Before purchasing or investing in a cryptocurrency, investors must first consider how they would like to store and transact with their coins.
Crypto owners may either choose self-custody — where they act as their own bank — or entrust a third party to keep custody of their cryptocurrency until it’s ready to be used.
For instance, those who use bank accounts rely on the services offered by a core model of storage and protection against theft in order to withdraw, deposit, and access their money.
Crypto custodians are similar. Think of them as a bank where you can store your coins, manage their liquidity, and protect them from theft.
What determines a good crypto custodian?
Accessibility and theft protection are two primary requirements that any crypto-curious person should consider.
Some crypto custodians offer digital wallet services ("hot wallets") that are connected to the internet. These offer faster transaction speeds and may be suited for an investor who intends to be an active trader.
But as ownership of cryptocurrencies such as bitcoin (BTC-USD), ethereum (ETH-USD), and altcoins has expanded, custodial services have also developed an alternative known as cold storage. These services let crypto holders keep their coins and tokens offline on hard drives, like money under the mattress.
A few of the largest crypto custodians to date are Coinbase (COIN), BitGo, and Gemini.
What happens if a crypto custodian is hacked?
Funds stored in a bank account are typically protected by the Federal Deposit Insurance Corporation from theft, fraud, and other risk factors.
However, cryptocurrencies are not yet federally regulated, so crypto custodian services take other precautionary measures in order to protect their customers, oftentimes through an additional insurance policy.
If you’re leaning towards a hot wallet or private key custody service, it's important to confirm that the company is insured for losses that result from a cybersecurity breach.
This type of policy is more common among the larger exchanges. For example, BitGo has disclosed they have a $700 million insurance policy, whereas Gemini has a $200 million policy.
Furthermore, you will also want to confirm that the custodian service you choose insures the full value of your holdings. That way, in the event of a hack that results in theft, you would be reimbursed in full.
Bradley Smith is an anchor at Yahoo Finance. Follow him on Twitter @thebradsmith.
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