Clay Finck (02:34):

As you mentioned on today’s episode, we are going to be doing a deep dive on self-custody solutions to help the listeners who own Bitcoin get a better understanding of what it is and why it’s important. Before we do that, I wanted to tell a quick story about how Tyler and I got connected.

Clay Finck (02:53):

I was on my flight back from Miami from the Bitcoin Conference, and this guy behind me on the plane was just going on and on about Bitcoin, just chatting with the guy next to him, trying to educate him about all these different topics around Bitcoin. And I could pretty much hear everything he was saying, and I was just thinking, wow, I wish I could just hit record on my phone and just hold it up to him because he was just such a knowledgeable guy on Bitcoin and self-custody.

Clay Finck (03:18):

I ended up introducing myself, told him I run a podcast, work with TIP, and I told him, “Man, I got to get one of your guys from Unchained Capital,” because that’s where he worked, he worked at Unchained Capital. I’m like, “I got to get one of you guys on the show. So here I am, sitting here with Tyler today to talk about self-custody.

Tyler Campbell (03:35):

Yeah. And the funny thing there is that could be just pick your employee in Unchained. We’re incredibly passionate about this stuff, helping our clients, individuals, and businesses secure their generational wealth by holding their own private keys. That is our sole focus. And so everybody’s incredibly passionate. That does not surprise me at all. Hopefully, the passenger on a plane was not taking aback too much, hopefully learned something. But yeah, really not surprised by that.

Clay Finck (03:58):

Yeah. A hundred percent very passionate about Bitcoin, and I can tell the same with you as well. I think the first place we should start is why self-custody is just so important. I typically don’t take self-custody of my cash as myself and many other people hold their cash in a bank. And I don’t take self-custody of my stocks. I hold it at a broker, and they hold the ownership of the stocks for me. With that, why is it important that people who own Bitcoin take self-custody and actually own that Bitcoin themselves?

Tyler Campbell (04:30):

Private key ownership, right? Self-custody is so much more than a cliche or an ideology. The phrase “not your keys, not your coins” has been around for quite some time. Right? I saw it on T-shirts at the Bitcoin 2022 Conference in Miami. It’s this mantra and now in the space, but I worry that it’s become a little bit diluted in terms of its core messaging, in terms of the why behind not your keys, not your coins.

Tyler Campbell (04:52):

Self-custody, at the end of the day, is a security principle. It’s a security principle that was embedded in the white paper when Bitcoin was first introduced to the world 13 years ago. Bitcoin is meant to be a Internet native money that can be sent back and forth amongst peers without any intermediary, no stamps of approval coming from anyone. Self-custody, the ability for you to take extreme ownership over the best money that’s ever been created. Right?

Tyler Campbell (05:17):

If you think about the 21 million hard cap in Bitcoin, there’s only ever going to be 21 million created. My Bitcoin is my portion of that 21 million. It does not make sense for me to have that owned by some other entity, right? I do not want my Bitcoin fundamentally being owned by some other entity, right? All Bitcoin is held on addresses, and there are keys to those addresses, and either your exchange or a centralized entity holds those keys or you hold those keys.

Tyler Campbell (05:43):

And I think we’re seeing more and more the importance of individuals holding their keys. Like anything else in technology, there’s user interface, user experience gaps that are certainly being filled in. Time and time again, I get to see it every single day. So the barrier to entry is really it’s kind of dropping in terms of being able to hold your own keys combined with the importance of it. Of course, from a security perspective, along with the ease of use, I think that’s a world where we’re headed towards those individuals holding their own keys.

Clay Finck (06:08):

In relation to the self-custody piece, I hear time and time again to minimize and avoid counterparty risk. How significant is this risk and why do Bitcoiners put so much emphasis on it? Someone living in the US, we have a well-functioning society with a government that has generally respected property rights and private ownership of assets. Could you talk more a bit about maybe counterparty risk and why Bitcoin specifically we should take ownership of not some of these other assets.

Tyler Campbell (06:40):

Absolutely. I think the phrase to hone in on there is generally respected, right? So the precedent has been set. I’m sure maybe it was 90 years ago, but in 1933, we had Executive Order 6102 President Franklin Delano Roosevelt, which resulted in ultimately the confiscation of a particular amount of gold from American citizens. Sure, that was 90 years ago, but the precedent has been set. And when we think about counterparty risk in terms of a bearer asset, something like Bitcoin, where you can hold the keys, I want my Bitcoin to be an asset to me and a liability to absolutely no one else.

