Crypto self-custody

[1nvest]

Moderator Message:
This thread split off from here. - Chris

There was a recent post on the crypto board about self-custody.

I had just finished writing a response explaining that while I personally like self-custody, many here value holding the likes of their ISA shares with a nominee. I.E with a custodian.

The post was gone before I could respond. I'm curious as to why. I saw nothing actually offensive about questioning why people might think that it was difficult to hold your own bitcoin.

Was there a complaint and what was the nature of the complaint?
Was it a perceived aggression on the part of the person posting?
Were they a new poster, we have had a lot that do seem to be "less than honest" recently.

Don't many have their crypto stolen when left online (custodian). Offline storage serves as a barrier against lucky random guessing of digital keys. Whilst there might be zillions of key combinations when there are billions of accounts, computer systems running at billions of tries/second sometimes get lucky (that luck might bring just a small win (account value), but could also be a big win (someone with a large value of crypto)).

With conventional banking the ledgers are physically/digitally secured. With crypto the ledger is open to anyone, but encrypted.

Another factor with crypto is that its considered a non legal tender currency and as such all transactions are liable to capital gains tax, whether that's swapping one crypto for another, being spent, being transferred to another etc. If as I have you ever get investigated by HMRC that likely would be a nightmare, where down to every penny is deeply analysed - with the investigators under pressure to find fault, triggering a successful passed to Court/prosecution 'bonus' (in my case no fault was found but boy did they try - several months of letters often being received a week or so after the letter date, demanding a reply within two weeks of the letter date and involving the return of details that often were not easily/quickly to hand). Seems in general that penalties are increasingly being used as a revenue stream whether that's via financials or driving etc.

[Urbandreamer]

Don't many have their crypto stolen when left online (custodian). Offline storage serves as a barrier against lucky random guessing of digital keys. Whilst there might be zillions of key combinations when there are billions of accounts, computer systems running at billions of tries/second sometimes get lucky (that luck might bring just a small win (account value), but could also be a big win (someone with a large value of crypto)).

It's a complicated subject, and it depends upon tradeoffs between convenience and security. It is certainly true that many see the benefits of holding BTC with a custodian. Should we start with everyone who buys a bitcoin ETF. Personally I self custody most of my BTC, but keep enough on Coinbase (who are the custodian for many of the ETF's) to fund purchases upon the VISA debit card linked to my Coinbase account.

With conventional banking the ledgers are physically/digitally secured. With crypto the ledger is open to anyone, but encrypted.

Another factor with crypto is that its considered a non legal tender currency and as such all transactions are liable to capital gains tax, whether that's swapping one crypto for another, being spent, being transferred to another etc. If as I have you ever get investigated by HMRC that likely would be a nightmare, where down to every penny is deeply analysed - with the investigators under pressure to find fault, triggering a successful passed to Court/prosecution 'bonus' (in my case no fault was found but boy did they try - several months of letters often being received a week or so after the letter date, demanding a reply within two weeks of the letter date and involving the return of details that often were not easily/quickly to hand). Seems in general that penalties are increasingly being used as a revenue stream whether that's via financials or driving etc.

That is an issue. I believe that I can provide such records as prove that I have done everything in my power to comply with my tax liabilities. Currently it all falls within my personal allowance, but I need the records if I reach a point that tax is due.

[stevensfo]

Don't many have their crypto stolen when left online (custodian). Offline storage serves as a barrier against lucky random guessing of digital keys. Whilst there might be zillions of key combinations when there are billions of accounts, computer systems running at billions of tries/second sometimes get lucky (that luck might bring just a small win (account value), but could also be a big win (someone with a large value of crypto)).

It's a complicated subject, and it depends upon tradeoffs between convenience and security. It is certainly true that many see the benefits of holding BTC with a custodian. Should we start with everyone who buys a bitcoin ETF. Personally I self custody most of my BTC, but keep enough on Coinbase (who are the custodian for many of the ETF's) to fund purchases upon the VISA debit card linked to my Coinbase account.

