When learning about bitcoin, it quickly becomes clear there are several different ways to approach ownership. You could buy bitcoin on an exchange and keep the funds managed within that account. Depending on where you live, you might be able to purchase shares of an ETF (exchange-traded fund). There are also fervent advocates for bringing bitcoin into self-custody by holding your own keys, reiterating phrases like “not your keys, not your coins.”
If you’re still new to bitcoin, understanding the nuanced tradeoffs for these different options can be challenging or overwhelming. In this article, we’ll compare them and help you make a more informed decision.
A popular starting point for buying and holding bitcoin is creating an account with a digital currency exchange. Many people have heard of the largest exchanges (i.e., Coinbase or Binance) which cater to people seeking trading capabilities across thousands of meme tokens and cryptocurrencies. Alternatively, there are thoughtfully designed, bitcoin-focused options such as River or Strike.
Exchanges are primarily designed to help users exchange one asset for another, such as converting dollars into bitcoin, or bitcoin into dollars. Therefore, if you’re interested in selling bitcoin in the immediate future, having bitcoin within your exchange account will allow you to do so.
Assuming the exchange is currently operational—which isn’t always the case, during periods of high volume and price volatility—you typically have the ability to deposit, withdraw, buy, or sell bitcoin at any time of day, including weekends and holidays. This stands out as an advantage compared to bitcoin ETFs, which are limited to stock market hours and may not offer in-kind redemptions.
Since exchanges are first and foremost built for trading, using an exchange for long-term bitcoin storage comes with a number of concerns.
By trusting an exchange as your bitcoin custodian, access to your funds is determined by them, not by you. They can enforce rules and requirements at their discretion, potentially restricting you from accessing your own money. They can also grant others access to your funds, either on purpose or by mistake. If the exchange runs a fractional reserve or is hacked (which is more common than you might think), the bitcoin they were holding on your behalf could be lost forever. With a strict supply limit of 21 million, bitcoin can’t be insured in the same way as fiat currency in a bank account.
When using an exchange, you also bear a lot of responsibility for properly protecting your account. If someone gets physical or remote access to your laptop, phone, or email credentials, they could potentially get into your exchange account and initiate a withdrawal, pretending to be you. Unlike fiat currency in traditional financial institutions such as banks and brokerages, bitcoin withdrawals are irreversible, and tracing the funds to find the culprit can be more difficult.
Exchange accounts can also be a more accessible target for attackers in the context of physical threats or social engineering, when compared to some of the other methods of holding bitcoin covered in this article. One of our 11 rules for protecting your bitcoin from modern scammers is to avoid keeping significant funds on exchanges.
Another popular starting point for obtaining exposure to bitcoin is through ETFs. Spot bitcoin ETFs have become very accessible in most brokerage accounts. They’ve made the process of owning bitcoin familiar and easy for many people who may have been hesitant to create an account with a digital currency exchange.
Bitcoin ETFs can offer some valuable protections compared to holding bitcoin on an exchange account. Most notably, if an attacker managed to log into your brokerage account, it’s not possible for them to withdraw anything into their own custody. ETF shares can’t be withdrawn, and transferring them to another account would be traceable to uncover the perpetrator’s identity. This is also true if the attacker tried to sell the ETF shares and transfer dollars to a bank account. Upon discovering the mischief, you could work with the brokerage account to undo the malicious behavior.
For this reason, ETFs provide strong resistance to risks such as account hacks, physical threats, and social engineering. They also don’t require much technical knowledge to properly manage. These convenient features make ETFs an attractive option for people with less technical expertise.
Similar to exchange accounts, using a bitcoin ETF involves trusting a custodian with full power over your bitcoin. This means you can’t access your funds independently, without permission from the custodian and brokerage. It’s also possible for the custodian to make mistakes and end up losing the bitcoin. Holding multiple different ETFs may not be helpful, as they might be using the same custodian behind the scenes. In the United States, nearly all of the spot bitcoin ETFs use Coinbase as their bitcoin custodian.
ETFs also have some unique limitations. ETFs are typically only available to be bought or sold while the stock market is open, which only accounts for about 20% of the hours in a week. Meanwhile, bitcoin remains operational every hour of every day, and its price can fluctuate at any moment.
Furthermore, unless an ETF offers in-kind redemptions, which is currently rare, it’s not possible to withdraw bitcoin directly from the contained environment of the brokerage. While this fact provides some of the security advantages discussed above, it’s a double-edged sword. It can mean you are a bit stuck—choosing to move your bitcoin into self-custody down the road is not possible without first selling the ETFs and rebuying bitcoin elsewhere. This can mean taxes, fees, and temporarily forgoing bitcoin exposure. While holding a bitcoin ETF, you are also unable to use your funds to participate in the global bitcoin payment system.
After learning more about bitcoin, many people become interested in the idea of self-custody, and removing their reliance upon a third-party custodian. Self-custody involves creating your own secret bitcoin keys, and moving your bitcoin to your own wallet controlled by those keys. There are several options to set up self-custody, but they all come with similar tradeoffs when compared to the other methods of custody covered in this article.
