the future, under explicit request, but you should not have to resort to that, unless strictly necessary, and knowing that your seed is now exposed to the internet; which defies the whole purpose of a cold wallet.
As the seed phrase is presented to you, it must obviously be recorded somewhere. What you do next is extremely important. What you must not do is to:
Take a picture of it
Save it on your phone/laptop
Save it on a text document
Write it down on your phone's notes
Send it to a trusted person or yourself via email or text
Save it on the cloud
Have it stored anywhere on a device that is connected to the Internet, even if it's behind a locked folder
How should you store your seed phrase, instead? The decision is yours and yours only, and it should be taken after careful consideration, research, and risk assessment.
Bitcoiners will typically:
Write it down on a small piece of paper (this is usually the first step, as the seed phrase is shown to you)
Cast it on a titanium card (it's fire and waterproof)
Store it inside a safe
Bury the titanium card in your garden, after careful evaluation
Learn your seed phrase, memorize it, and destroy any physical evidence of it (effective, but please consider the risks associated with it)
Add a “passphrase”, AKA your 13th (or 25th) word, to your cold wallet. That way, if someone were to gain access to your seed, your wallet would still be unusable without using the passphrase; or vice versa. Please note that forgetting the passphrase results in your wallet to become inaccessible, even in the presence of the seedphrase.
Store your words in a safe location known only to you
Use a “multisig” wallet. Please look into it, if interested, as I intentionally omitted them from this chapter.
Regardless of what you choose to do with your seed phrase, I believe it's important to memorize it. It's easy, it's only 12 words!
Just keep repeating them once or twice a day over an extended period, and you will learn them by heart. This gives you an extra layer of protection/backup.
Picture this: you can store your wealth inside your brain, how cool is that?
You can hypothetically destroy your device, walk across a border with billions recorded in your head, and then restore the wallet. Wow!
Another important safety tip: please remember that your seed phrase is never used during a transaction. In fact, you will never need it. Never, except for when you wish to recreate a wallet. If anyone asks to provide your seed phrase, they are most certainly trying to scam you. You only have one job. As Gandalf said to Frodo: “keep it secret, keep it safe!”
Don't flaunt it, don't brag.
Alright, we went over your wallet and your keys’ management and security—do you now consider yourself as untouchable, just because your seed phrase is buried under the earth? Not quite.
Home invasions, kidnappings, wrench attacks. They do happen.
Imagine: someone knocks at your door as you are home alone. Two masked people force their way inside your apartment, wielding a weapon and demanding you give away your seed phrase.
What do you do? You obviously comply; and there goes your Bitcoin.
You keep wondering “how did that happen?! How could these guys know?”
Then you remember: you recall that cheeky post you made online on your social media page, when you became a “half coiner”.
You are in disbelief, frustrated, angry, but hopefully uninjured.
Don’t think this only happens to millionaires, or to the ultra-rich.
Do some online research, and you will find out these acts of violence actually target “normal people” too.
Google “Bitcoin wrench attacks”, and see what I'm talking about.
Do not underestimate cyber criminals: they can track you down very easily.
An Instagram post about you being a Bitcoin holder is an obvious giveaway, and it goes without saying that you should not be so irresponsible as to do such things.
But even a reddit comment, or anything that is seemingly innocuous, is enough for the right people to learn everything about you.
Please, never, ever disclose your Bitcoin holdings online.
Humility pays off. Arrogance backfires.
The same should be applied to real life: do not brag about your Bitcoin with friends or family members. Don't be naïve, and think that your friend is loyal and they would never hurt you—people do the unthinkable when it comes to money.
Someone you deeply trust can “easily” turn on you, in order to get their hands on your BTC.
Remember that, through violence, it is extremely easy for someone to steal your wealth: all they need is a seed phrase.
Around the world, family members do get murdered over their life insurance: why would it be different here?
Now, please understand that these are nightmare, worst-case scenarios. I’m not saying they are the norm. They aren’t.
The chances of you being attacked are extremely low.
But they are not 0. And would you not want to be as safe as you can? All you have to do is to be smart about what you tell people and about what you post online. It’s easy: just try and not draw too much unwanted attention on you.
That doesn’t mean that, as a Bitcoiner, you should live in the shadows. Not at all.
It’s perfectly fine to be vocal about your passion for Bitcoin, and that’s exactly what I’m doing, as you can see.
It is in fact commendable, when you talk to your friends and family about Bitcoin and why it is such a revolution. I encourage you to spread the message, as soon as you develop a strong conviction.
But, as with many other things in life, there is a fine line you don’t want to cross.
Being a Bitcoin advocate doesn’t involve bragging on social media about how much you hold. You are absolutely free to do it, but please consider the risks.
I will leave you with another famous expression Bitcoiners love:
“Stay humble, stack SATs”.
Good. You are now ready to take your freedom into your own hands. That’s exciting, isn’t it?
As we are nearing the very final chapters, we will next talk about something that will make-or-break you as a Bitcoiner: its “price”! Ready to board the rollercoaster?
