Selecting the Right Custody Solution

Before deciding which custodial option to use, it’s crucial to assess our goals and comfort level with risk. Just as students choose college courses based on their personalities and interests, we should select a custody solution that aligns with our crypto holdings and preferences. Let’s assess our needs and risk tolerance. Try answering the questions and find out for yourself!  

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1. Investment size

• How much are you willing to invest, whether it’s Php 1000 or Php 100,000? 

• Are you comfortable with risking this amount of investment? 

Understanding the amount you’re storing is essential when choosing a custody solution. Smaller sums might be fine in a hot wallet for easy access. But larger investments might warrant a cold wallet or a third-party custodian to mitigate the risks. 

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2. Frequency of transactions

• How often do you engage in crypto transactions? 

• Are you regularly moving funds, or do you plan to hold your crypto for a few years without touching it? 

Hot wallets like OKX Web3 Wallet are ideal for frequent traders due to their accessibility and speedy transactions. Meanwhile, people who transact less frequently may find it safer to store their crypto in a cold wallet (Ledger, Trezor) or entrust it to a third-party custodian for added protection.

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3. Technical Expertise

• Do you find setting up a wallet or managing a seed phrase challenging? 

• Would you prefer someone else to handle your funds? 

If you answered ‘yes’ to both questions, it might be ideal for you to find a third-party custodian. They handle all the technical aspects, ensuring your peace of mind, and eliminating the risk of accidentally losing access to your funds.  On the other hand, if you answered ‘no’ to both questions, then you’d do better by having your own hot or cold wallet. If you answered one ‘yes’ and one ‘no’, consider exploring both options. 

Now that we’ve identified our preferences as crypto users, it’s time to look into what each custody solution offers. Just like incoming college students explore various programs to find what fits right for them, we must evaluate specific factors of each custody solution.

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1. Accessibility  

Some storage options provide instant access to your account, while others require multiple steps. Hot wallets are generally the most accessible, just a few clicks away in your browser for instant transactions. Cold wallets require a few extra steps of connecting to your computer. Lastly, third-party custodial storage (with asset managers) is the least accessible, involving paperwork and time to unlock funds from multi-signature wallets. 

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2. Security 

Now, let’s talk about security. Generally, the less accessible a custody solution is, the more secure it tends to be. Third-party custodians offer the highest security, employing measures like multi-signatures and insurance coverage. They also eliminate the risk of you losing your seed phrase or sending funds to the wrong address accidentally. Cold wallets provide a bit less security without the insurance, placing the responsibility on you. Hot wallets are the least secure, as online threats like malware or bad actors can target your computer and extract your funds.

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3. Compliance 

Compliance becomes a significant consideration when dealing with third-party custody. Custodians must adhere to specific regulatory frameworks including AML (anti-money laundering) laws, KYC (know your customer) requirements, and data protection. Each custodian may have varying approaches to compliance, so it’s essential to research and pick a compliant service provider.

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4. Cost 

In terms of cost-effectiveness, most hot wallets can be downloaded online for free. Meanwhile, cold wallets come at a higher cost since they are physical devices. Third-party custody solutions are the most expensive, considering fees for fund management and security services. 

Understanding these factors simplifies the process of choosing a custody solution that aligns our needs! With this knowledge, you’re well-equipped to securely store your crypto! In our next module, we’ll analyze some risks associated with crypto storage and explore the future of blockchain custody.