Importance of Self-Custody

Self-custody of bearer assets such as gold or bitcoin is essential for the following reasons.

1. Hedging Purpose

Gold and bitcoin serve, in particular, to hedge against tail risks in the existing financial system. Gold and bitcoin therefore become (especially) valuable precisely when familiar structures begin to falter and collapse. Financial institutions may close their doors if they go bankrupt or comply with government orders. In other words, when gold and bitcoin are stored with a third party, they become vulnerable at the very moment they become most valuable.

2. Irreversibility of Transactions

Financial instrument such as bonds, stocks and ETFs are normally intermediated securities. Although intermediated securities can be transferred from one regulated gatekeeper to another, such securities cannot be held directly. That is why the theft or misappropriation of intermediated securities is easily reversible.

Gold is also reasonably portable – even if it is difficult to smuggle it across the border unnoticed. And it can be held directly without intermediaries. The theft or misappropriation of gold certainly has undesirable consequences, but there is a (good) chance of apprehending the perpetrator and confiscating the gold.

Bitcoin can also be held without intermediaries. Because it is intangible, it is easy to transport across borders and very difficult to confiscate. Once bitcoins are stolen or misappropriated, they are almost irrecoverable.

In the case of third-party custody, assets are entrusted to a third party, which carries an inherent risk of misappropriation. However, the risk of theft also increases:

• Custodial institutions' large wallet holdings are more attractive targets for hackers than individual smaller holdings.
• Assets held with custodial institutions are linked to the owner's identity, which opens attack vectors against the owner (especially extortion and scams). The best protection against personal attacks is privacy, i.e. the ability to keep one's assets confidential, which is only possible with self-custody.

3. Protection against state intervention

Many people are subject to state seizure of property. Even in countries governed by the rule of law, the instrument of seizure is provided for. One need only recall Executive Order 6102 issued by U.S. President Roosevelt in 1933, which banned private ownership of gold. Your own unbreakable, secret vault offers the best protection against such a scenario.

4. Insurance

Assets held with custodians are generally not (fully) covered by insurance. It rarely makes economic sense to fully insure large pools of assets. The risk is too highly concentrated and correlated. And even if insurance were in place, the custodian – not the client – is the insured party, meaning that long payout periods are still to be expected.

5. Agency Dilemma

The principal-agent problem, also known as the agency dilemma, occurs when there is a conflict of interest between two parties in a relationship: the principal, who delegates authority, and the agent, who acts on behalf of the principal. 

The owner wants his assets to be held as securely as possible. In a competitive market environment, however, custodians compete with one another on price and are therefore forced to prioritize efficiency, which could compromise security. Self-custody minimizes the agency dilemma. 

Find out about the best form of self-custody: MISC™