February 7, 2023

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Crypto Coverage: Bitcoin Investors Take Control

Jan. 24 (Reuters) – Paranoid? The domino fall for FTX and other cryptocurrency custodians is enough to make even the most confident investors grab their bitcoin and shove it under the mattress.

In fact, owners of large and small companies are taking “self-custodianship” of their funds, moving them from cryptocurrency exchanges and trading platforms to personal digital wallets.

In a sign of this shift among retail investors, the number of bitcoins held in smaller wallets — those holding fewer than 10 bitcoins — rose to 3.35 million as of Jan. 11, up 23% from the 2.72 million held a year earlier, according to the data. From CoinMetrics.

As a percentage of the total bitcoin supply, wallet addresses holding less than 10 bitcoins now hold 17.4%, up from 14.4% last year.

“A lot of this really depends on how often you trade,” said Joshua Beck, founder of TrueCode Capital hedge fund. “If you’re going to buy and hold in the next 10 years, it’s probably worth the investment and learning how to hold your assets really well.”

The stampede has been fraught with the FTX scandal and the crash of other cryptocurrencies, with big investors at the forefront.

The 7-day average daily movement of funds from centralized exchanges to personal wallets jumped to a six-month high of $1.3 billion in mid-November, around the time of the FTX crash, according to data from Chainalysis.

The data showed that large investors whose transfers exceeded $100,000 were responsible for those inflows.

Reuters graphics

where are my keys?

Not your keys, not your coins.

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This mantra among early cryptocurrency enthusiasts, warning that access to your funds is paramount, circulated regularly on the internet last year as financial platforms fell like flies.

Self-care isn’t a walk in the park, though.

Wallets can range from those that are “hot” online or those that are “cold” in offline machines, though the latter usually don’t appeal to first-time investors, who often buy cryptocurrencies on large exchanges.

Multi-level security can often be a cumbersome and expensive process for the small investor, and there is always the challenge of maintaining the encryption key—a password-like string of data—without losing or forgetting it.

Meanwhile, hardware wallets can crash or get stolen.

“It’s very difficult, because you have to keep track of your keys, you have to keep those keys backed up,” said Beck of TrueCode Capital, adding, “I will tell you, it’s very difficult to self-guard a number of people’s million-dollar cryptocurrency portfolio.”

Institutional investors are also turning to regulated custodians—specialized companies that can hold funds in cold storage—since many traditional finance firms would not be legally able to “self-hold” investors’ assets.

One such company, BitGo, which provides custody services to institutional investors and traders, said it saw a 25% increase in internal inquiries in December compared to the previous month from those looking to move their funds off exchanges, as well as a 20% jump in assets under custody.

David Wells, CEO of Enclave Markets, said that trading platforms have been very wary of the risks of storing investors’ assets with a third party.

A comment that stuck with me was “Investors will forgive us for losing some of their money with our trading strategies, because that’s what they signed up for, and what they won’t forgive us for being poor trustees.”

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Additional reporting by Medha Singh and Lisa Pauline Matakal in Bengaluru; Editing by Praveen Char

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The opinions expressed are those of the author. They do not reflect the opinions of Reuters News, which is bound by the trust principles of integrity, independence, and freedom from bias.