In this episode, Lorraine explains what “not your keys, not your crypto” means, the pros and cons of holding your crypto on an exchange, and the benefits of self-custody of your crypto. She distinguishes between hot and cold wallets and emphasizes why private keys, which give you access to your funds, should be backed up and kept safe.
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Hi, welcome to Decentralized, a podcast on the crypto space, where I'll be talking about the crypto landscape, the crypto infrastructure, crypto assets, and the crypto market, as well as factors that affect it. My name is Lorraine Mutyaba, and I am the host of Decentralized.
I am going to start this episode with the expression "not your keys, not your crypto". If you've scoured crypto Twitter, crypto YouTube, and crypto Reddit, you've probably come across this expression. It was fast popularized by Andreas Antonopoulos, a Bitcoin educator, advocate, and the author of the Internet of Money, which is recommended reading for anyone who is interested in Bitcoin and crypto. In it he makes a compelling case for Bitcoin that could turn any skeptic out there into a believer. It is light reading, and it's a good book. I highly recommend it. But what did he mean when he said "not your keys, not your crypto"?
A crypto wallet is used similarly to the wallet in which you store your coins and your cash. Similarly, but not the same. A crypto wallet gives you access to your funds as opposed to storing them. There are two keys associated with every crypto wallet, a private key from which is derived a public key. And then from the public key, you can derive something called a public address. A private key is typically a string of numbers and letters, but it could be a phrase. It could be a code. It could take on various forms. With a public address, you can receive crypto. With a private key, you can access that crypto that you have received and use it as you wish. Let's say I wanted to send my friend Ivan some Bitcoin. I would ask Ivan for his Bitcoin I Bitcoin address. And then I would send the crypto to that address. If he wanted some Solana, I would ask him for his Solana address and send some Solana to that address. Addresses are only compatible with specific types of cryptocurrencies. So I cannot send Solana to a Bitcoin address and vice versa. You can think of a crypto wallet, like a, a bank account with your private key being the pin code that gives you access to that account. And your address being the account number that you use to receive funds. Whoever has access to your private key can do anything they want with your crypto wallet and with the funds in it. Your private key should remain private.
When you store your funds, your crypto, on an exchange, the exchange has custody of your crypto assets, and therefore it can do whatever it wants with them. That's not to say it will, but it can. There are other downsides to keeping your crypto on an exchange. First of all, the exchange could limit access to those crypto assets by freezing or limiting withdrawals on its platform, or if the wallet holding your funds is undergoing maintenance. Before the crypto lender Celsius and the crypto exchange Voyager failed, they froze withdrawals on their platforms, and their users still do not have access to their crypto funds. The other thing is that if that exchange files for bankruptcy or fails, you will not be made whole. Coinbase, a crypto exchange and one of the biggest in the world, recently disclosed that, and I quote, "because custodial held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets, we hold in custody on behalf of our customers could be subject to bankruptcy proceeding, and such customers could be treated as our general unsecured creditors." This means that users would lose access to their balances because they would become Coinbase'' property. So they are downsides to holding your crypto on an exchange, but having a self-custody wallet has benefits. Not only do you control your private keys and therefore control the funds in your wallet,vif you believe that cryptocurrencies are going to be part of a new financial order where we are our own banks, then self-custody is the only way to go.
Let's say you want to get a self-custody wallet. What options are available? Well, you have hot wallets and cold wallets. Hot wallets are connected to the internet. All the time. Cold wallets are not .Hot wallets include web wallets, software, wallets, and some exchange wallets. The private keys of a hot wallet are generated online and transactions are signed online using those private keys. As long as the environment in which the keys are generated is secure, your wallet should not be compromised. Assuming of course, that, that device on which you download it is free of malware. Hot wallets are ideal for people who frequently buy crypto or traders, as they give you easy access to your funds, as well as exchanges, and other aspects of the crypto space.
The most popular hot wallets include MetaMask, MyEtherWalllet, Coinbase wallet, MyCrypto wallet, and other wallets. Each has its pros and cons. Some are multi-currency wallets, while others are single-currency wallets. Even though these hot wallets are very safe, assuming the keys were generated in a secure environment and that your device is safe, they still are not considered the most secure way of storing your crypto. To do that, you need a cold wallet.
Cold wallets are not connected to the internet. The private keys of cold wallets are generated offline in a secure environment and transactions are assigned in a secure environment as well. Examples of cold wallets include paper wallets. Paper wallets are simply a piece of paper with just a private key and a public address. This paper wallet should be generated in a secure offline environment. And once it's generated, it should be printed using a printer that is not connected to the internet. You should probably make several backups of this paper wallet. Because it is a paper wallet, it's not fire and waterproof, and ink fade with time. So you could laminate a copy. You could keep one in your safety deposit box. You could keep one in a vault in your house. You could keep one at your parents' house. And then you have hardware wallets. Hardware wallets are USB- like devices that again generate your private keys offline and allow you to sign your transactions offline. The most common includes Trezors and Ledgers, but they're quite a number out there. When a private key is generated using a hardware wallet. a recovery phrase is also generated. And in the event that you hardware wallet is damaged or stolen, you can use that recovery phrase to gain access to your funds.
Hot wallets also have this capability. Cold wallets are ideal for people who do not intend to transact often. Uh, these are crypto users who just want to buy their crypto and hold it. The more inconvenient it is for you to access your funds. The more secure your funds are. And so there is something called deep cold storage. An example of deep cold storage would be getting your hardware wallet, storing it in a steel case, placing that steel case in a container, and then burying that container in your garden and growing a Rose Bush on top of. There are upsides and downsides to being your own bank. In 2013, James Howells, a Welshman living in Newport, Wales, discarded a hard drive that contained the private keys to a Bitcoin wallet that would have given him access to 8000 Bitcoin. That's roughly 173 million dollars. At one point, the bitcoins were worth half a billion dollars. Since 2013, he has been trying to gain access to that dump site, but all his efforts have been in vain. If you are new to crypto it's okay to first use exchange wallets until you become comfortable with using, uh, Hot or cold wallets because they require a level of personal responsibility.
And again, if you lose your keys, your crypto is gone. I would encourage you to become familiar with, um, self-custody wallets, because they do give you control over your crypto, and that does come in handy. But that's all I have for you this week. Thank you for listening, until next time.
Take care of yourselves.