Tyler Campbell (07:13):

I bucket counterparty risk. I, in broad strokes, frame it in two categories. We have counterparty risk that comes in the form of permissioning and counterparty risk that comes in the form of security. For permissioning, I want to be able to move my Bitcoin at 1:00 AM on a Sunday if I so please. Now, if you hold your Bitcoin on exchanges, they hold the keys to that Bitcoin. They are subject to delays and withdrawals. Maybe there’s a grace period of seven to 10 days where you need to approve addresses before you can send.

Tyler Campbell (07:42):

Now, they put these hoops in place because you think about the incentive set that these counterparties have, these exchanges, well of course, they want you to keep your Bitcoin on the exchange because then you’re one step closer to trading for somebody’s weekend crypto project, and you’re going to be losing out on the best money that’s ever been created. When we think about also market volatility, exchanges have been known to maybe be out of service or undergo maintenance during periods of extreme volatility in the market. So that’s another way where the permissions just really are not in your control. You don’t have permission to move your money when you so please.

Tyler Campbell (08:12):

And then, even in the traditional financial system, we saw this in early 2021 with GameStop, right? The SEC and Robinhood came in and said, “We’re going to halt GameStop trading. It’s like, “Okay. I want nobody to tell me that they can halt my movement of my Bitcoin.” That is the, I think, counterparty risk as it relates to permissions, but then it’s also security. When you hold your own keys, you are securing your Bitcoin yourself. You’re not relying or outsourcing that security to a third party. We have Bitcoin, that’s held on exchanges. They are holding the keys. They are then subject to attacks from a few different vectors, right? You have, of course, black hat hackers who, if there’s a big honey pot, a natural incentive for them to want to go hack into these systems.

Tyler Campbell (08:51):

There’s also internal social engineering attacks, right? Employees at a given company could have access to a lot of special information. And you think about your account level security at a given cryptocurrency exchange when you’re buying Bitcoin, you have your username, your password, maybe your two-factor authentication. But even then, an employee at the company can reset two-factor authentication, right? You want that login information that’s sensitive to maybe the protecting information relating to your balances or something but not ultimately your keys and the ability to move Bitcoin. Using that as a counterparty risk framework, of course we do live in the West and property right is generally respected. But for me again, when I’m thinking about my portion of that 21 million, still the trade-off is always going to be in favor of holding my own keys.

Clay Finck (09:35):

I think another thing worth mentioning is that when you own Bitcoin on an exchange, you essentially own an IOU.

Tyler Campbell (09:43):

Absolutely.

Clay Finck (09:43):

You have your Bitcoin on Coinbase. They hold the actual keys like you mentioned, but what you own is just an IOU on Bitcoin, I mean, and what does that mean? You have to trust that Coinbase stays in business. You have to trust that they manage their keys effectively. We saw a tweet earlier this week about Coinbase saying that they may be subject to taking the coins of their clients. If it means they’ll remain in business. And another point worth mentioning is that these exchanges can be hacked. And if these exchanges get hacked, and they can’t pay back all their clients, then you’re subject to potentially losing your Bitcoin. So I’m curious, are customers at some of these larger exchanges like Coinbase, are they insured against an event like this? Or how does that work if that were to somehow play out?

Tyler Campbell (10:29):

Few things there, and I love that you mentioned that. Yeah, you log into your Coinbase or you’re given exchange and you see a representation of your Bitcoin, now that’s on paper, that’s a number on the screen. It is an IOU, right? That is their obligation to you. That’s your claim to a specific amount of Bitcoin. But is the given exchange solvent? If there was a Bitcoin run on the exchanges, would they be able to service everyone? That’s really, really important to focus on.

Tyler Campbell (10:53):

When it comes to the 10-Q filing that Coinbase, they had to do a quarterly 10-Q. In there, they had this disclosure about assets. Their platform are considered under their custody. And ultimately, any customers would be basically unsecured creditors of Coinbase in that example. Do you want to be an unsecured creditor of a cryptocurrency exchange or do you want to hold your money, your wealth on your own keys? I think the more and more we frame this stuff and we think about it really hard, the choice is clear.

Tyler Campbell (11:20):

Now, in general terms of service, all exchanges are going to have their own terms of service and our generation, particularly Clay, like when I downloaded iTunes when I was younger, the terms of service, I just clicked through that as fast as possible, and I’m sure folks do that everywhere. It’s no fault of the end consumer, to the listeners out there, who are using these cryptocurrencies exchanges, but it is a really interesting exercise to find these terms of service pages on your laptop.

