Key Takeaways

• Bitcoin custody is a foundational decision, it determines who secures the keys and ultimately, who controls your Bitcoin.
• Self-custody offers full control and privacy, but also introduces operational, technical, and physical risks, along with limited access to financial services and inheritance planning.
• Third-party custody is convenient and familiar, but centralizes risk, making your Bitcoin vulnerable to hacks, insolvency, or fraud.
• Both models have served investors well, but each carries serious trade-offs, especially as Bitcoin grows and security needs evolve.
• Multi-institution custody introduces a third option: combining control and resilience without the burdens of self-custody or the trust dependencies of traditional custodians.
• Understanding the strengths and weaknesses of each model is essential before choosing the right long-term custody solution.

Why Bitcoin Custody Matters

If you own Bitcoin, you need to make one critical decision: Who secures the keys to your Bitcoin?

Bitcoin is a bearer asset, meaning whoever holds the private keys can access the Bitcoin. Custody, the management and security of private keys, then becomes paramount, because lost or compromised keys can result in a permanent loss of Bitcoin.

This makes custody foundational for Bitcoin, not just a minor detail, but a core part of your financial planning for your Bitcoin wealth.

For many people, this concept is new. When you save money or invest in stocks, you’re used to a bank or broker holding assets on your behalf. Bitcoin is different. You can hold it directly without a financial intermediary, but that means you’re also directly responsible for how it’s secured and accessed.

Historically, “holding the keys” to your Bitcoin meant physical control of a hardware device like a Ledger and the associated seed phrase. This meant having full control and access.

But modern solutions like multi-institution custody (MIC) change the historical notion of control. Today, investors can retain control over their Bitcoin even without personally managing a key through solutions like MIC.

In Bitcoin, custody isn’t an afterthought. It’s the difference between keeping your wealth and losing it. That’s why custody is often considered one of the most important and most challenging aspects of long-term Bitcoin ownership.

Custody Gone Wrong, A Historical Precedent for the Existing Custody Landscape

In Bitcoin’s early years, most users stored their Bitcoin on exchanges until Mt. Gox collapsed in 2014, taking over 800,000 BTC with it. The total included approximately 750,000 customer Bitcoin and about 100,000 of Mt. Gox’s own holdings, totaling around 7% of all Bitcoin in existence at the time.

At its peak, Mt. Gox was handling over 70% of all Bitcoin transactions globally. It was the go-to exchange for buying, selling, and holding Bitcoin. However, the catastrophic loss, caused by a long-running hack that siphoned out ~850,000 Bitcoin, led to Mt. Gox’s bankruptcy and ultimately destroyed public trust in centralized exchanges.

That’s when the mantra “Not your keys, not your coins” started to gain traction across the Bitcoin community.

In response to the failure of Mt. Gox and other centralized custodians, self-custody has become increasingly popular. Consumer-grade hardware wallets, such as Trezor, Ledger, ColdCard, and Foundation Devices, among others, were introduced, offering users a way to securely store Bitcoin independently.

The Trezor Model One was the first widely adopted consumer-grade hardware device, debuting on July 29th, 2014. So, over the decade from 2014 to the present, two dominant forms of Bitcoin custody emerged:

• Self-custody, where you hold your own keys using hardware wallets or seed phrases
• Third-party custody, where institutions or exchanges hold keys for you

These models have served Bitcoin investors for years, but they each come with serious trade-offs. As Michael Tanguma, CEO of Onramp, noted in a recent interview:

“It’s not hard to self-custody and remember 12 words (seed phrase). But it’s hard to self-custody when your net worth is reliant on it.”

What Is Self-Custody?

Self-custody means you personally hold the private keys to your Bitcoin. This is most often done using a single hardware wallet (like a Ledger or Trezor) or a multisig wallet setup, either DIY or via collaborative custody platforms like Unchained or CASA.

