Is money safer in the bank or under the pillow? The situation is similar with cryptocurrencies. Self-custody is often preached like a mantra in the cryptocurrency scene: Remember: ‘Not your keys, not your coins’? But dangers lurk here, especially for beginners. If you choose the right crypto platform, you can trust your coins are protected by world class security.
Here’s why self custody can be a draw and how you find
| Custody 101: Why Holding Keys With a Reputable Provider Can Make Sense
Cryptocurrencies like Bitcoin (BTC) exist on the blockchain. To use them, you authorize transactions with a private key stored in a wallet. When purchasing through a centralized exchange, broker or crypto asset provider, the provider can securely custody the key on your behalf, so you retain ownership while benefiting from institution‑grade security, straightforward recovery options, and an intuitive user experience. Regulated crypto brokers like Coinbase implement safeguards such as rigorous compliance, and 24/7 monitoring to help protect access even in adverse scenarios. As Coinbase is regulated under the new EU’s MiCA rules, it must keep customer crypto completely separate from Coinbase’s own assets, so it cannot be used to pay Coinbase’s debts if the company ever faced financial difficulties. However, Coinbase always gives you the option: you can also withdraw to self‑custody at any time if you prefer to manage your own keys. |
Dangers of self-custody
Misplaced, lost, destroyed or stolen: The case of a Welsh Bitcoin miner is world famous. He had thrown his hard drive with the private keys for Bitcoin worth approximately €500 million in the trash. Since 2013, the Bitcoin miner has been fighting unsuccessfully to obtain permission from Newport City Council to search the local dump. As positive as self-custody seems at first glance, it can lead to the loss of all cryptocurrencies, especially for beginners.
1. Insecure backups and poor storage:
The private key must be kept secure and secret. But what does that mean?
- If stored digitally (screenshot, cloud, notes), it can be stolen by hackers.
- If it is written on paper, it can be lost, destroyed by fire or water, or someone can find it.
- If it is engraved in metal plates, these too could be stolen or lost.
- If it is stored with another person, you have to trust that person.
2. Problems with the seed phrase
If you’ve lost your private key, you can restore your wallet using the seed phrase. This consists typically of 12 or 24 words. However, the same problems arise here as with the private key.
3. Loss or destruction of a hardware wallet
A hardware wallet is often the preferred option for self-custody. It stores the private key offline. But even here, there are a few things to consider.
- If it is stolen or lost, you usually can no longer access your coins.
- A hardware wallet can also be destroyed by fire, water, and violence.
- Hardware wallets also usually have a recovery seed phrase. The risks mentioned above apply here.
When you store your coins on a centralized exchange or broker, there is no physical device to look after.
4. Software Wallet
Software wallets allow self-storage of cryptocurrencies directly on a smartphone or in a browser. However, they are considered significantly less secure than hardware wallets. If the device is lost, hacked, or damaged, access to the coins may be lost. The following also applies here: No seed phrase – no recovery. Many of these wallets store the seed phrase not automatically, but require the user to record them manually and securely. Some wallets, such as Coinbase Base App* offer an optional backup function via cloud services such as iCloud or Google Drive.
5. Loss of access to the estate and access restrictions
Unfortunately, many crypto users do not consider all the events that can occur. If a person dies and has not taken appropriate precautions, then in the worst case scenario no other person will have access to the cryptocurrencies they have stored.
If the cryptocurrencies are stored on a licensed crypto asset provider, the heirs have a contact person and can ultimately get access to the cryptocurrencies.
How do you identify a reputable crypto broker?
To choose a secure and reputable crypto asset provider, you should check for a few things.
1. Regulation and licensing
Reputable crypto asset providers have a license from the relevant regulatory authority. An official license such as MiCA from the EU, which is implemented by local authorities, requires, among other things, that customers’ crypto assets are kept separate from those of the crypto company and thus do not flow into the insolvency estate in the event of insolvency. Coinbase Germany was the first crypto provider ever to receive a license from the German financial regulator. As the first listed crypto exchange on the NASDAQ and now included in the S&P 500, Coinbase Global, Inc. is obliged to publish regular reports on its business.
2. Security in crypto custody
Coinbase stores the majority of its customers’ cryptocurrencies offline in cold storage. Customers’ cryptocurrencies should be held 1:1, as with Coinbase.
3. Account security
Wherever online accounts are involved, phishing is a major risk. Especially in the crypto space, a single wrong click can have fatal consequences: If access is compromised by a phishing attack, the coins are often lost forever – because, unlike traditional banks, there is no deposit protection and no chargeback.
Therefore, it’s crucial to choose a crypto broker with comprehensive account security features. Coinbase is among the most secure crypto asset providers and offers a range of protection mechanisms:
- Two-factor authentication (2FA): with authenticator app or SMS
- Biometric login: Face ID or fingerprint (mobile)
- Address whitelisting: Payouts only to previously approved wallet addresses
- Real-time alerts: on login attempts or security-relevant actions
4. Has a crypto exchange or broker ever been hacked?
Unfortunately, even professional exchanges may fall victim to hacking attacks in which large sums of cryptocurrencies are stolen. One of the most prominent attacks hit a crypto exchange in February 2025. The hackers stole a record sum of cryptocurrencies worth $1.5 billion. Other well-known crypto exchanges have also been victims of hacking attacks in the past. However, Coinbase is the most trusted crypto app and uses its world class security to help protect against these kinds of attacks.
Conclusion
The decision whether to self-custody your cryptocurrencies or entrust them to a regulated provider should not be made based on ideology, but rather on practical considerations. For most retail investors, the likelihood of their private keys/seed phrase being lost, stolen, or destroyed may be higher than that of losing their crypto on a regulated crypto asset provider like Coinbase.
*This service is not regulated under MiCA, and is powered by Coinbase Bermuda Technologies Limited.
Cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and others are managed using so-called wallets. These wallets store the keys that allow access to the cryptocurrencies on the blockchain. Wallets have
- a public key,
- a private key and
- a seed phrase
The public key is publicly visible and is used to receive cryptocurrencies. The private key should be kept safe and secret, as it is used to send cryptocurrencies. The seed phrase, or recovery phrase, should also be kept safe and secret. This is because it can be used to restore the wallet and its associated keys, thus also gaining access to the wallet.
Disclaimer:
Trading in crypto is highly risky and may not be suitable for all as the entire amount invested could be lost. Information is provided for educational purposes only and is not investment advice. This is not a recommendation to buy or sell a particular digital asset. Coinbase makes no representation on the accuracy, suitability, or validity of any information provided or for a particular asset.
This is an article written by Coinbase, Fintechnews does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. Readers should do their own research before taking any actions related to the company. Fintechnews is not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in the press release.
Please note this is no investment advice.
Featured image by Oporty on Freepik