Tyler Campbell (11:43):

Tonight, when you’re hanging out, give it a control F and do a keyword search and really search phrases like loss of funds or theft protection. And you’re going to uncover a lot of interesting things. Many popular exchanges have such programs in place, but they are maybe paid programs. So in order for your funds to be insured up to a specific amount, you have to be a part of a paid subscription product. You have to have all of these things done, maybe 10 steps provide your social security number, have over X amount of funds on the platform, verify your identity in 10 different ways. That’s obfuscated so much from your cousin on Thanksgiving dinner, who you told to go by Bitcoin, that individual is generally not going to be protected under those policies.

Tyler Campbell (12:27):

Again, this is Bitcoin, it’s volatile. These exchanges come and go, of course, Coinbase is a behemoth like slay your heroes, right? Always be on the defensive especially when it comes to your money. So yeah, it’s a fantastic question. If you are using an exchange and you’re holding your Bitcoin on an exchange, do that exercise. Go to those terms of service and check out what you might be subject to.

Clay Finck (12:46):

In many ways, Bitcoin is just this massive tool of empowerment that’s when I think about it, sometimes it just blows my mind how any country can go into any exchange, shut them down, tell them to do X capital control and they can do whatever to these companies, but they cannot touch the Bitcoin network. If you own your private keys, you own it. And you can take it anywhere in the world that you want to. So talk to us a little bit about the recent CNBC story that they put out in relation to Bitcoin and what’s going on in Ukraine.

Tyler Campbell (13:19):

So I go back and forth, whether the author of the article or as a Bitcoiner, because they referred to a secret Bitcoin or potentially they referred to hardware wallet as a USB stick. So that was the first red flag. I’m like, “Oh, okay.” But then, they also used this line later in the article that said the individual in question, and we’ll talk about that. I was holding the key to his financial survival. I’m like, “Okay, key. No pun intended. It’s just an interesting note there.” But that article was really covering Alex Gladstein, from the Human Rights Foundation, talks about this a lot, how Bitcoin is used all around the world.

Tyler Campbell (13:48):

And right now, there’s some geopolitical turmoil, of course, in Ukraine and Russia. And there are individuals who are trying to leave these countries, normal citizens. And there was an individual who’s in Ukraine who wanted to leave. And when fleeing across the borders, you wanted to take your money with you, and the ATM lines were crazy long. The banks were shutting down access to accounts. So this individual that’s focused on in this story actually used Bitcoin in two really unique ways that I love highlighting.

Tyler Campbell (14:16):

One is, in the story, it’s mentioned that that individual needed local currency. He did a peer-to-peer exchange with his friend to send Bitcoin in exchange for local currency. So the liquidity is pretty incredible to focus in on, right? I mean, not only is this a money you can secure yourself without a third party telling you yes or no, but it’s also really liquid. There’s a demand for it clearly, and so he was able to get his local fiat currency and that he maybe needed to cover X, Y, Z expenses, so that liquidity was put on display.

Tyler Campbell (14:45):

But then also primarily, that individual was able to take their hardware wallet, which we’ll touch on in a second across borders without going to a bank and requesting money be transferred or waiting in line somewhere to access cash in an ATM that was ultimately the line was a mile long. That individual was able to take their wealth with them just by holding onto a device. And he mentions in the article, even just a seed phrase would work. And what we’re going to talk about that too, but the ability to cross borders with this bearer asset not lugging a suitcase full of gold, but being able to just carry what ultimately feels and looks maybe like a really fancy USB stick, really, really powerful.

Clay Finck (15:20):

And I’d like to add someone who’s fleeing from, say, Ukraine to call it Poland across the border, they can take their Bitcoin hardware wallet. They can’t take their Ukraine bank account. They can’t take their-

Tyler Campbell (15:34):

Right.

Clay Finck (15:34):

… real estate, and what can they take? You can haul some gold bars. Maybe you could haul some cash. I mean, outside of that, Bitcoin is one of the best options, especially just the ease of transportation.

Tyler Campbell (15:47):

Absolutely. Ease of transportation, even being able to do that exchange for the local currency that he needed. I believe it was in the 600 versus the denomination. I don’t know what the specific currency was, but peer-to-peer exchange like that, not signing over the deed to a property or taking a long time to transport gold from one location to another. It was a peer-to-peer exchange executed digitally on the Bitcoin blockchain settled most likely in 10 minutes, really, really incredible.

Clay Finck (16:13):

All right, now that we’ve talked about why self-custody is important, let’s talk about Bitcoin wallets. There are a number of options for storing your Bitcoin in your own wallet, but how does this actually work fundamentally?

