crypto custody

What is Crypto Custody for Traditional Investors?


Cryptocurrency is a promising emerging asset class that has already yielded impressive gains for early adopters and investors. But some early Bitcoin enthusiasts lost their recovery keys, meaning their assets are locked away forever. 

It’s estimated that US$140 billion of Bitcoin are locked away in dormant wallets. Many of these wallets are believed to be owned by early adopters who didn’t properly store their recovery keys, resulting in losing access to life-changing fortunes. 

A recovery key is a string of words granting access to your crypto wallet. Typically only 12 words long, keeping these words stored safely is essential for non-custodial crypto storage. 

Storing your recovery key insecurely can mean a malicious actor gaining access to your crypto, and storing them too securely or not at all means losing the ability to access the wallet entirely. 

The recovery key-centric nature of cryptocurrency has kept many traditional investors away from the asset class. It’s understandable; deleting the wrong file or throwing away the wrong piece of paper can erase fortunes. 

Fortunately, crypto custody services have emerged to solve this problem and adequately serve traditional investors who want to explore the asset class without potentially losing everything to an absent-minded mistake. 

Today, we’ll explore the world of cryptocurrency custody and how it can give you a safe and secure way to start investing in cryptocurrency. 

How Does Crypto Custody Differ from Other Wallets?

Before going any further, let’s clear up some terms you may encounter that can be confusing. Generic crypto wallets are often called “custodial wallets” or “non-custodial wallets.” Neither of these wallets is the same as the crypto custodial services we’re discussing. 

A generic custodial wallet is simply a wallet offered by a service provider that offers a traditional log-in system and account recovery options, such as Coinmotion’s personal wallets. A non-custodial wallet is a wallet application, such as Electrum that can process transactions and restore wallets with recovery keys but lacks account recovery or traditional log-in functionality.

Crypto custody services are different from both. They are not wallets that are ready and waiting to make transactions. Instead, they are intended for the long-term storage of crypto. 

Custody services for cryptocurrency are similar to custodial services for other assets. For example, you can buy gold bullion and store it in your safe at home, or you can hire a custodial service to store your gold in their vaults. The difference with crypto custody is that the coins live on the blockchain, not in a safe. Custodial services store your recovery keys or create their own.

Most crypto custodian services will use “cold” wallets. This term simply means it’s not connected to the Internet. A “hot” wallet is connected to the Internet, which is needed to make transactions. But the purpose of custodial wallets is long-term storage, so cold wallets are used for the best security possible. 

Do Crypto Custody Services Cost More?

Crypto custody services generally have fees beyond a standard personal wallet. You’re hiring a custodian’s services and putting confidence in their security. Preventing cryptocurrency hacks is no small feat, and your fees help secure your account. 

Additionally, most custody services will have account minimums. For example, Coinmotion’s private crypto banking services, including custodian services, have a minimum of €10,000.

Setting up crypto custodial services is similar to setting up custodial for other assets. A simple overview of the process involves:

  • Providing all required personal information
  • Paying associated fees and ensure you meet any account minimum
  • Passing a vetting process to make sure your crypto was acquired legally
  • Handing over your recovery keys to the custodian or transfer your crypto to their wallet
  • Having confidence that they are protecting your keys

Pros and Cons of Crypto Custody for Traditional Investors

Crypto custody services might be the right option for traditional investors who want to start cryptocurrency investing. Let’s explore some pros and cons of custodial services.

Pro: The Custodian Takes Care of Everything

Your crypto custody provider handles the safe and secure storage of your assets. You don’t need to worry about losing everything because you spilled coffee on the paper containing your recovery phrase. 

You also don’t have to become a cybersecurity expert. Provided you pick the right custodial services, they will securely store your coins so malicious actors cannot access them. 

Pro: Assets May Be Insured

Historically, crypto assets have lacked the insurance of traditional investments. Thankfully, this is starting to change due to enhanced regulatory legislation and institutional adoption. However, you’ll need to review the terms and conditions of any custodian services to see if your assets will be insured or otherwise guaranteed should they be lost. 

Pro: Potential to Earn Interest on Deposited Crypto

Decentralized Finance (DeFi) has recently taken the crypto world by storm. DeFi allows users to lend and borrow crypto assets and sidesteps the traditional lending process. 

Exploring and profiting from DeFi is a high-risk investment, but the perks of DeFi have made their way into many safer crypto platforms that provide interest for stored crypto. You may be able to find a custodial service that also provides interest in your stored crypto.

Con: The Custodian Controls Your Coins

One of the appeals to many crypto enthusiasts is the possibility of “being your own bank” by owning complete control of your crypto assets. For example, if you control your recovery phase, you are in total control of your money. 

Crypto custody services intentionally go against this rebellious stance. Traditional investors interested in crypto custody likely won’t consider this point a con, but many crypto enthusiasts will. 

It’s up to you to decide — do you want full responsibility for your crypto assets? Or would you rather have a trusted third-party protect them for you?

Con: Potential to Lose Coins Due to Hacks or Bankruptcy

Sadly, digital cash attracts hackers and cybercriminals. Any institution involved in storing, transacting, or mining crypto is generally a target of bad actors. So you’ll need to pick a crypto custody service provider with a demonstrated history of security. 

Additionally, crypto platforms have a long history of going bankrupt, shutting down, and disappearing. Therefore, similar to security, businesses that have been around for a while are a safer bet than a brand new crypto platform. 

Discover How Coinmotion’s Crypto Custody Enhances Your Portfolio

Crypto custody can be a valuable part of your overall crypto portfolio. It can serve as a destination for long-term, safe, secure storage for assets you don’t plan to sell soon. 

Coinmotion offers private cryptocurrency banking services that include secure custodial services alongside other services that make crypto less risky and more akin to traditional investments. Ready to get started with our crypto custody services? Contact us today to speak to a personal banker and discover how we can secure your crypto and help grow your portfolio.

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The views, thoughts, and opinions expressed in the text belong to the author and not necessarily to the author’s employer, organization, committee, or other group or individual.

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