Understanding Bitcoin Storage as a Business

Most businesses' journey into bitcoin begins when they discover its potential as a revolutionary financial instrument that addresses fundamental flaws in traditional monetary systems—notably debasement, restrictions, and financial repression. Upon deciding to allocate capital to bitcoin, businesses must immediately tackle the crucial question of how to store their bitcoin.     

It is crucial to distinguish between self custody, where you manage your own keys, and outsourcing storage to a custodian. While the bitcoin ethos calls for self custody—something we’re extremely passionate about at Sovreign—there is no one-size-fits-all approach to bitcoin custody. We'll begin by examining different solutions before delving into the most reputable custodians and products in the industry.    

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Self custody

The concept of self custody in the bitcoin ecosystem revolves around private key management. These cryptographic keys function as the essential tools for executing transactions. When bitcoin remains on an exchange or other platforms without being transferred to self custody, users effectively hold mere promises rather than actual assets. The exchange maintains control through their proprietary keys. 

Unlike most assets we're familiar with, bitcoin is a bearer asset, implying that ownership is determined by physical possession rather than registration or the holder's identity. The simplest comparison would be physical gold. On the contrary, most traditional assets like stocks, bonds, or cash deposits rely on legal records and financial institutions to prove ownership. 

When you own company shares, for instance, a brokerage or custodian documents your ownership rather than you physically holding anything. This system depends entirely on trusting third parties like banks and brokerages to maintain security and enable transfers. Bitcoin fundamentally changes this model by giving complete control to whoever holds the private keys, which makes custody both simple and more complex at the same time.

Managing private keys essentially involves safeguarding confidential information. Specifically: cryptographically generated data that must remain secret and is virtually impossible to predict or replicate. 

Generally, a private key is considered a password to prove ownership of assets. While creating private keys is straightforward using computers or mobile devices, security experts recommend dedicated hardware wallets to ensure keys never encounter potential online vulnerabilities. 

For bitcoin, custody means controlling the private keys that grant access to your holdings. Think of it like a digital keychain; if you possess the keys, you own the bitcoin. Through public and private key cryptography, only the person (or entity) with the correct key can authorize transactions. This gives bitcoin holders complete control, but also full responsibility for their assets' security. For businesses, this unique structure is both empowering and challenging, since losing access to the keys means losing access to the asset itself.

The sovereignty of digital assets fundamentally depends on retaining exclusive authority over cryptographic signatures; hence, imprudently delegating this control to external parties effectively relinquishes ownership of your holdings. A core tenet is the maxim "not your keys, not your coins," which embodies the clear divide between self custody and deferred custody.     

This philosophy of personal asset stewardship has always resonated throughout the bitcoin ecosystem, evidenced by roughly two-thirds of the circulating supply being independently secured by individual holders. 

Upon choosing autonomous custody, individuals must carefully consider various implementation approaches. However, while securing large amounts of bitcoin used to be one of the most daunting and challenging aspects, technology and solutions have made significant strides. Today, it's possible to secure your bitcoin comfortably with near-perfect security.

Hot wallet

Hot wallets are bitcoin wallets connected to the internet, allowing for immediate access to funds. 

Their main appeal comes down to convenience:

• Funds can be transferred quickly, facilitating day-to-day transactions and operational needs.
• Many hot wallets offer user-friendly interfaces and intuitive platforms that are easy to navigate.
• They can easily integrate with online services and payment systems.

    The main downside is the security vulnerabilities:    

• Being connected to the internet exposes them to hacking, malware, and phishing attacks.
• They present a single point of failure, if the private key is lost or compromised, access to the funds is irretrievably lost.
• Their higher risk exposure makes them unsuitable for storing significant amounts of bitcoin.

Examples of hot wallets are Sparrow Wallet, Blue Wallet, and Electrum.    

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Cold wallet

Cold storage secures bitcoin private keys by keeping them offline, isolated from any internet connection. This method significantly enhances security and is seen as the standard for any material kind of bitcoin holdings.   

