Self-custody

Holding the private key to your own digital assets, rather than leaving them with a trading venue or a custodian that holds the key for you.

Example

An exchange failure cannot reach a self-custodied holding, and a lost recovery phrase cannot reach an exchange balance.

Important

It removes the counterparty and hands you the operational risk in exchange. It relocates the failure rather than removing it, and the new failure has no complaints procedure.

Related terms

• Private key — The secret number that authorises a change to a ledger entry. Whoever holds it controls the asset, nobody else can move it, and nobody can restore it.
• Custody — The safekeeping of securities by a regulated institution on behalf of their beneficial owner, including holding the record of ownership and processing corporate actions.
• Counterparty risk — The risk that the party on the other side of an arrangement fails to pay what it owes you.
• Digital asset — An entry on a shared ledger, transferable by whoever holds the private key controlling it. Unlike every other instrument in this curriculum it is not a claim on an issuer, a company or a borrower.

Lessons that explain it

• A secret number, and one line in a shared record — What you own is not a coin and not a claim on anybody. It is the ability to authorise a change to one entry on a ledger - and who holds that ability is the whole of the risk. (10 min)
• Seven questions about one specific asset — What it does, who can issue more of it, who already holds it, how deep the book is, whether the rules can be changed, where you would keep it, and what would tell you that you were wrong. (14 min)
• Total loss is an outcome here, not a tail — Four separate routes lead to zero, none of them exotic. Then the volatility arithmetic, the costs nobody totals, and a tax treatment that can leave a bill in currency against a position that has already fallen. (13 min)

All 578 terms in the Investing glossary