Tyler Campbell (16:28):

Bitcoin wallets, the terminology in a nomenclature used in Bitcoin. Wallet is the closest thing that folks can relate something to as it relates to your finances, right? You open up your wallet, you have dollar bills. It’s where your money is stored, so I think that’s the nomenclature that’s been set. Maybe a bit of an uphill battle to try to term, like phrase it differently. If you go into the deep recesses of Bitcoin Twitter, there’s a war raging on terminology right now about this stuff. Do we call hardware wallets wallets or do we call them signing devices because they sign for transactions?

Tyler Campbell (16:58):

At the end of the day, you want to be working towards the lowest common denominator. How do I tell my cousin at Thanksgiving dinner, how do I tell him, “Hey, set up a Bitcoin wallet. Here’s what it does.” At its core, what your wallet is, and it can take many different shapes, right? You can have a Bitcoin wallet as an app on your phone. You can have a hardware wallet, which we’ll discuss popular brands like Trezor, Ledger, and ColdCard. But ultimately, if you want to think about a wallet, the mental model you can use is a Bitcoin wallet is a set of Bitcoin addresses that you control the keys to.

Tyler Campbell (17:27):

Now, where those Bitcoin addresses are populated and how you use them might change in form factor, but a Bitcoin wallet is just a collection of Bitcoin addresses that you have the keys to and sometimes it includes those keys to those addresses as well. All Bitcoin lives on addresses whether that’s Bitcoin at Coinbase or Bitcoin you hold the keys to. Who is the key holder to those addresses? That’s where we get into the self-custody discussion. Bitcoin wallet’s really just an amalgamation of keys to specific addresses, then the aggregate balances of Bitcoin on those addresses.

Clay Finck (17:58):

I think it’s important to remember that Bitcoin is really just a ledger showing which addresses own how much Bitcoin and the wallet is essentially a device that’s used to sign the transactions to move in and out of the addresses. Now, let’s start with the less secure maybe wallet options. Talk to us about what a hot wallet is and what the benefits and risks are of using a hot wallet.

Tyler Campbell (18:26):

Of course. And going back to your point there. Yeah, Bitcoin like with the wallet nomenclature, a lot of folks, it’s easy to think that Bitcoin lives in a hardware device, right? Like Ledger or Trezor, but Bitcoin’s never actually in the wallet. The wallet just secures your keys, whether it’s a hot wallet or cold wallet. That is a really interesting thing to focus in on. It’s like you breaking that mental model is important, but it’s prevalent. It’s everywhere, and it totally makes sense, but we’re going to continue to fight a good fight on that front. And it’s also helpful when we say address for those listeners who maybe they’re not ultimately sure what a Bitcoin address is.

Tyler Campbell (18:57):

It’s really just a collection of numbers and letters. It’s a long string of letters and numbers. They might look slightly different between wallets and that’s a little bit more technical, but all you got to know is just a random string of letters and numbers. It’s not as clean quite yet as an email address, but that’s what we mean when we say addresses. Just use that as your mental model, maybe about 20 or so characters, that are just alpha numeric, just letters and numbers. Those addresses are tracked in a Bitcoin blockchain.

Tyler Campbell (19:21):

To your question, Clay, hot wallets. Hot wallets, and when we say hot and then we’ll use cold later as well, that just refers to the key, the private key to that Bitcoin to your Bitcoin addresses, whether they have been exposed to the Internet or not. So I have a hot wallet on my cell phone. I went to the app store. I downloaded blue wallet on my iPhone. When I set up my blue wallet, there’s a number of wallets that you can download on Android and an iPhone, when I set up that wallet on my iPhone, I was given a seed phrase, a set of 12 or 24 words that I could write down, and that was my master private key. I could take those 12 or 24 words, put them on another hot wallet or even a hardware device like that gentleman’s USB stick, who is in Ukraine. And I could completely recover my addresses and control my Bitcoin with my keys.

Tyler Campbell (20:11):

Now, the problem there on my phone is that those 12 or 24 words seed phrase, which we’ll touch on I think in just a little bit as well, that seed phrase ultimately is being shown to me on the screen of my phone. My phone’s connected to my Wi-Fi or to my cell provider. So any malicious actor that potentially is watching my phone, there’s just the risk that my seed phrase has been exposed online. Hot wallets certainly have their place, of course, right? I think the appropriate analogy going back to the traditional financial system is, “I use a hot wallet. I use a mobile Bitcoin wallet because I want to be able to pay individuals or I have a lightning wallet on my phone.”