 Cold wallets can take lots of different forms:

• Hardware wallets: Physical “hardware wallet” devices often resemble USB drives that securely store private keys offline. Popular examples include Coldcard, Passport, and Blockstream Jade. When discussing hardware wallets, it's important to distinguish between air-gapped and non-air-gapped devices. Standard hardware wallets are non-air-gapped, meaning they are compatible with external devices that may be connected online. An air-gapped hardware wallet operates entirely offline, without any direct connection to potentially compromised devices such as computers or smartphones. This means it doesn't connect to the internet or communicate via USB, Bluetooth, or Wi-Fi. Instead, it typically uses QR codes or removable storage (like SD cards) to sign transactions, ensuring that private keys remain isolated from any networked device.
• Air-gapped computers: Computers that have never been connected to the internet are used exclusively for storing and managing private keys.
• Paper wallets: Physical documents containing printed private keys or QR codes. 

Cold storage offers enhanced protection by keeping private keys offline, which eliminates exposure to online threats such as hacking and cyberattacks. This setup also requires physical possession of the storage device to access the funds, adding an extra layer of security. Because of these factors, cold storage is particularly well-suited for long-term holding of significant amounts of bitcoin, especially when the funds are intended as an investment rather than for frequent transactions.    

That being said, significant advances in user experience have been made in air-gapped cold storage wallets to make them more convenient to use for everyday transactions, particularly when combined with dedicated watch-only wallets on bitcoin-only software such as Sparrow Wallet.     

In institutional environments, a blended approach is commonly employed, integrating hardware security with offline transaction signing. By relying on air-gapped devices—kept entirely offline—for signing transactions, institutions can facilitate secure, multi-party coordination without risking exposure to internet-based threats. This method achieves a balance between stringent security standards and the operational needs of handling large asset transfers both safely and efficiently.    

However, a significant issue persists: all the setups we've discussed so far rely on a single signature to move funds. This creates a single point of failure for your organization and places an enormous responsibility on whoever manages it. While there are ways to mitigate this risk—such as setting up passwords or using Shamir's Secret Sharing—the gold standard for self custody remains multi-signature wallets.    

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Singlesig vs. multisig wallets

Many professionals gravitate toward dedicated security devices as the premier solution for protecting cryptographic keys. However, the selection process encompasses more than hardware preferences; it demands a thorough evaluation of authentication frameworks, spanning from basic single-key protocols to sophisticated multi-signature arrangements, each governing how funds may be accessed.     

The optimal choice between single-signature (singlesig) and multi-signature (multisig) architectures depends heavily on individual requirements, risk tolerance, and operational needs. While these custody models demonstrate contrasting strengths, they need not be mutually exclusive. Indeed, a hybrid approach often proves optimal, implementing multi-signature security for substantial long-term holdings while deploying singlesig solutions for smaller, readily accessible balances, particularly through lightning-enabled mobile applications.     

Single-signature    

A single-signature wallet is the simplest and most widely used form of self custody bitcoin wallet. It involves just one master private key, which can generate addresses for receiving bitcoin. If bitcoin is sent to one of those addresses, the amount will be counted towards the wallet balance, and it can only be removed from the wallet after approval from someone who has the private key.    

However, this simplicity comes with inherent vulnerabilities. Even the most methodical and conscientious individuals may find themselves confronting the loss of crucial items through inadvertent errors or circumstances beyond their control.     

For individuals using a singlesig bitcoin wallet, basic security measures can provide effective protection without advanced technology. Common strategies include duplicating seed phrases, fragmenting them, employing different encoding methods, or spreading assets across multiple wallets.

A bitcoin seed phrase (or recovery phrase) is a set of 12 to 24 randomly generated words that serve as a backup for a bitcoin wallet. It allows the user to recover their private keys and access their bitcoin if the wallet is lost, damaged, or deleted. The seed phrase is generated when creating a new wallet and must be kept secret and secure, as anyone with access to it can control the bitcoin in the wallet.

However, these methods come with hidden risks. Duplicating seed phrases can protect against loss but also increase vulnerability. If any copy is compromised, all bitcoin holdings are at risk.

To enhance security, users can implement a BIP-39 passphrase, which adds an extra layer by requiring a user-created word in addition to the seed phrase. This means the seed words alone are not sufficient to access the wallet. While using a passphrase is simpler than creating a multisig wallet, it also requires secure storage, as losing it can lead to permanent access loss.

Multi-signature    

Multi-signature (multisig) wallets address the biggest flaws of self custody. Instead of relying on a single point of failure, you create a quorum of keys, requiring multiple signatures to execute a transaction. This setup is structured as an M-of-N quorum, where N represents the total number of keys involved in the wallet, and M denotes the number of keys needed to produce a valid authorization. This is commonly configured as a 2-of-3 or 3-of-5 multi-signature setup.

