Self-custody in the crypto world: importance and benefits

Opening the app of your favorite exchange and seeing a positive balance is a rewarding feeling, but there is an uncomfortable truth that every user must know: seeing a number on screen is not the same as having real control of your money.

When you leave your cryptocurrencies in the hands of a third party, you are lending them your assets under the promise that they will return them when you ask, an excess of trust that has cost thousands of millions in hacks and historical bankruptcies.

In this post, we are going to bajar a tierra the concept of self-custody so you understand, without weird technicalities, why protecting your own keys is the only way to guarantee that your digital savings belong only to you, today and always.

The problem is not “crypto”: it is the risk of custody

Many users live with a false sense of security when seeing the balance in their App, but the reality is simple: seeing a number is not the same as owning the money. The true risk is not in blockchain technology, but in the custodian to whom you hand over your keys. By delegating custody, you give a third party permission to decide when you can withdraw your money or, worse yet, to mix it with other assets in practices of rehypothecation (loans with your funds).

If that custodian makes a mistake, suffers a hack, or simply blocks your account due to new regulation, you face a permanent loss of your funds without a traditional institution to rescue you. In crypto, if you don’t have the keys, you only have a promise of payment that can break at any moment.

Three ways in which you stop being the owner of your funds

When you keep your cryptocurrencies on a third-party platform, your ownership depends on a thread. Here I explain the three scenarios where “I have X money” becomes “I cannot access anything”:

1. Technical vulnerability (Hacking of Hot Wallets)

• For an exchange to be fast and convenient, it needs to have part of the funds in “Hot wallets”. The problem is simple: if the keys are connected, they are exposed.

2. Financial risk (Bankruptcies and mismanagement)

• If the exchange uses your assets for risky loans (rehypothecation)or mixes your savings with its operational expenses, any financial bump can lead it to bankruptcy.

3. Operational barriers (Blockages and pauses)

• Even if the exchange is honest and secure, you can lose control due to external decisions.

Lessons of history: Real cases

Bitfinex (2016): ~119,756 BTC stolen

In August 2016, Ilya Lichtenstein infiltrated the Bitfinex exchange, which resulted in the theft of approximately 120,000 Bitcoin (BTC) and Bitcoin Cash (BCH). When the assets were stolen, they had a value of approximately $72 million.

However, what really defines this case is not only the theft, but the traumatic subsequent process for the users. To avoid immediate bankruptcy, the exchange distributed the losses among all its clients, cutting their balances by 36% in exchange for a debt token. What followed was a decade of uncertainty, international litigation, and partial recoveries that depend on slow and complex judicial processes.

Lesson: Recovering your funds can take years… or never happen.

Binance (2019): 7,070 BTC stolen

One of the most famous hacks that Binance suffered was in May 2019, where cryptocurrencies worth approximately $40 million were stolen. The hackers used the technique of “phishing and malware” to obtain the access keys to the platform’s Hot Wallets.

The platform stopped all withdrawals and deposits for a week. Changpeng Zhao (CZ), founder of Binance, announced that the platform would cover the losses with its own funds through its insurance fund (SAFU).

Lesson: Even the largest platforms are not safe from hacks.

KuCoin (2020): access to hot wallet keys

In September 2020, it was the target of an attack, and the hackers managed to steal more than $281 million in coins and tokens. Furthermore, the hackers managed to obtain the keys to some of the Hot Wallets on the exchange.

Although KuCoin quickly blocked all transactions on its website, the damage had already been done. This breach is among the largest in crypto asset history.

In the aftermath, KuCoin’s management team launched a comprehensive investigation. This swift move yielded positive results, as more than $204 million in funds were recovered within weeks.

FTX (2022): bankruptcy + subsequent hack (~$477M) and fund shortfall

The FTX bankruptcy is the most cited example of the risks posed by this lack of account segregation, because by being at the same address, a large amount of digital assets from hundreds or thousands of clients, makes it very difficult and almost impossible to segregate the digital assets by users of the platform.

Just when FTX was imploding in November 2022, a series of unauthorized transactions drained $477 million from the exchange. By January 2023, the exchange said it had identified $415 million in “hacked cryptocurrencies.”

Although no perpetrator was identified at that time, former FTX CEO Sam Bankman-Fried said he believed the attack was “either a former employee or somewhere someone installed malware on a former employee’s computer.” He claimed to have reduced the list of possible perpetrators to eight people before being blocked from the company’s internal systems.

However, by January 2024, US federal prosecutors had identified and charged three people for allegedly carrying out the attack.

Lesson: Third-party custody adds financial risk, not just cyber risk.

Self-custody: The responsible solution

First of all, self-custody embodies the original spirit of Bitcoin and decentralization, whose main premise says: “If they are not your keys, they are not your coins,” referring to the private keys of each address. By self-custodying, the investor has total control over their private keys, which are essential to access and move the funds.

The SEC explained that Hot Wallets, are wallets constantly connected to the Internet. Which have as Pros: Greater convenience and ease for conducting quick transactions.

While among the cons, the SEC states the existing cybersecurity risks, since by being always connected to the network, they are vulnerable to malware, phishing, and direct hacking attacks, especially if significant sums are stored.

