The recent troubles faced by crypto custodians such as FTX have led many investors to take “self-custody” of their funds, moving them from crypto exchanges and trading platforms to personal digital wallets. This trend is reflected in the rising number of bitcoin held in smaller wallets (those with under 10 bitcoin), which increased by 23% to 3.35 million as of January 11th, according to data from CoinMetrics.
The proportion of total bitcoin supply held in wallets with less than 10 bitcoin has increased to 17.4%, up from 14.4% a year ago, as more investors opt for self-custody of their funds. Joshua Peck, founder of hedge fund TrueCode Capital, commented that the frequency of trading plays a role in this trend, stating that for those who plan to “buy and hold for the next 10 years,” it is worth investing time to learn how to properly custody assets.
The trend towards self-custody of crypto funds has accelerated following the FTX scandal and other crypto collapses, with large investors leading the charge. According to data from Chainalysis, the 7-day average of daily movement of funds from centralized exchanges to personal wallets reached a six-month high of $1.3 billion in mid-November, when the FTX incident occurred. The data also showed that big investors with transfers of over $100,000 were responsible for these flows.
What About the Keys?
The phrase “Not your keys, not your coins” is a popular saying among early crypto enthusiasts, emphasizing the importance of maintaining control over one’s own funds. This phrase trended online frequently last year as finance platforms faced difficulties. However, self-custody is not without its challenges. There are different types of wallets, such as “hot” ones that are connected to the internet and “cold” ones that are stored offline in hardware devices. Cold wallets may be more secure but they may not be appealing to first-time investors who typically buy crypto on big exchanges.
Self-custody can be a cumbersome and expensive process for small-time investors, who have to navigate the complex process of securing their encryption keys without losing or forgetting them. Additionally, hardware wallets can fail or be stolen, adding to the challenges of self-custody. Joshua Peck, founder of TrueCode Capital, mentioned that “it’s a very challenging prospect of doing self-custody for a multi-million-dollar portfolio of crypto.” Some institutional investors are turning to regulated custodians, specialized companies that can hold funds in cold storage, as traditional finance firms may not legally be able to self-custody assets.
BitGo, a firm that provides custodian services for institutional investors and traders, reported a 25% increase in onboarding inquiries in December compared to the previous month, as investors sought to move their funds from exchanges. Additionally, the firm saw a 20% increase in assets under custody. David Wells, CEO of Enclave Markets, pointed out that trading platforms are becoming increasingly aware of the risks of storing investors’ assets with a third party. Wells mentioned that “investors will forgive us for losing some of their money through our trading strategies, because that’s what they sign up for, what they’re not going to forgive us is for being poor custodians.”