Freedom from Centralized Control: An introduction to Bitcoin self-custody

In celebration of Independence Day, we’re encouraging everyone to liberate themselves from centralized controllers. This journey begins with discerning when you are in control of your own assets and when you’re not.

Gabe Higgins
July 4, 2023
Freedom from Centralized Control: An introduction to Bitcoin self-custody

Repeatedly, we've witnessed the damaging impact of centralized entities in the cryptocurrency domain, exemplified by the downfall of organizations like Mt. Gox, FTX, Celsius, BlockFi, and Prime Trust. These collapses have led to disastrous consequences, eradicating billions of dollars in wealth. Countless individuals have seen their life savings, college funds, and retirement accounts wiped out, demonstrating the extensive impact of these failures.

Regrettably, these losses will persist unless we continually underscore the dangers and individuals take proactive measures to sidestep these pitfalls.

It's crucial for everyone to understand that Bitcoin's principal advantages lie in its resistance to censorship and its decentralization. Yet, these benefits evaporate when users depend on centralized control systems. While there may be occasions where such services are necessary, it's vital to discern when and how to employ them judiciously, without making them the crutch for security and access.

There's no doubt that security can be challenging. However, numerous tools exist that simplify self-custody and Bitcoin's security, and they're becoming more user-friendly all the time.

It's imperative that our community continues its efforts to enlighten and prepare users to maintain full control over their assets at all times. This journey begins with discerning when you are in control of your own keys and when you're not.

How to recognize a centralized third party

The oft-repeated mantra, "Not your keys, not your coins," effectively conveys the notion that control over the cryptographic digital signature—commonly known as the 'private key'—denotes ownership. This alphanumeric string is intrinsically linked to the wallet securing the Bitcoin. Ultimately, the owner of this key is the owner of the assets within. The key is the exclusive instrument for authorizing Bitcoin transactions, and if it's lost or destroyed, there's no way to transfer the assets. This is likely the case with Satoshi’s keys, so the Bitcoin are trapped in those wallets forever.

While there are complexities involving the creation of wallets and the structuring of keys, such as with a multisig wallet that requires multiple keys for validation, we'll focus on the essentials for now.

Here's the essential message: NEVER TRUST ANYONE WITH YOUR BITCOIN KEYS!

It's prudent to restrict usage of third-party services handling your Bitcoin ,this includes exchanges like Coinbase, Binance, Kraken, and FinTech/Neobanks such as Cashapp, Venmo, PayPal, Robinhood, Strike, Swan, etc. Despite these services' ease of use, entrusting them with your Bitcoin keys could be risky. While these are convenient services that provide easy access to Bitcoin, do not trust them to always have the Bitcoin you think they do just because it shows some digits in the app.

Every Bitcoin wallet has a unique private key, which is often revealed during the onboarding process due to its essential role in backing up your seed phrase or wallet recovery.

Centralized custodial services are easy to identify, often requiring an identification process with personal information. All services having access to customer funds are obliged to register as a Money Service Business (MSB) under the Banking Secrecy Act, enforcing rules about Know Your Customer (KYC) and Anti-Money Laundering (AML). Therefore, it’s safe to assume any service complying with these regulations, controls the private keys.

Although many people trust 'regulated' entities, believing that they are government-vetted and offer protection, no such guarantees exist. Ownership of digital assets is validated solely by the blockchain. If you don't directly own the Bitcoin wallet, someone else does.

To be clear, these services are fine for limited use. Afterward, immediately transfer your funds to your private wallet. Avoid storing Bitcoin on these services, as this exposes you to risks like fraud, theft, and scam tactics. Scammers often impersonate exchanges or use an exchange's guise to attract volume, before disabling withdrawals and absconding with the funds.

If you cannot directly transfer Bitcoin to your private wallet, assume you don't truly own Bitcoin. Strike, Swan, and other services that emphasize the importance of self-custody encourage users to move Bitcoin off their platforms.

Remember, custodial services ARE NOT REAL WALLETS; they are akin to bank accounts where third-party custodians hold your assets. While they may serve a purpose, avoid holding a significant amount of your Bitcoin with these services. A good rule of thumb is to store no more than 20% of your total stack with them at any given time, ideally, leave nothing.

How to take ownership and hold your keys

The notion of self-custody can seem intimidating due to a misconception that it's complex or requires technical expertise. However, it's not as daunting as it appears. Anyone can use Bitcoin safely and appropriately while maintaining custody. Managing keys is a skill that you can quickly acquire and continuously improve upon. Several apps simplify this process. When you start using a self-custody wallet, you'll immediately encounter the 'seed phrase' and the process to 'backup' your keys.

Here are some user-friendly, self-custodial wallets that are accessible to everyone:

This is not an exhaustive list, there are many self-custody wallet options to choose from, but it’s recommended that wallets have an open-source code base and have a team of experienced developers for support. 

All you need to do is simply withdraw the Bitcoin you bought on the third party service to your self-custody wallet by creating a transaction, sending Bitcoin to yourself. Think of it like you’re withdrawing money from your bank account and depositing it into your safe deposit box at home. It’s really that simple and there are a ton of tutorials on Youtube depending on which wallet you choose.

How BlockSpaces can help

At BlockSpaces, we firmly adhere to the belief that self-custody offers the optimal way to engage with Bitcoin, particularly for businesses. The adaptation of off-the-shelf Bitcoin wallets often poses a challenge for businesses, as these wallets are primarily designed with individual users in mind.

Today, we're excited to unveil the first fully integrated self-custody Bitcoin/Lightning wallet that seamlessly interacts with business accounting systems for effortless invoice and payment reconciliation.

In celebration of Independence Day, we're encouraging everyone to liberate themselves from centralized controllers. As part of this initiative, we're offering a limited number of nodes for free!

Here's how it works: After you sign up, BlockSpaces establishes a dedicated Lightning node on your behalf, with the keys to the wallet under your control. We supply initial inbound liquidity, so there's no need to seek out connections. Our end users don't need any prior knowledge about nodes, the Lightning network, or liquidity management to use our solution. It's a plug-and-play, one-click integration that any business can employ to start accepting Bitcoin payments in mere minutes without counterparty risk.

Register for your free account and embark on your journey today!

*Please note that this service is currently only available via a desktop browser. We're diligently working on a mobile-friendly version.