A multisig wallet represents an advanced security system that requires multiple digital signatures to authorize transactions. Like a vault with several locks, a multisig setup demands a predetermined number of keys from a larger set to access funds. Picture a 2-of-3 arrangement: any two keys from a set of three must work together to move bitcoin, similar to how a safety deposit box might require two keys to open. This approach vastly improves upon traditional single-signature security by removing any single point of vulnerability.    

What makes multisig particularly elegant is its flexibility: key holders can authorize transactions independently, from different locations, at different times. Unlike other security schemes, the keys never need to be in the same place, even during wallet creation. This feature makes multisig especially valuable for group treasury management, where different stakeholders can securely control shared funds while maintaining their independence.    

While multi-signature arrangements provide enhanced security, implementing them independently presents notable challenges due to their inherent complexity and limited availability of expert guidance. Proper management requires diligent record-keeping of multiple authentication keys alongside crucial configuration data, such as wallet descriptors and setup parameters. For newcomers, navigating these technical intricacies can prove daunting. 

However, an alternative exists in the form of supervised custody solutions—a framework that maintains the essence of self custody while offering professional oversight. Under this arrangement, although certain wallet details are shared with a trusted partner, ultimate control over asset disposition remains exclusively yours. This hybrid approach streamlines the setup process by minimizing personal administrative responsibilities while delivering valuable auxiliary benefits: dedicated technical assistance, inheritance planning support, and seamless integration with various financial instruments, including trading platforms and lending facilities.

How multisig works

In a multisig setup, private keys are generated and distributed across different parties or stored in separate, secure locations. To authorize a transaction, a specified number of these keys (like 2 out of 3) must provide their signatures. This setup builds in redundancy: if one key is lost or compromised, the remaining keys can still authorize transactions, ensuring continued access to funds. 

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Why multisig can be superior to singlesig

Multi-signature arrangements eliminate single points of failure, reducing the risks associated with losing or having a single key stolen. This structure enhances security, as an attacker would need to compromise multiple keys, ideally kept in different locations, to gain access to the funds. Additionally, it fosters shared responsibility by requiring multiple approvals for each transaction, creating a built-in system of checks and balances.

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Why multisig makes sense for a business

For businesses, multi-signature aligns well with corporate governance practices, mirroring traditional financial controls where significant transactions require multiple sign-offs. It also serves as a risk mitigation tool, distributing control among trusted team members or departments to reduce the chances of internal fraud or human error.

While powerful, these kinds of setups also have limitations in flexibility and policy enforcement. In traditional schemes, all keys are treated equally, with the only policy being how many must sign to authorize a transaction. This simplicity works for basic use cases, but for a business, there’s often a need for more robust structures with layered policies, role hierarchies, and contingencies for complex operational needs.

With a layered architecture, businesses can implement a stack of multi-signature schemes with distinct roles for each key. These layers use time delays and conditional activation, enabling dynamic, policy-driven control over the custody setup. This addresses critical scenarios such as key loss, staff turnover, or emergency access.

Collaborative multisig setup

This hybrid approach divides custody between the client and a trusted entity, using a 2-of-3 multisig setup. The custodian may control one or two keys, while the client manages the rest. An exciting new tool now available is Theya’s Business Advisory Vault. In this system, the business retains two keys, while Theya holds a third as a backup.

Businesses can access a dashboard to manage their holdings, and if they partner with a company like Sovreign for custody support, they can benefit from additional management assistance. This setup provides the advantages of both Theya's key holding for redundancy and the expertise of a bitcoin advisor.

This model reduces the client's burden by delegating some responsibilities to a third party. However, when choosing collaborative custody, it is important to keep the majority of the keys held privately; otherwise, the custodian becomes a single point of failure.

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Multi-institutional arbitrage

New products have emerged that allow keys to be held by different institutions to provide security and redundancy. 

This collaborative model requires a quorum of these agents to authorize any transaction, significantly enhancing security compared to traditional single-custodian systems. By distributing the risk across several institutions, businesses can protect their assets from potential breaches or mismanagement. With multi-institution custody, a single failure—such as a key loss or a hacking incident—will not compromise the entire system, making it orders of magnitude more difficult for attackers to gain control over the client’s bitcoin.

For businesses, the benefits of multi-institution custody are substantial. It allows for greater control over assets while minimizing counterparty risk, as no single institution can unilaterally access or move the bitcoin.

