Recently heard about the term crypto custody and want to learn more? Go through this definitive guide to crypto custody to advance your crypto knowledge.
Digital transformation is the bridge connecting us to a new age of future. There was a time when people communicated through mail before people had smartphones. Within a small period of time, digital advancements have taken over almost every aspect of our lives. Therefore, it is quite reasonable to wonder about the prospects of representing real-world assets in the digital landscape.
One of the most popular digital assets which have garnered considerable levels of popularity in recent times refers to cryptocurrencies. The rising attention on cryptocurrencies has also drawn attention towards crypto custody and how you exercise ownership of crypto assets. Let us find out more about custody of cryptocurrencies or digital asset custody solutions and their significance in modern markets.
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Is Crypto Valuable?
As of August 2021, the total capitalization of the crypto market was over $2 trillion, which clearly shows the value of crypto for the world. The applications of digital assets like cryptocurrencies are influencing conventional financial services. At the same time, crypto has also fuelled the proliferation of new DeFi solutions and a completely transformed perspective on finance.
While many people wonder about the highlights of crypto, such as security, transparency, and a new form of finance, it is important to note that it is intangible. Therefore, many people are confused about cryptocurrency custody without any clarity regarding where they can store the cryptocurrency they have. If you are a Bitcoin owner, do you have the coins representing the value of Bitcoins that you can store in your physical wallet?
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What is Crypto Custody?
The growth of cryptocurrency has been a formidable phenomenon in recent times, especially with additional emphasis on trust and security. In addition, the demand for regulations and standardized operations is also increasing in the crypto ecosystem. Till now, centralized and decentralized exchanges have hogged the limelight in discussions around crypto custody and trading.
However, the approaches for storing and managing digital assets such as cryptocurrencies have become popular in recent times. This is where you would come across modern crypto custody services, which are basically independent storage and security systems for cryptocurrencies.
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Importance of Cryptocurrency Custody
The next critical factor in any discussion around custody solutions for crypto would focus on its significance. The crypto custody market size has been projected to grow at a 21.5% CAGR to reach $1.2 billion by 2026. How are custody solutions an important aspect for the growth of the crypto ecosystem? One of the foremost answers for this question would point towards the growing interest of financial institutions, hedge funds, and individuals with a high net worth in cryptocurrency.
Cryptocurrency custody can serve as vital support for expanding their crypto holdings. Around 150 active crypto-related hedge funds have already accumulated almost $1 billion in terms of the value of assets under their management. However, around 52% of the hedge funds, financial institutions, and high-net-worth individuals depend on services of independent custody solutions. Therefore, the growing interest of institutional investors in the crypto space establishes the need for institutional crypto custody solutions.
Custody in the case of crypto assets is a broad term with the availability of many solutions. You can discover many unique choices for storing crypto assets and ensure all-around access to your crypto assets. In addition, you should also notice the value of crypto custody solutions and the challenges associated with them.
Understanding Cryptocurrency Custody
In order to understand “what is crypto custody” in detail, you need to focus on a detailed impression of asset custody. In the case of traditional financial markets, custodians are basically the institutions that offer different financial services. However, the custodians in traditional financial markets have to focus primarily on safekeeping of assets.
The custodians can serve as vaults that hold the assets of investors in electronic and physical variants and take a fee for safekeeping your assets. In addition, the custodians also leverage their market experience for efficient and faster settlement of investors’ trades. In the case of cryptocurrency custody, you would find similarities with custodians in traditional financial landscape. However, custody of crypto has some unique details which you should note carefully.
Institutional crypto custody solutions have similarities to custodians of traditional financial services, albeit with a prominent difference. Custody solutions for crypto focus primarily on taking responsibility for the digital assets of customers and securing them. The secret to effective crypto storage and management with custody solutions is clearly evident in secure key management.
Working of Crypto Custody
Another important factor in any discussion on crypto custody services would bring the focus on how they work. Crypto works on the foundation of blockchain, and as the name implies, cryptographic security is a basic aspect of cryptocurrencies. Key management helps in cryptographic security of assets and allows custody of digital wallets through private keys. However, the institutional crypto custody solutions hold the private keys to assets on behalf of the owner. The custody solution for crypto ensures that any other party could not access the private keys of a user.
The security of any asset is an important concern for crypto custody as investors focus on security before allocating assets to custody services. On the other hand, you would find many inherent features with cryptocurrency for obtaining the assurance of security. First of all, you can find representations of crypto assets on blockchain which are impossible to modify. The next critical aspect in custody of crypto assets refers to access to crypto assets through public and private keys.