Taking control over your bitcoin into your own hands unlocks a number of advantages compared to trusting a custodian. It means that as long as you protect and maintain your keys, you can always access your bitcoin savings without requiring permission from anyone else. Nobody can require you to do things in order to move your funds, and nobody can spend, confiscate, or lose your bitcoin without you first providing them with your keys.
If you generate and hold your keys completely offline, such as by using a hardware wallet and seed phrase, self-custody can offer protection from remote attackers who try to hack into or infect your internet-connected devices, such as your laptop or phone.
Independent self-custody means you can potentially operate with a higher level of privacy, because you aren’t necessarily sharing your balance information with anyone else. There’s also no fees you need to pay anyone else for their help with the custody of your bitcoin, which is unique to this option.
Managing your bitcoin independently means that finding trustworthy resources for assistance is less straightforward than the other options covered in this article. If you end up experiencing a technical difficulty that you don’t understand, you may need to seek the help of other people. This sets the stage for a common danger—receiving bad or malicious advice from someone who is not as knowledgeable or ethical as you expected. Scammers use many different angles to target people holding bitcoin in self-custody, and over time they have become more talented at fooling their victims. If you are considering holding bitcoin in self-custody, you should familiarize yourself with the rules to protect yourself.
A similar concern presents itself when thinking about your legacy. If you were to pass away, your loved ones would need to figure out how to access your bitcoin and safely transfer it to your beneficiaries. It can be difficult to properly set up a successful bitcoin inheritance plan without involving dedicated professionals. Even if you think you’ve provided comprehensive instructions, it’s almost impossible to ensure that your loved ones won’t have questions, and if they do, they may end up seeking help from the wrong people.
Ultimately, independent self-custody can be dangerous for people who are new or inexperienced with bitcoin keys, transactions, wallets and nodes. Deep technical expertise can be very important, and it’s easy for people to feel overconfident in their understanding until they run into an unexpected issue. The elderly are a particularly vulnerable cohort, and better options might be ETFs or collaborative custody, covered below.
Bitcoin natively offers users the ability to build multisignature wallets, meaning that bitcoin can be secured by multiple unique keys. For example, bitcoin could be secured by an arrangement where there are three separate keys, while any combination of two keys can approve spending or moving the bitcoin to a new location.
This allows for customizable access—you could hold two keys yourself, and get help from a collaborative third party key agent who holds the third key. This third party wouldn’t be able to access the bitcoin alone with their one key, and you could still access your funds independently with your own two keys. Alternatively, you could employ two or even three key agents to separately protect the keys to your bitcoin, and no single key agent among them would be able to lose your bitcoin due to a hack or malfeasance.
Collaborative custody can provide many of the same benefits of independent self-custody, such as empowering you to have full, permissionless control over your funds. Depending on how you choose to spread out the keys, you can prevent third parties from having any ability to access your funds, or you can create contingencies where multiple independent key agents can work together to help you or your loved ones recover bitcoin.
A huge advantage unique to collaborative custody is the ability to have bitcoin experts on standby, available to help you and your family with technical questions and inheritance. With a dedicated partnership you can rely on and trust for information, you are less susceptible to bad advice and making catastrophic mistakes related to holding your own keys.
Collaborative custody involves help from other people, so there will be some fees involved, unlike independent self-custody. Additionally, for a collaborative custody partner to provide the comprehensive assistance you might be looking for, you’ll typically need to share some information about your bitcoin, such as your balances.
Despite guidance from your collaborative partnership, creating and maintaining a multisig bitcoin wallet is more effort than using a bitcoin ETF. You should also be wary of social engineers, who may try to impersonate a staff member of your collaborative custody partner, and give you malicious instructions. Following our guide to protect yourself from scammers and being vigilant in verifying support representatives with features such as Support PINs are important considerations to help keep yourself protected.
Now that we’ve covered the main advantages and disadvantages for each widely used method for holding bitcoin, they can be placed in a chart for a quick comparison. You may notice that holding bitcoin in an exchange account stands out as the worst choice, while ETFs, independent self-custody, and collaborative custody all possess strengths in various areas.
*Depends on the details of the collaborative arrangement
**Assuming exchange isn’t experiencing downtime
***Depends on the complexity of the independent setup
The best choice for an individual depends on their situation and goals. For example, a person who needs an easy, non-technical path to bitcoin price exposure, and strong resistance to scammers, may benefit the most from an ETF. This person might be willing to accept the tradeoff that they don’t hold their own keys, and are using a trusted third party.
Meanwhile, a privacy-focused person who understands and trusts bitcoin’s engineering more than financial institutions, might prefer the opposite approach and be more attracted to independent self-custody.
If you’re seeking a middleground—unlocking the benefits of institutional expertise without putting full control of your bitcoin into the hands of a fallible custodian—it makes sense to explore collaborative custody. At Unchained, we’ve built a wide range of collaborative custody options and bitcoin financial services, growing trusted partnerships with our clients since 2016. We invite you to schedule a free consultation to ask questions and learn more!
