Cryptocurrency offers investors primary ownership of assets and cryptocurrency in their wallets. Still, many investors hesitate to buy digital assets because they offer different security than hedge funds, investment banks and other traditional institutions. This is where crypto custody emerges as an independent, innovative solution to safeguard crypto assets.
Here is a brief explanation of crypto custody and its importance in the cryptocurrency ecosystem.
What is Crypto Custody?
Every cryptocurrency wallet consists of both the public key and the private key. The public key component creates a series of cryptocurrency wallet addresses that can be viewed publicly. Crypto custody systems work to secure digital assets with private key encryption. It is a secure storage solution that helps to protect crypto wallet assets or holdings from loss or theft.
For digital assets to be widely used, crypto custodians are crucial. The regulation mandates that organizations that manage substantial sums of money, such as hedge funds, investment banks, and family offices, have a custody partner to protect their client’s money.
How does crypto custody work?
The private keys that allow access to a person’s cryptocurrency and other digital assets are safely stored and managed by crypto custody services. For users to manage their assets and conduct transactions, private keys are a crucial part of cryptocurrencies. If a person loses or misplaces their private keys, they risk losing access to their assets permanently.
Self-custody and Third-party custody are the main types of crypto custody.
Self-custody refers to storing one’s cryptocurrencies and digital assets without relying on a third-party service. It offers several benefits, including greater control and privacy over one’s assets and a reduced risk of theft or hacking with third-party custody providers.
However, self-custody requires a high degree of technical expertise and responsibility. The person must be familiar with the best practices for securely generating and storing private keys.
Considering self-custody, it is important to carefully weigh the benefits and risks and educate yourself on best practices for secure private key generation and storage.
A third-party custodian may be the best option for those who want to avoid managing their accounts or find dealing with the technology too scary. These financial institutions are licensed to operate as custodians at the state or federal level and are registered and regulated.
This kind of cryptocurrency custodian maintains the security of their clients’ holdings by safely storing the private keys to their wallets. Three kinds of third-party crypto custodians are based on financial institutions.
- Digital asset managers
- Custodial banks
How to Secure your Crypto Wallet
One of the first things new users should learn is how to keep their cryptocurrency wallet secure. Outside threats and human mistakes are typically the two main causes of security problems. In just a few simple steps, find out how to increase the security of your cryptocurrency wallet and overall crypto safety.
- Use a reputable wallet provider
- Limit the use of centralized exchanges and custodial services
- Be careful where and how you buy crypto
- Back up your wallet
- Leverage 2-factor authentication (2FA)
- Use biometric/facial recognition or an entry passcode to lock your wallet
- Use an encrypted password for added security
- Be careful of scams and phishing attempts