24 January (Reuters) – Paranoid? The domino demise of FTX and other crypto custodians is enough to make the most trusting investor grab their bitcoin and shove it under the mattress.
Holders large and small are indeed taking “self-custody” of their funds, moving them from crypto exchanges and trading platforms to personal digital wallets.
As a sign of this shift among retail investors, the number of bitcoins held in smaller wallets — those holding less than 10 bitcoins — rose to 3.35 million on Jan. 11, up 23% from 2.72 million a year ago. according to data from CoinMetrics.
As a percentage of total bitcoin supply, wallet addresses with less than 10 bitcoin now hold 17.4%, up from 14.4% a year ago.
“A lot of this really depends on how often you trade,” says Joshua Peck, founder of hedge fund TrueCode Capital. “If you’re just going to buy and hold for the next 10 years, then it’s probably worth making the investment and learning how to preserve your wealth very, very well.”
The rush has been amplified by the FTX scandal and other crypto collapses, with major investors leading the way.
The 7-day average of the daily movement of funds from centralized exchanges to personal wallets rose to a six-month high of $1.3 billion in mid-November, at the time of the FTX collapse, according to data from Chainalysis.
Major investors with transfers of more than $100,000 accounted for those flows, the data showed.
WHERE ARE MY KEYS?
Not your keys, not your coins.
This mantra among early crypto enthusiasts, warning that access to your money is paramount, was regularly trending online last year as financial platforms dropped like flies.
However, self-preservation is no sinecure.
Wallets can range from “hot” connected to the internet or “cold” in offline hardware devices, although the latter are typically not attractive to new investors, who often buy crypto on major exchanges.
Multi-level security can often be a cumbersome and expensive process for a small investor, and it’s always a challenge to guard your encryption key – a string of data similar to a password – without losing or forgetting it.
Meanwhile, hardware wallets can malfunction or be stolen.
“It’s very challenging, because you have to keep track of your keys, you have to back up those keys,” says TrueCode Capital’s Peck, adding, “I can tell you it’s a very challenging prospect to do self-custody for a multi million-dollar portfolio of crypto.”
Institutional investors are also turning to regulated custodians – specialized companies that can hold funds in cold storage – because many traditional financial firms would not be legally able to hold investors’ assets “in-house”.
One such firm, BitGo, which provides custody services to institutional investors and traders, said it saw a 25% increase in onboarding requests in December from the previous month from those seeking to withdraw their funds from exchanges, plus an increase of 20% in assets under guardianship.
David Wells, CEO of Enclave Markets, said trading platforms were extremely cautious about the risks of storing investors’ assets with a third party.
“One comment that stuck with me was ‘investors will forgive us for losing some of their money through our trading strategies because that’s what they sign up for, what they won’t forgive us for being bad custodians’.”
Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Edited by Pravin Char
Our Standards: The Thomson Reuters Principles of Trust.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias under the Trust Principles.