Tyler Campbell (20:44):

Lightning network is a way to send Bitcoin peer-to-peer instantly with no transaction fees. Also, you think about it like a checking account, right? My savings account. My savings might be in cold storage, might be on my hardware devices. My keys are on my hardware devices, and I’m keeping that completely offline versus my checking account. If I have a couple hundred dollars worth of Bitcoin or a few million stocks that I want to be sending around, I keep it on a hot wallet. So it’s all about managing that risk, but hot wallets certainly do have their place.

Clay Finck (21:11):

I really like that analogy you use where the hot wallet, it’s a little bit less secure, but you can think of it. If you want to spend Bitcoin, you can treat it as your checking account. You have your phone as direct access to your Bitcoin. You want to go and buy something at the Bitcoin Conference, you can just walk up to the stand and do that or you head to El Salvador and buy your sandwich from the local joint. And then, the hardware wallet is you would store most of your Bitcoin. It’s much more secure.

Clay Finck (21:39):

So let’s dig into the cold storage or hardware wallet options. What does the process look like for storing your Bitcoin on a hardware wallet, like a Ledger or Trezor, and why is this route more secure?

Tyler Campbell (21:55):

When thinking about cold storage and hardware wallets, and even in the question, it’s really important to break this model of Bitcoin, sending it to a hardware wallet or living on a hardware wallet, really when you’re setting up a Trezor or Ledger or ColdCard even, you’re setting up your private keys, right? Your wallet contains your keys. Your Bitcoin lives on addresses.

Tyler Campbell (22:15):

When you’re setting up those keys on a hardware device and you’re generating your master private key in the form of a seed phrase, these hardware devices are doing so in a way that the device itself is going to be displaying you your 12 or 24 words that you can then go right down, and it’s not going to be a device that is Wi-Fi enabled or Bluetooth enabled. I think Ledger, there’s a model for Bluetooth, but now when you’re generating that seed phrase, it’s happening offline. So you don’t have that risk of my seed phrase is being shown to me on the screen of my computer or the screen of my phone.

Tyler Campbell (22:47):

It’s actually happening on a physical device. You then go right down that seed phrase on a piece of paper. Some individuals do go so far as stamping that seed phrase into steel because paper can burn and your seed phrase is sacred. That’s the most important thing you can keep secure when we set up a cold storage wallet, and I think the cold comes in when it’s like, “Okay, there’s no way that this seed phrase has been exposed to the Internet. It’s not hot in any fashion. It’s cold.” Then, I guess maybe if you’re if you’re thinking about securing it in a safe, in a basement, maybe that might be physically cold as well. But yeah, that’s generally the process.

Clay Finck (23:19):

When you dive into Bitcoin wallets and all of these fancy terminology with this, once you start to dig in, you really understand that this is magic Internet money. There’s a lot of complicated stuff going on in the background, but it just works. So let’s break down some of the terminology. You have seed phrases, you have pass phrases, you have PIN numbers. When it comes to these hardware wallets, could you break some of these down and help someone that’s just new to this better understand what all of this really means.

Tyler Campbell (23:48):

This is one of my favorite things to do. I also think it’s, in a way, kind of cool. Bitcoin’s not a company. It’s not a central entity. There’s nobody out there defining all of these terms. So naturally, in an open source fashion, we’re going to have different terminology for things. Seed phrase. I use seed phrase. If you’re setting up a Trezor wallet, they might call them backup words or something like that. Right? Really defining this stuff is important. It’s important for shaping your mental model of self-custody too.

Tyler Campbell (24:15):

So starting with seed phrase, since I’ve mentioned it a couple of times, your seed phrase is the most important thing you can keep secure, and it’s shown to you by your hardware device as a set of 12 or 24 words that are going to be randomly generated for you that you can write down. Now, even that sounds like we’re in a sci-fi novel, right? It’s like, “What?” Okay, I’m getting 12 random words. Well, okay, let’s touch on just… Let’s go a little bit deeper.

Tyler Campbell (24:39):

Those 12 or 24 words are completely random. They’re coming from what’s known as the BIP39 word list. It’s 2048 words. These words are a standard in Bitcoin. So these words, if you generate a 12-word seed phrase onto a Trezor, if you lose your Trezor, you can take those 12 words, populate them onto a Ledger device and completely recover your Bitcoin wallet. Now, that’s pretty insane. So these 12 or 24 words are generated for you by the device. So that’s a seed phrase.

Tyler Campbell (25:07):

Again, most important thing you can keep secure. There’s reasons why folks go to the lengths of stamping these seed words into steel. They’re incredibly, incredibly important. Now, each device is also potentially something that could get stolen, right? So you want to add a layer of physical protection onto the device. And that’s where a PIN comes in. Similar to like how you might have a PIN on your cell phone. You can set a PIN for your given hardware device.

