Bitcoin and Crypto Asset Safety Options In 2022

In this guide, learn some of the major factors that go into crypto asset safety strategies, which will hopefully help you to decide on the safety and storage options that best fit your needs.

Whether investing in Bitcoin, Ethereum or another digital asset within the cryptocurrency market, storage is a critical aspect to get right. Despite the rapidly growing interest in cryptocurrencies – especially for accredited and institutional investors – the risks of hacking, scamming, mis-handling, and mis-mangament of crypto assets continue to be important considerations. Given this, a sound storage strategy can go a long way in protecting one’s digital assets; whether implemented individually, by a trusted custodian or a third party.

The demand for crypto as an asset class is on the rise, with developments like DeFi (decentralized finance) responsible for a significant amount of the growth as well as the losses. In 2021, we saw DeFi transaction volume grow 912%, meanwhile 72% of stolen crypto funds in 2021 – totaling $3.2 Billion USD worth of cryptocurrency – were taken from DeFi protocols.

In this article, we’ll dive into 3 key distinctions to understand with respect to Bitcoin and crypto storage options in general. Whether you are interested in managing your crypto assets yourself, becoming the client of an institutional custodial solution, or entrusting your investment with a fund, this guide will help. Although the best option for an investor truly depends on one’s goals and risk-tolerance, we see these 3 distinctions as essential irregardless:

Hot storage vs. Cold storage

One of the most important distinctions to make with respect to Bitcoin and crypto asset safety is between hot and cold wallet solutions. A hot wallet is connected to the Internet, and one’s assets can be more quickly moved around; whereas a cold wallet solution tends to be more secure due to it not being connected to the Internet and stores the crypto assets in a much less liquid manner, generally. If a wallet is web-based, mobile-based, or downloaded on a desktop computer, it’s most likely a hot wallet. 

Whether managing one’s own wallets or entrusting assets with a custodial solution (more on this below), it’s important to understand whether storage solutions are fully hot, fully cold, or a combination of both. Most exchanges store their customers’ assets in offline cold storage, and most hardware wallets are cold wallets. Generally, the security level of a cold storage solution is significantly higher than with a hot wallet.

A crypto vault, on the other hand, is not quite a cold wallet and isn’t quite a hot wallet, either. A vault is like a wallet in that it has a unique address used to send cryptocurrencies. However, a vault differentiates from a wallet in that there is a withdrawal delay and approval process so as to strengthen vault security.

Self-custody vs. Custodial

Another important distinction to understand is the difference between self-custody and custodial crypto storage solutions. Most centralized exchanges – like Coinbase or Binance for example – offer investors the opportunity to “hold” their assets on the exchange. One of the most critical truths to learn with respect to exchanges is that by storing or keeping one’s crypto assets on exchanges the exchanges maintain custody over the assets. 

Why is this important to keep in mind?

Well, if one loses access to the exchange or the exchange shuts down, there generally is little recourse one has to retrieve their assets without first getting support from the exchange, due to these exchanges technically having custody over the assets while they are being held on the exchange.

An investor must ask themselves whether a custody solution is best and what type of custody solution is best. Custody solutions have their place and benefits.

As an example, there has been a steady growth of custodial solutions for institutional, accredited and sophisticated investors in general, with many options squarely focused on providing highly-secure solutions that meet regulatory requirements.

One of the other risks to consider with respect to self-custody is social engineering tactics, which represent a significant amount of stolen crypto funds. Social engineering does not involve the stealing of crypto assets via code vulnerabilities, for example, but rather consists of scammers luring holders of crypto assets into clicking buttons or sharing information that could lead to the loss of funds. With a custodial solution provided by a trusted third party or a fund manager, this type of risk can be mitigated.

Specifically, it is important to investigate the key management model of any custody solution. Generally, with a custody solution, the individual investor or asset holder is not the direct signing authority, but rather it is the solutions provider.

Non-instutitional-focused vs. Institutional-focused

As alluded to above, Bitcoin and crypto asset safety options can also differ significantly as far as whether they are tailored to institutional investors; benefits such as the insurance of one’s funds in the case of loss, the ability to perform staking activities while keeping one’s funds safely in cold storage, and beyond.

Third-party solutions exist specifically for accredited or institutional investors. From asset managers to hedge funds (as is the case here with BitBull Capital and our 3 fund offerings), the demand for bank-level security and safety is met with institutional-focused crypto asset safety options, best when provided by a qualified custodian.

An example of a non-institutional-focused custody solution, for example, could be storing one’s crypto assets on a centralized exchange.

A fully-managed solution entails investors benefiting from the expertise of fund managers with extensive experience in the crypto space as well as institutional-grade security and compliance standards. BitBull Fund offers this type of solution.

Knowing the regulations applicable from an individual investor as well as the solutions provider perspective is vital, while also determining how well an institution-grade addresses counterparty risk, indemnity, multi-signature wallet usage and beyond.

Perhaps one of the most critical components to Bitcoin and crypto asset safety is ensuring that the individuals or service providers entrusted with overseeing the protection of the assets are highly-experienced and, if a solutions provider, the infrastructure is in place to meet or exceed the needs of institutional investors or corporate treasuries, for example.

Whereas some needs are standard, others are quite specific for investors. What’s more, the combination of risk, cost and complexity involving investment into crypto assets is unique. 

Here at BitBull Capital, our fund offerings have been created to meet the demand of investors with diverse risk-tolerance, and we bring extensive experience, and launched the world’s first crypto fund of funds. We’re here to help you navigate the crypto space and determine which approach and solution is best for your needs.

Book a call with us today to learn more.

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