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Public and Private Keys
If you dig deep into any type of popular crypto wallet, then you can find how they use the keys. As a matter of fact, any solution offering you the custody of crypto assets, such as a crypto wallet, does not store your actual crypto. On the contrary, the cryptocurrency custody solution of your choice would store the private keys for you. The custody solutions such as wallets could also help you manage your cryptocurrency effectively with direct access to your private keys.
- Public keys are basically a long numeric code associated with a specific wallet or custody solution. It serves as the address of the custody solution and should be paired with the right private key for executing transactions.
- Private keys, on the other hand, are randomly generated binary numbers, which can help in encryption and decryption of transactions. The private key helps in unlocking and verifying a transaction.
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Different Alternatives for Crypto Custody
With a detailed impression of the basics related to custody of cryptocurrencies and the crypto custody market size, now it is reasonable to focus on different types of solutions. What are the types of custody solutions you can use for cryptocurrencies? Here are the three common types of crypto custody services you can find for individual as well as institutional investors.
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Self-custody
One of the foremost options for individual crypto custody solutions would obviously refer to self-custody solutions. Take control over your crypto assets with hardware, software, or paper wallets according to your convenience. Self-custody solutions for crypto help you use hardware, software, or paper for storing the private keys to your crypto assets. The advantages of self-custody solutions include better security and improved control over your assets. However, you have to take on the responsibility of your asset alongside the vulnerabilities of hacking and asset loss.
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Exchange Wallets
The next common entry among cryptocurrency custody solutions would bring exchange wallets into the equation. Exchange wallets are basically the solutions in which investor allocates the control and management of private and public keys to exchanges. However, investors would enjoy seamless access to their public and private keys through an online wallet.
Such types of solutions are suitable for institutional crypto custody where the exchange takes responsibility for managing private keys. While exchange wallets offer considerable simplicity and ease of access for managing the custody of crypto assets, they also present certain counterparty risks.
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Third-party Custodian
The final type of entry among crypto custody services would refer to third-party custodians. Service providers storing digital assets on behalf of customers can easily qualify as third-party custodians. However, third-party custodians offer the facility for including custom-defined features and controls for controlling management of the asset.
Third-party custody services are ideal for institutional crypto custody with exceptional institutional-grade security alongside insurance. You could find the promising value of standardization with clearly defined rules and controls for managing crypto assets. On top of it, third-party custodians also offer better flexibility and security, albeit with a higher cost suitable for institutions.
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Storage of Keys
As you can notice clearly, the different types of cryptocurrency custody solutions store the private keys of investors. The custody solutions provide security for crypto assets through secure maintenance of the private keys of investors. Custodians could choose hot storage, cold storage, or even smart contract wallets and multi-signature wallets for storing private keys.
- Hot storage is a method for storing crypto assets online, which allows online custodianship of your crypto. Hot wallets can help you use a digital private key to access a specific asset. However, they are extremely vulnerable to hackers.
- Another common form of private key storage mechanism in crypto custody services includes cold storage. As the name implies, cold storage of private keys focuses on offline storage of private keys. Cold storage requires a private key for accessing the offline digital wallet and reducing the security vulnerabilities.
- A multi-signature wallet is another example of a mechanism for storing private keys in crypto custody solutions. The multi-signature wallets require multiple approvals for transactions alongside allowing online custodianship of crypto assets. Multiple users could access the decentralized wallet, thereby indicating a formidable improvement in solutions for custody of cryptocurrencies.
- A smart contract wallet would also provide a vital indication of the types of storage for private keys in cryptocurrency custody solutions. The smart contract wallet offers custody of smart contract tokens alongside proving ownership through online custodianship. Smart contract wallets also have interesting details like control by code, a private key, and a master account.
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Final Words
The basics of crypto custody show how it can transform the conventional precedents for managing your crypto assets. Institutional investors are seeking new avenues for expanding their crypto holdings, and custody solutions offer the desired support. New custody solutions for crypto assets provide new opportunities for reducing the risk and complications associated with managing your own crypto assets. Custody solutions can also provide an additional layer of security for your crypto assets.
As a matter of fact, the custody solutions for crypto are suitable alternatives to exchanges. Therefore, cryptocurrency custody might be a profound driver for crypto adoption by empowering simple and streamlined crypto asset storage and management. Blockchain and crypto continue to transform the world, and custody solutions are a crucial highlight of the emerging ecosystem. Learn more about custody solutions and find the best choice for your crypto needs right now.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