In contrast, the SEC explained that Cold Wallets are storage methods disconnected from the Internet, which have as Pros: Greater security against online threats.

But they also have Cons, because the main risk offered by this method is physical loss, device damage, or loss of the seed phrase, although this last risk can be mitigated with multiple backup copies of the seed phrase in secure locations.

The 3 fatal mistakes with your seed phrase

1. The most common mistake is taking a picture of it, saving it in mobile notes, or uploading it to the cloud (iCloud/Google Drive). If it’s one click away, it’s within a hacker’s reach.
2. Entrusting access to all your savings to a piece of paper is a beginner’s mistake. The paper degrades over time, the ink fades and it is extremely vulnerable to water or fire.
3. Many users write down their seed phrase, lock it away, and assume everything is fine. The fatal mistake appears months later:they discover they wrote down a word incorrectly or that the order is wrong. In crypto, a single spelling error in your seed equals losing access forever. Not testing the restoration before depositing important funds is playing Russian roulette with your savings.

As the famous saying goes “it’s better to be safe than sorry”. That’s why it is very important that you are careful when preserving your seed phrase and take certain precautions that will help reinforce your security in a very simple way. “Your seed is not for the reel.”

Yoseyomo: From a scrap of paper to a metal vault

If you have decided to take the reins of your cryptocurrencies, the last link in your security cannot be a piece of paper. Yoseyomo  is born to professionalize the physical storage of your seed phrase, elevating your backup to the level of a personal banking infrastructure.

Paper vs. Metal: The physical risk

Unlike paper, a metal backup positions itself as the gold standard thanks to its extreme resistance: while paper burns at 230°C, the steel and titanium of Yoseyomo withstand over 1,400°C, surviving fires where any traditional document would disappear.

Furthermore, its physical nature makes it immune to floods or humidity that erase ink, and its robustness prevents it from breaking, getting lost among folders, or being mistakenly discarded during a move, guaranteeing that your access to capital is as eternal as the metal.

What it is (and what it is NOT) Yoseyomo

It is essential to understand its role in your strategy:

• It is:An indestructible physical storage tool for your seed phrase (your backup). It is designed to last generations.
• It is NOT: An electronic hardware wallet. It does not connect to the PC nor sign transactions. Its function is to protect the code that allows you to recover your money if your electronic device fails.

Recommended setup: “Two locations, zero screens”

To set up your Yoseyomo without leaving a digital trace, follow this 6-step guide:

1. Controlled environment:Generate your seed phrase in a private place, without cameras or people nearby.
2. Manual verification:Write the phrase on paper first and verify each word twice.
3. Engraving on metal:Transfer the words to your Yoseyomo plate.
4. Destruction of the trace:Once the plate is engraved, burn the paper you used as a draft.
5. Duplicity:Create a second copy on another plate and store it in a different geographical location.
6. Trial by fire:Delete your wallet and restore it using only your Yoseyomo. If the balance appears, your system is infallible.

Strategy for real life: The hybrid model

Most experienced users apply a strategy based on common sense: the division between “vault” and “pocket”. This approach allows you to enjoy the unbreakable security of self-custody without giving up the agility offered by traditional custody platforms for day-to-day.

For this system to work, we must implement a responsible hybrid model, where the distribution of your assets is strategic and not random:

• The Main Fund (vault):This is where you keep your long-term savings or significant amounts. The ideal is to use a self-custody wallet. It is your store of value, protected by you, where security is the absolute priority and fund movement is infrequent.
• The money for daily use (pocket): These are the small amounts you use to operate, trade, or make quick payments. This capital can live on an exchange or a custodial mobile wallet. While you sacrifice some control, you gain the speed needed to take advantage of market opportunities or pay for services instantly.

The golden rule: Preventive maintenance

The biggest risk of this model is complacency. A common mistake is letting the “pocket” grow too large out of laziness. To avoid this, establish a mandatory rebalancing rule:

• Control rule:Move excess from the “pocket” to the “vault” on a monthly basis or whenever the operating balance exceeds €1,000 (or the figure you define according to your risk profile).
• By diversifying your methods under this planning, you not only optimize your operations but drastically reduce the impact in case any third-party platform suffers a setback. You decide how much you risk and how much you protect.

What goes where?

Frequently asked questions (FAQ)

Does a “big” platform guarantee me security?

• No. The history of cryptocurrencies is marked by the fall of giants that seemed “too big to fail”.When you leave your funds on a platform, you are not the owner of the assets, but a creditor of the company.

Is it safe to store the seed in my password manager?

• The main risk is not the manager itself, but malware on your device. If your computer or mobile device is infected, the malware can capture the phrase the moment you copy and paste it, or even access the manager’s database if it is left unlocked.

Does Yoseyomo replace a Hardware Wallet?

• No, and it is fundamental to understand that they are complementary tools, not substitutes.

At the end of the day, real security does not come from a platform, but from your own decisions and habits. Your crypto, your rules. Ready to take control? Start today to build your own financial freedom. Buy, sell, and manage your assets with the confidence only you can guarantee. Explore Bitnovo and secure your digital future.

As Andreas Antonopoulos rightly said: “Your keys, your bitcoin. If they are not your keys, it is not your Bitcoin.”