Investors, both individuals and institutions, have developed an aversion to paying for custody of their bitcoin over the years.
As bitcoin evolved from "magic internet money" to a $1.4 trillion asset, solutions emerged to protect the best-performing asset of the past decade.
Many of these solutions have been inexpensive, which was reasonable when bitcoin was valued in the hundreds or thousands of dollars.
However, with bitcoin now approaching six figures and competing against a global asset pool worth $900 trillion, custody will come at a cost—whether directly in dollars or through hidden risks.
These seemingly free or low-cost options often come with hidden costs that most people don't realize until it's too late or while narrowly escaping catastrophe.
Taking a step back, it’s important to highlight that there have been two primary approaches to bitcoin custody historically: third-party custody and self-custody.
Third-party custody mirrors the traditional financial system, where investors trust an institution, like an exchange, to safeguard their bitcoin. While this model may work for stocks and bonds, it’s a poor fit for bitcoin. If the institution is hacked, goes bankrupt, or engages in fraud, your bitcoin is likely gone forever.
Although leaving bitcoin on an exchange might seem “free,” the true cost is the potential for permanent loss, which must be avoided at all costs.
These exchanges typically charge little or nothing for custody because their revenue comes from trading fees, and their operations are often subsidized by venture capital. In other cases, exchanges pay an external custodian to safeguard their clients’ bitcoin, so there is an incentive for these companies to tell their clients to move their bitcoin off the exchange.
Self-custody, on the other hand, places the responsibility of managing bitcoin on you, the bitcoin owner. Since you are responsible for protecting your bitcoin, not much can be charged, so this has been another low-cost option.
A hardware wallet, such as a Ledger or Trezor, can be purchased for around $100 to protect bitcoin. However, self-custody brings significant trade-offs. While it reduces reliance on exchanges, it introduces risks such as broken hardware wallets, lost seed phrases, forgotten passcodes, “treasure maps” for managing inheritance, threats of physical violence, and more.
Collaborative custody offers an enhanced version of self-custody. In this model, the individual holds most keys but involves a third party as a backup, reducing the risk of a single point of failure. However, this does not mitigate the aforementioned hidden risks.
Hidden Costs of Custody
Despite the low or no fees associated with these custody models, the hidden costs are high. I’ve experienced these hidden costs myself and have spoken with hundreds of people since working in the industry who share the same experiences.
Common stories include:
Lost bitcoin on platforms like BlockFi, Celsius, or FTX.
Forgotten passcodes or lost seed phrases for hardware wallets
Physical threats or phishing attempts targeting bitcoin owners
Concerns about family members being unable to access bitcoin if something happens to them
Troubles managing self-custody when traveling
These examples highlight the hidden costs that are often downplayed. Whether it’s the fear of an exchange collapse or the anxiety of managing private keys, there are serious costs involved in both third-party and self-custody. The monetary cost is just one part of the equation.
When trusting a third-party custodian, there's always a lingering question: “Will this exchange or institution still be around tomorrow?” We've seen enough failures in the bitcoin and crypto space to know that even seemingly reputable platforms are not immune to collapse.
Moreover, as hackers become more sophisticated, both the platforms holding your bitcoin and you, the user, are vulnerable to increasingly advanced phishing and hacking attacks.
On the other hand, self-custody, often portrayed as a straightforward solution (“just write down your 24 words”), is far more complicated in practice. The risk of user error—such as misplacing a seed phrase or failing to secure your keys properly—is ever-present.
Additionally, the physical risk of holding private keys makes bitcoin holders potential targets for theft, coercion, or even violence. In the event of a sudden death or incapacity, many bitcoin owners lack a clear plan for passing their assets on to their family.
Many bitcoin investors are recognizing that while they may be able to manage self-custody, their loved ones will be left on an island if anything happens to them.
The combined stress of managing private keys, the fear of human error, and the personal risks associated with physical threats are significant hidden costs.
For many, this burden outweighs the perceived financial savings of using a "free" or low-cost custody solution and as bitcoin appreciates over time, these hidden risks become even more pronounced.
Evolving Bitcoin Custody: Mitigating Hidden Costs
Many individuals are still using the same low-cost methods of securing their bitcoin that they did when bitcoin was 1/100th or 1/10th of today’s value.
What worked when bitcoin was a few thousand or ten thousand dollars may no longer be sufficient as its value continues to rise. The risks of mismanagement, physical security, and inheritance planning are growing.
To secure bitcoin in this next cycle, investors who have accumulated material amounts of bitcoin (as measured by % of net worth or considerable $$ value) should consider evolving their bitcoin custody approach to meet these heightened risks.
I am of course biased as I work at Onramp, a bitcoin custody and financial services company, but I joined for good reason. When I first heard of the company in spring 2023, I immediately recognized that the company was addressing a major gap in the market with a multi-institution custody solution.
Multi-institution custody is a robust and secure solution that distributes key management across multiple independent businesses specializing in protecting keys on behalf of investors. This approach eliminates single points of failure and shifts the burden of key management away from the individual.
In this setup, no single institution can move or lose client funds. It requires the coordination of multiple independent institutions that can only act in the explicit direction of the end client.
By distributing custodianship among reputable institutions, bitcoin holders can maintain security in a trust-minimized fashion while avoiding the risks of storing their private keys at home for material amounts of bitcoin. This system offers a similar level of convenience as traditional third-party custody and eliminates many of the hidden risks discussed.
This system not only protects assets through institutional-grade deep cold storage but introduces the ability to access financial services such as seamless inheritance planning and insurance solutions.
While multi-institution custody comes with a cost, it is justified when weighed against the hidden risks of self-custody and traditional third-party models. These added layers of security and planning allow bitcoin to take its rightful place as the bedrock of your financial strategy.
The peace of mind from knowing your bitcoin is secure for the long term and your family is protected is invaluable.
While Onramp is the leading provider for multi-institution custody, others will enter the space, as this is the next evolution of bitcoin custody required to protect individuals and institutions bitcoin from $1T to $2T, $5T, and beyond.
Sign up for Onramp using my link to receive $250 off your multi-institution vault.
Side note: Diversification of custody solutions is worth considering. I use multi-institution as the secure solution for most of my bitcoin, but I also see the merit of self-custody for a smaller percentage of my savings.
This is a nuanced topic requiring individuals to assess their circumstances and create a solid plan for managing their bitcoin.
Similar to traditional finance, diversification plays a role in managing investments as bitcoin continues to appreciate and gain widespread adoption, and those with much of their net worth invested (think 10%+) ought to consider the right custody mix to protect their bitcoin.