Pros:

• You have full, unilateral control to move your Bitcoin at any time
• No exposure to institutional failures like Mt. Gox
• Aligns with Bitcoin’s core principle of sovereignty
• Greater privacy, no third party monitors your holdings or transactions (unless using Collaborative Custody)
• Cost-efficient, no ongoing custody or management fees once set up

Cons:

• If you lose your keys or seed phrase, your Bitcoin is permanently lost
• Reliance on software (e.g. Ledger Live, Ledger Recovery) and firmware updates introduces third-party dependencies
• Inheritance is difficult to set up securely
• You may become a single point of failure for your family—in other words, the only thing separating your retirement and your children’s inheritance from loss could be a single mistake
• Physical security and usability become burdensome as your holdings grow
• Increased physical threats as personal data is leaked (as seen recently with Coinbase), making self-custody users a target

As Tanguma puts it:

“People hit a ceiling. They love the idea of sovereignty, but the responsibility of holding that much wealth alone becomes a dealbreaker.”

What Is Third-Party Custody?

Third-party custody is when an institution (such as an exchange or custodian) holds the keys to your Bitcoin and manages security on your behalf. It’s the model most people are familiar with, similar to how traditional brokerage or bank accounts work.

Pros:

• Easy to use, no hardware or seed phrase to manage
• Provides access to financial services like trading and lending
• Institutional-grade infrastructure, including security protocols and regulatory compliance
• Smooth onboarding experience and customer support, especially for beginners
• Feels familiar to investors coming from traditional financial services

Cons:

• You don’t control the keys; a single institution does
• Custodian failure, fraud, or hacks can result in permanent loss
• Vulnerable to SIM swaps, phishing, and social engineering attacks, which are becoming more frequent and sophisticated
• Withdrawals can be frozen or delayed, especially during moments of market stress or crisis
• Limited transparency, as clients often can’t audit holdings directly on an exchange
• Fundamentally incompatible with Bitcoin’s bearer-asset nature

As Tanguma explains, the limitations of third-party custody:

“There’s no undo button. That’s the difference. A hack in traditional finance is a reputational problem. A hack in Bitcoin custody is catastrophic.”

Where Existing Custody Models Fall Short

Both models have earned their place in Bitcoin’s history, but neither fully addresses the modern needs of many Bitcoin investors as the price appreciates and stakes are higher.

Self-custody offers control, but may fail in practice.

Roughly 20% of all Bitcoin, about 4 million BTC, is estimated to be permanently lost, often due to misplaced seed phrases, damaged devices, or forgotten PINs.

That’s an enormous amount of wealth gone forever. And while self-custody can work well for smaller allocations, the psychological and operational risks increase as Bitcoin allocations grow.

Third-party custody offers convenience, but introduces central points of failure.

Many investors have suffered losses due to exchange hacks, internal mismanagement, insolvencies, or outright fraud. Custodians often pool client funds in omnibus wallets, meaning one breach or failure can impact thousands of users at once.

Even “trusted” institutions like Celsius, BlockFi, Prime Trust, and FTX failed to protect client assets when it mattered most.

In total, over $600 billion has been lost across the digital asset space, directly reflecting the trade-offs and risks inherent in both models.

As Michael Tanguma puts it:

“People are trying to square a round peg—Bitcoin—with square TradFi systems that just weren’t built for it.”

That’s why more investors are asking: Is there a better way to hold Bitcoin?

The Future of Bitcoin Custody (Today)

Until recently, investors had two main options: self-custody or third-party custody. Both have served a purpose, but each comes with significant trade-offs.

To address gaps in the market, a third model has gained traction: multi-institution custody.

It builds on the strengths of multisig and institutional infrastructure to offer a solution that keeps clients in control of their Bitcoin, while also providing seamless access to financial services like inheritance planning and loans.

You retain full control, but offload the operational burden. You eliminate single points of failure without needing to manage seed phrases or maintain hardware.

It’s not a fit for everyone. But for those seeking security, simplicity, and long-term peace of mind, it’s worth exploring as part of a well-considered custody plan.

Learn more in: What Is Multi-Institution Custody? A Bitcoin Custody Explainer

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