Growing Risks in Self-Custody of Bitcoin for Crypto Investors

Published on April 6, 2025 | By Trevor Laurence Jockims

As the cryptocurrency landscape becomes increasingly popular, many investors are opting to self-custody their digital assets, such as Bitcoin. While this method offers a level of independence from third-party custody services, it does not come without its growing set of risks, particularly in the face of global uncertainties ranging from natural disasters to geopolitical conflicts.

The Shift to Self-Custody

Crypto investors have a choice when it comes to storing their currency: they can either opt for third-party custodial wallets, known as "hot wallets," or self-custody methods that allow them to maintain total control over their holdings. The latter involves storing the private keys—unique cryptographic keys necessary to access their cryptocurrency—either on hardware devices in "cold storage" or as written seed phrases.

The majority of well-known exchanges, such as Coinbase and Blockchain.com, utilize hot wallets, which are continuously connected to the internet, providing convenience but also exposing users to risks such as hacking and fraud. Recent high-profile collapses, like that of FTX, have further amplified the skepticism around third-party custodial options.

Increasing Risks Highlighted by Recent Events

Recent events have illustrated that self-custody is not without vulnerabilities. For instance, social media posts following devastating wildfires in California highlighted claims of lost Bitcoin as individuals reported that their seed phrases and storage devices were damaged or destroyed. While individual losses are difficult to verify, the discourse underscores the unique challenges posed by self-custody, especially during such catastrophic events.

Nick Neuman, co-founder of self-custody service Casa, noted that the physical threats posed by natural disasters necessitate a rethink regarding Bitcoin security practices. "Most people secure their Bitcoin with one private key," he pointed out, emphasizing that storing a single seed phrase on paper or a single device is a critical point of failure.

Vulnerabilities of Common Security Practices

Despite the awareness of these risks, many Bitcoin holders continue to follow common practices that leave their assets poorly protected. For example, protecting seed phrases written on paper or metal plates may seem secure but could easily succumb to fire or water damage.

To mitigate these risks, safety measures such as fireproof bags or safes are sometimes employed. However, Neuman argues that these solutions offer only limited protection. The challenge is not just preventing physical destruction but also ensuring the ability to recover assets amidst potential chaos, such as the aftermath of a natural disaster.

Evolving Self-Custody Solutions

In response to the growing need for secure self-custody options, some companies, including Casa, are offering more sophisticated solutions. Multi-signature setups allow users to distribute keys across several devices or locations, reducing the risks associated with any single point of failure.

For example, in a multi-sig custody arrangement, a user maintains control of a majority of keys while a trusted partner holds a minority. This setup means that even if some keys are lost, as long as at least one key remains accessible, the owner can still recover their assets.

John Haar, managing director at Swan Bitcoin, emphasized the importance of spreading keys across multiple regions, enhancing protection against localized risks, such as natural disasters.

Best Practices for Cryptocurrency Custody

Experts like Jordan Baltazor from Fortress Trust underline the importance of applying best practices from other areas of personal life to cryptocurrency management. This can include robust organizational strategies for key management and ensuring that multiple backups exist.

As global events continue to unfold, particularly in regions impacted by conflict and instability, the conversation surrounding self-custody of cryptocurrencies like Bitcoin is more relevant than ever. With increasing awareness of the associated risks, it becomes crucial for investors to fortify their strategies and understand the limitations of self-custody.

In conclusion, while self-custody offers privacy and control over digital assets, it also poses unique risks that require careful consideration and strategic planning in today’s unpredictable world.

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