With conventional banking the ledgers are physically/digitally secured. With crypto the ledger is open to anyone, but encrypted.

Another factor with crypto is that its considered a non legal tender currency and as such all transactions are liable to capital gains tax, whether that's swapping one crypto for another, being spent, being transferred to another etc. If as I have you ever get investigated by HMRC that likely would be a nightmare, where down to every penny is deeply analysed - with the investigators under pressure to find fault, triggering a successful passed to Court/prosecution 'bonus' (in my case no fault was found but boy did they try - several months of letters often being received a week or so after the letter date, demanding a reply within two weeks of the letter date and involving the return of details that often were not easily/quickly to hand). Seems in general that penalties are increasingly being used as a revenue stream whether that's via financials or driving etc.

That is an issue. I believe that I can provide such records as prove that I have done everything in my power to comply with my tax liabilities. Currently it all falls within my personal allowance, but I need the records if I reach a point that tax is due.

As someone who is trying, albeit slowly, to learn more about this, it would be great if you could talk more about self-custody issues and which external devices you use.

I was reading recently about a cryptocurrency called Monero that seems to be the only truly anonymous currency. Quite interesting. But if it's truly anonymous and untraceable, isn't it just a matter of time until it becomes illegal/ impossible to trade?

My BTC is doing well, but it's really pocket money amounts and meant as an experiment.

Steve

[Urbandreamer]

As someone who is trying, albeit slowly, to learn more about this, it would be great if you could talk more about self-custody issues and which external devices you use.

I was reading recently about a cryptocurrency called Monero that seems to be the only truly anonymous currency. Quite interesting. But if it's truly anonymous and untraceable, isn't it just a matter of time until it becomes illegal/ impossible to trade?

My BTC is doing well, but it's really pocket money amounts and meant as an experiment.

Steve

In reverse order:

Monero is indeed very interesting. Governments ARE actively trying to shut it down as it is truly anonymous.
You won't be able to trade it on a KYC exchange, and probably not exchange fiat currency for it or the reverse.
Worse from my point of view is the question "is it money". Sure it is currency, but while we are told how it is mined and it's inflation policy, there is no means to verify those things.
If you truly are interested in it I would advise investing in your own miner and purchasing it very shortly before spending it.

Self custody.
Well technically the difference between hard wallets, cold wallets and hot wallets is a rabbit hole.
A hot wallet keeps your keys and arguably can be hacked.
Hardware wallets hold your keys but are seldom exposed to the internet, hence more difficult to hack without physical access.
Speaking of physical access, most people keep the hardware wallet with the paper recording the seed phrase. We should all put more thought into how we store our seed phrases.
A cold wallet can be a robust hardware wallet or even better a deleted hot wallet. With no easy means to extract the contents you can't get much colder.
You can use the XPUB to generate receive address, until you need to withdraw BTC. At which point you use your seed phrase to create a hot wallet, withdraw BTC, then delete the hot wallet.

My hardware wallets.
I used a Ledger, but grew unhappy with their security ethos. Instead I use a Blockstream Jade. The first is technically harder to hack, Ledger put serious thought into their hardware. However they didn't protect identity records of customers, and they recently upgraded their firmware in their top of the range product to provide them with your seed phrase. This obviously means you can ask them for it if you have lost your record. They didn't ask, they just did it.
I hadn't checked, but it seems that they abandoned that and instead offer a third party to provide the service.
https://shop.ledger.com/pages/ledger-recover

Custody. There are advantages to custody. For example Inheritance is easy with the likes of an ETF. Self custody requires a lot of the inheritors.

Historically not all custodians have been sound. FTX still owes me BTC. Apparently the fact that they can pay out the value that bitcoin was when they went bump is supposed to put things right. As I said I do have some bitcoin with Coinbase. I suspect that the US government will be unhappy if they fail in their duties given that the government has 3940 bitcoin deposited there. As said I use them as it make buying things in the fiat world easy.

I intend a post in October describing my adventures since April. I am currently under water with respect to the bitcoin I bought back then. Hence not spending my bitcoin.