Tyler Campbell (25:32):

If an attacker or somebody steals your hardware device, they go to plug in your Trezor, and they need to enter a PIN in order to get into the device. The PIN and seed phrase, think about them as they’re there to protect your Bitcoin, but they play drastically different roles. Seed phrase is your Bitcoin, so to speak, versus the PIN, just a layer of physical protection for your device, right? If you forget your PIN to your device, not the end of the world. You have your seed phrase physically secured, you can recover your wallet. That’s PIN and seed phrase is what I work with every single day with clients.

Tyler Campbell (26:04):

And then, we mentioned something else called a passphrase. You can think about a passphrase as a 13th or a 25th word on top of that seed phrase. Now passphrases, fundamentally change your seed, right? If you’re using a wallet with a passphrase enabled on it, you have your 12-word seed phrase, and then you have your additional passphrase. If that’s the wallet you’re using, and let’s say you lose your Trezor, if you want to go recover that onto a different device, just having those 12 words ain’t going to be enough. You also need that passphrase.

Tyler Campbell (26:36):

With that, you can think about, “Okay. Sounds interesting.” But I always like to lay out a word of caution there. If you’re not an advanced user, adding that passphrase, it’s really an additional single point of failure, right? One lone seed phrase is already a single point of failure if you lose those seed words. A seed phrase plus a passphrase, you just now have two single points of failure. So another thing to note about that pass phrase, the 12 or 24 words are generated by your device.

Tyler Campbell (27:01):

Coming from that word list, the passphrase can actually be defined by you. So humans hear that, and we think that we’re a lot smarter and more random than we really are. So we hear that and we go, “Okay, great.” A passphrase is case sensitive, right? Tyler with a capital T is a different passphrase than Tyler with a lower case T. It can include special characters like an exclamation point. It can even include a space. So if you’re setting a passphrase initially, and you think that you wrote it down correctly or you maybe entered a wrong space, that could really, really set you up for a pretty stressful time if you ever do need to recover that seed phrase and passphrase, and you’re wondering if you have wrote it down correctly.

Tyler Campbell (27:38):

Just a word of caution with passphrases, all of these things exist to protect your Bitcoin just to varying degrees of severity. Again, circling back to seed phrases, the ultimate thing you can do is secure your seed phrases physically.

Clay Finck (27:50):

I think one of the most important things you mentioned there was single point of failure. Say I stored my Bitcoin on a Trezor or Ledger, and I had my house broken into. And somehow, they found my 24-word seed phrase. Immediately, I would want to get that Bitcoin off my Trezor, but I know that if I have a passphrase set up, and they don’t have access to that, then I know I should be fine. I’ll just get it moved over, and I know that in the near term, they’re not going to have that passphrase unless they were able to somehow luckily guess what it is.

Clay Finck (28:23):

So I think when you’re thinking about storing your Bitcoin, you want to ensure that there’s no single point of failure. You distribute all these points of failure across the physical world, and I think that’s something that’s really important that I think through personally when I think about storing my Bitcoin.

Tyler Campbell (28:40):

Absolutely. Absolutely. And yeah, the single point of failure cannot be stress enough because it is my life savings, right? It’s a lot of people’s wealth. And so you’re thinking about securing that it’s so much more than some call options that you might do on a Robinhood app, right? It is your money. And thinking about single points of failure quite critically is really, really important to do really think about the trade-offs involved, right? This is Bitcoin. There’s obviously going to be trade-offs.

Tyler Campbell (29:04):

When you think about reducing single points of failure, think there are other solutions that exist for security that are just native to the Bitcoin protocol, multisignature being one of them, what we do at our company, Unchain Capital. And so thinking about that, I think when it comes to risk parameters and I think about my potential attack vectors, I’ve seen it time and time again where you can be your own worst enemy.

Tyler Campbell (29:24):

For me, with passphrases, do I trust myself to write it down correctly or give it to an error without there being an error in the way that I wrote it down? I think about that versus risk of theft or break in, and that fluctuates and changes for everybody’s different position, right? What works for Clay might not work for my colleague Phil, might not work for me.

Tyler Campbell (29:44):

Security is an evolution and thinking about these things, that’s why it’s always good also to do a security self-assessment, I would say, every year with your Bitcoin setup. It’s what I’m doing now, still working for me. Have I moved into a new apartment or home? Have these life changes happened? And do I need to reassess my thinking on this stuff? So, excellent, excellent point.