When evaluating whether or not to outsource your custody, a few things have to be considered. 

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Benefits of collaborative custody

• Optionality: Professional custodians can offer secure storage solutions, regulatory compliance, and insurance coverage.
• Shared accountability: Liability is distributed among custodians, reducing the risk of negligence or fraud by any single party. Legal agreements can enforce mutual oversight, incentivizing custodians to act in the client’s best interest.
• Customizable security models: Clients can mix and match custodians with varying security practices (e.g., one institution uses hardware security modules, another uses air-gapped cold storage), creating a tailored defense against threats.

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‍Trade-offs of collaborative custody:‍

• Complex coordination: Managing multiple custodians requires robust communication and governance frameworks. Disagreements between institutions could delay critical transactions.
• Higher costs: Fees for multiple custodians, legal agreements, and auditing processes may exceed the cost of a single-custodian solution.
• Technical overhead: Businesses must ensure compatibility between custodians’ systems (e.g., signing software, hardware wallets), which may require additional IT resources.
• Slower transaction speed: Collecting signatures from geographically dispersed parties or institutions with varying approval workflows can slow execution times compared to self custody.
• Dependency on custodian policies: Changes to a custodian’s terms (e.g., withdrawal limits, jurisdiction-specific freezes) could unexpectedly restrict access to funds, even with multisig setups.

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Key considerations for implementation‍

When implementing a collaborative custody model, businesses must prioritize clear governance protocols to outline roles, establish response timelines, and formalize dispute resolution processes in contractual agreements. 

This ensures accountability and minimizes ambiguity during critical operations. Geographic diversity is another vital factor: distributing custodians across multiple regions helps mitigate localized risks, such as political instability, regulatory crackdowns, or natural disasters, which could compromise access to keys if concentrated in a single jurisdiction.

Additionally, regular independent audits of custodians’ key management practices are essential to verify compliance with agreed-upon security standards, ensuring that all parties adhere to protocols and maintain the integrity of the custody arrangement. 

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Bitcoin ETFs

Bitcoin ETFs provide businesses with exposure to bitcoin’s price movement without the need to directly buy and store the asset. While ETFs may be a low-overhead option, they introduce counterparty risk, come with management fees, and prevent businesses from converting their holdings into real bitcoin without incurring trading costs and triggering a taxable event. It’s a tradeoff between convenience, access to different products, and ultimately the value propositions that bitcoin provides.

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Insurance

Regardless of how you choose to store your bitcoin—whether through self custody, collaborative custody, or institutional solutions—securing comprehensive insurance should be a non-negotiable priority. Insurance acts as a safeguard against both internal and external threats, covering scenarios like theft, accidental loss, or physical damage to storage infrastructure. 

Coverage options vary depending on whether assets are held in hot wallets or cold storage. For instance, Crime insurance typically protects against digital theft or loss across both hot and cold storage environments, while Specie insurance is narrower, often limited to offline assets stored in designated physical locations, and may exclude certain insider threats.

When vetting custodians and insurance, here are key questions to ask: 

• What is the total coverage limit of the custodian’s policy?
• Are client wallets segregated from the custodian’s own assets to prevent commingling risks?
• Who are the insurers underwriting the policy, and what are their AM Best ratings? (AM Best is a benchmark for assessing insurer financial strength.)
• Does the policy cover external threats like hacking?
• Does the policy cover internal risks such as insider theft, including misconduct by executives?
• Does the policy include coverage for natural disasters (e.g., fires, floods, earthquakes) that could destroy private keys?
• What is the scope of coverage? Does it apply to custody wallets, self-managed hot wallets, or both?
• Do the legal entities named in the policy match those in your service agreement?
• Does the custodian allow clients to purchase supplemental insurance for added security?
• What is the financial structure of the policy? Does it include coinsurance (shared cost percentages after a deductible) or self-insurance (the custodian assumes partial risk)?
• What are the specific terms for deductibles and payout thresholds?

By addressing these questions, you can ensure alignment between your risk management strategy and the custodian’s safeguards.  

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Businesses have plenty of options for bitcoin storage

After buying bitcoin, storing bitcoin is one of the key duties for your business to familiarize itself with.

If you are looking for comprehensive training and advice on bitcoin custody implementation, Sovreign specializes in making sure you waste no time getting up to speed. Please reach out to us, and our experts will be able to help you.