How to Buy Bitcoin and Own Your Money: Part 1
Why Choose a Self-Custodial Wallet?
So you want to buy crypto...
The first decision you need to make is what kind of wallet to store your crypto in. You have two options:
- Get a custodial wallet with a government-regulated centralized crypto exchange, like Coinbase or Kraken.
- Buy crypto through a crypto on-ramp (like Flypto) and send it to a self-custodial wallet.
What’s the difference?
- With a custodial wallet, a third party (ie. the crypto exchange) holds your keys.
- With a non-custodial wallet, you hold the keys.
What do we mean by keys? There are two kinds: a public key and a private key.
The public key is the address you send funds to. Like an email address, you can give it out and people can send you crypto.
The private key is like a password. To send crypto, you need to “sign” the transaction with your private key. If someone gets your private key, they could steal your crypto.
Want to understand how crypto works under the hood? Take the Deep Dive.
What does it matter who holds the keys?
There’s a saying in the crypto world: Not your keys, not your coin.
When you open an account with a crypto exchange, you get a custodial wallet, which means the exchange has custody of your private key. You can access your crypto, but the crypto exchange owns it, and they can do whatever they want with your crypto, and they can’t all be trusted.
Take the recent FTX collapse for example: they lent customer assets to their sister hedge fund, Alameda capital. When the news broke, Alameda tried to sell their investment, which caused the value to tank. When customers went to withdraw their funds, there was nothing to withdraw. FTX is just the latest, most spectacular in a string of crypto exchange collapses where the customers lost their coin.
Self-custodial wallets
With a self-custodial wallet, only you control the keys, so you own your crypto. You and only you determine where it goes. A crypto exchange can’t send it somewhere else. Your assets can’t be confiscated or frozen by a government. Only you can transfer it, or exchange it back into fiat currency, and there’s no financial institution to take a cut!
It’s important to understand that the existence of your crypto is not tied to the app that you used to create your self-custodial wallet. Your coin exists on the blockchain, independent of any technology you use to manage it. So if the app suddenly stopped working, you could download a different app and restore your self-custodial wallet using your seed phrase.
Self-custodial wallets are not without risk. With freedom comes responsibility. If you lose your keys and your seed phrase, you’ve lost your crypto forever. Some people accept the risk of the crypto exchange collapsing or misappropriating their funds in exchange for being able to call up customer service if they lose the key. But for those who want to own their crypto assets, a non-custodial wallet is the only choice.
Buy crypto now.