Clay Finck (30:02):

Preparing for this discussion. We talked a little bit about how everyone goes through this sort of hero’s journey where they discover Bitcoin. They’re like, “Oh, this stuff’s pretty cool. It’s like going up in price.” So you buy some and then you hear all about this stuff with, “Oh, you got to hold your own keys.” And then you’re like, “Oh, there’s all these different ways to hold your own keys.” So you might start with a hot wall because it’s just so easy, it’s on your phone.

Clay Finck (30:22):

And then you’re like, “Well, is this the most secure?” So it’s pretty funny. We all go through that journey where you learn more and more, you become more and more comfortable with Bitcoin and you get to that point where you have the best security for your specific situation.

Tyler Campbell (30:37):

Totally. And that’s a really good point. It’s not all or nothing, right? You can have a lot of funds existing as a claim to Bitcoin on Coinbase. You’re given exchange. And when you, let’s say, you want to go down the rabbit hole of, “Okay, I’m going to buy a hardware device, I’m going to set up a seed phrase,” you don’t have to move your entire wealth over to that address that’s secured by your hardware device.

Tyler Campbell (30:58):

A hundred bucks worth of Bitcoin. See how it functions, like get your feet wet with it. It’s powerful to learn at your own pace, and it’s also kind of forgiving in the sense that you don’t have to do everything at once. You want to feel ultimately comfortable and confident in your setup. And if that feeling of being comfortable and confident comes with a few test transactions, sending it back to Coinbase, then from Coinbase back to the addresses you control, going through those motions, it’s an incredible learning opportunity. And also, it does feel really, really good. It’s hard to put the feeling, to describe the feeling of holding Bitcoin with your own keys, but it’s certainly palpable.

Clay Finck (31:36):

Is there anything else, in regards to the hardware wallets that listeners should be mindful of, whether it’s the risks or just best practices in storing their Bitcoin on one of these devices?

Tyler Campbell (31:48):

I think these hardware devices you always do, first and foremost, when you’re setting up a device for the first time, you want to make sure because these different devices of course have different methods of being set up or initialized, right? Different ways of getting that seed phrase. So with the Ledger device, they use a compatible software on your Mac or PC called Ledger Live. With Trezor, there’s a compatible software called the Trezor Suite that guides you through the setup process.

Tyler Campbell (32:15):

Just in terms of having good Internet hygiene, always make sure that you’re accessing the Ledger Live or Trezor Suite from the appropriate domain, right? It should be trezor.io. Everything should look and feel correct. It’s really, really worth doing a double check when you’re on these websites, downloading these softwares to set up your devices.

Tyler Campbell (32:32):

Another thing with these devices is phishing scams, right? Bitcoin’s very valuable. A lot of people want Bitcoin. You should never be entering your seed phrase, your 12- or 24-word seed phrase, into any email or if there’s somebody you get a malicious email asking, like from “Trezor” that wants for your safety, please enter your seed phrase. We’re going to be securing your funds or moving your funds to a more secure location, never be doing that. Again, it’s low-hanging fruit. We think we won’t won’t fall susceptible to this stuff, but if you cast enough lines, you’re going to catch a fish. That’s what these literal fishing attempts, these hackers are trying to do.

Tyler Campbell (33:10):

So just being diligent about physically securing your seed phrases, making sure that your Trezor or Ledger isn’t just out on your desk at home, or even if you’re a fan of these companies and a fan of Bitcoin, like putting stickers on your laptops and stuff, as you’re walking through the airport, probably not… Again, low-hanging fruit, just general best practices, right? Don’t want to put basically a red flag on yourself.

Tyler Campbell (33:31):

And then also, having just one hardware device, that’s a single point of failure, right? That seed phrase, maybe associated passphrase, that device itself so having just one of these devices set up. A great way to learn when you’re securing your generational wealth, there are other options available for you, making use of potentially more of these devices.

Clay Finck (33:50):

Let’s talk about some of the other options. Unchained Capital offers unique services around Bitcoin self-custody that make holding your own private keys even more secure. Talk to us about what you guys offer at Unchained with the multisig solution.

Tyler Campbell (34:08):

Everything at Unchained is built on this foundation of and wanting to empower businesses and individuals to hold their own keys. Now, at the core is a solution called multisig or multisignature. Again, with Bitcoin and the terminology, it’s a mouthful, right? Multisignature. What does that mean? When you’re setting up one hardware device, right? You have one Trezor, one Ledger, you go to move your Bitcoin.

