Written By 1Bitcoin.ca, August 30th, 2022
After more than a decade of existence, the Bitcoin ecosystem has evolved to offer a variety of ways to get exposure to this amazing asset. In this article we will explore the spectrum of Bitcoin ownership and how each may have a use case in your portfolio.
While there are many different layers of Bitcoin ownership, the most important differentiator of some of these methods of Bitcoin ownership is whether or not you are the holder of the private keys of your Bitcoin. If you don’t own the keys to the Bitcoin, you don’t own the Bitcoin - you own an IOU to that Bitcoin. This is why one of the most important mantras of Bitcoiners is “Not Your Keys, Not Your Coins”. Owning your private keys is what allows Bitcoin to be a true bearer asset, meaning that you fundamentally own the Bitcoin and no one can take it from you as you have full custody and control over them. If you do not have the keys, you can not move the coins. It is binary - you either can move the coins yourself or you have to wait for a 3rd party to move them for you.
You can buy Bitcoin in a stock or an ETF, which allows you to have exposure to the price. However, it is important to understand that this is merely a financial instrument. You don't actually own the Bitcoin. You have a claim against a 3rd party for it who may or may not have it in their reserves, security, custody and storage is not something you need to deal with.
One of the simplest ways to buy Bitcoin is on an exchange, but if you leave it on the platform, you don't actually have control over the keys or the Bitcoin. This means you don't own Bitcoin - you merely have an IOU for the Bitcoin. Remember, not your keys, not your coin! When you buy from an exchange it is important to withdraw your Bitcoin!
Whether you receive it on your hot or cold wallet, you are using a third party node. Now, this is much better than the previous options, but you are not quite utilizing Bitcoin fully just yet! You have control of your keys which is better than 90% of the options out there. You’re just missing one piece.
Running and verifying the transaction on your own node, is how it should be done. It is the truest sense of Bitcoin where you can verify down to a satoshi that there are no cheaters on the entire network. You own this asset outright and are not relying on any third party to verify or send any funds.
As we mentioned above, Bitcoin is a bearer asset. What this means is you either control the bitcoin keys, or you don’t. It is very simple to prove ownership of certain keys. Since Bitcoin is purely digital, it is paramount to secure your keys. If they are compromised that means someone can move your bitcoin to an address that you do not control. While having ownership of your Bitcoin is binary, Bitcoin security is not. You can always do more to get more secure but if you follow basic principles, it will help you avoid 95% of most common issues.
Take possession of your Bitcoin.
Verify your own transactions/run your own node
Use a dedicated computer.
Never give someone Bitcoin to trade for you.
Don't download “trading software”.
Better yet, don't trade. Buy and secure for the long term.
If you must trade, make sure you work with a reputable brokerage that is licensed in your country of residence.
Hot = device that has an active connection to the internet (cell phone or desktop wallet) Always assume there's a risk that your digital asset can be compromised. Consider this to be your chequing account.
Cold = device that holds the keys offline. It is a more secure form of storage and is typically for larger sums of Bitcoin.
While there are certain use cases for a third party custody such as when you borrow against Bitcoin, it is still important to understand the importance to custody your own keys and understand the risks involved when another custodian is in the picture.
At 1Bitcoin.ca, we recommend clients to withdraw their bitcoin and we offer onboarding and security consultations. Security is not a binary issue. The goal is to mitigate any potential errors and to always have access to your Bitcoin, especially to ensure your loved ones have a way to access them in case of emergency.
There is quite a bit to learn about so please don't hesitate to reach out to myself or the team at 1Bitcoin.ca. We are always here to help in any way we can!