Tyler Campbell (34:31):

If I want to send Bitcoin to Clay and I want to use my Trezor to do so, I provide one signature and that then sends a Bitcoin on the Bitcoin blockchain over to an address that Clay controls. That’s a single signature, just one hardware device. Multisignature allows for a… It’s a security setup. Our product is called a vault or multisignature product allows you to not just have one hardware device and one associated seed phrase controlling your Bitcoin addresses, but rather a quorum is the term, a set of keys.

Tyler Campbell (35:01):

So the solution we use at Unchained Capital is a two of three multisignature, so your vault with Unchained, you have three total keys controlling your addresses. One key is held by Unchained. Two keys are held by user, so you’re always in complete power of moving your Bitcoin as you so please. You have two hardware devices, two associated sets of seed phrases. Then, Unchained has a key. So you have that redundancy in play now for your Bitcoin wallet for your setup.

Tyler Campbell (35:29):

You can think about the framework as maybe a digital treasure chest or a digital vault, and that vault has three key holes. And in order to open up that vault, you need any two of your three keys that could be both of your keys, both of your devices could be plugged in, or it could be one of your devices and one of ours. Thinking about it like that, that’s kind of the core of what we do is multisignature security.

Tyler Campbell (35:51):

And then from there, our clients that we work with, not only are they securing their generational wealth in the best way possible, they’re also one step closer to our financial services like Bitcoin-backed loans or IRA product has been really, really popular. Again, all built on this foundation of multisig, right? Even if you go to take out a loan with Unchained, you provide one of your keys to a multisig where you’re going to be sending your loan collateral.

Tyler Campbell (36:13):

So you can prove to yourself that we’re not going to be re-hypothecating your funds or lending it out anywhere to get a yield. Your collateral is just being secured by multisig until you pay off your loan. And then, we send you back your collateral. It’s really this foundation of multisig security and then, of course, the education that goes along with it.

Clay Finck (36:30):

Now, I mentioned earlier that the important piece of storing your Bitcoin just on a hardware wallet is ensuring there’s no single points of failure, and the multisig solution ensures that as well. There’s no single point of failure. You need two keys to sign a transaction. So with that, the security seems somewhat similar. But I’m curious, what are some of the additional benefits of using multisig to secure your Bitcoin?

Tyler Campbell (36:54):

Yeah, you really have this increased fault tolerance is what the term, especially in computer science, is called. If something is fault tolerant, it means that something can go wrong, and you’re still going to be okay. Now, if you are using one seed phrase to secure your funds, one hardware device, one seed phrase. You lose that seed phrase, you better hope your device works. If your device works, and we know that hardware’s not perfect, right? I mean, old iPhones crash every other week. It’s crazy. That is a single point of failure.

Tyler Campbell (37:21):

Now, in the name of reducing or eliminating single points of failure, when you have a multisignature setup, especially with Unchained, you think about it, we hold a key. So you’re eliminating yourself as a potential single point of failure where we hold a key. Now, you have two keys. You have two devices, two sets of seed phrases. That’s ultimately four things that you need to protect.

Tyler Campbell (37:39):

Now, if any one of those four things, just you lose it or something happens, maybe if your device goes to the bottom of the ocean or you lose a seed phrase technically, and this would be a dire situation. But technically, you could lose up to three of those four elements and still be okay, but that’s crazy, right? Because we’re humans, crazy things happen, right? It’s just a human nature, right? It’s like Murphy’s law, whatever can happen will happen.

Tyler Campbell (38:05):

Having that fault tolerance, knowing that something can go wrong and you still have access to your Bitcoin where we have a key, and then you would ultimately have at least one of those other items, that’s just… I mean, it’s like sleep easy at night kind of bottled up into one security solution. It really is.

Clay Finck (38:20):

This question just came to my mind. What is Unchained doing with the keys? Do they have them in some old vault or how are those stored?

Tyler Campbell (38:30):

Yeah, that’s a fantastic question. And thinking about the knowledge, us as a key holder, it’s really important to hone in on the fact that we are a collaborative member in your setup, right? Worth stressing at any given time, you hold the majority of your Bitcoin keys. We’re there as needed as a backup key. Of course, now we have a bunch of education coming along with partnering with Unchained. When it comes to our keys, there is a certain subset of individuals at Unchained that have knowledge about our private key and our signing procedures.

Tyler Campbell (38:58):

What I do know is that our private keys are generated offline in an air-gap fashion, meaning not touching any Internet-connected device and are geographically distributed. When it comes to the secure generation of our keys, I know how that works at a high level, but even myself on the concierge team, knowing the exact details just for good operational security, that’s kept to a very strict set of eyeballs.

Clay Finck (39:21):

That’s interesting. Now, you’re on the concierge team, you mentioned, and you’re working with people one-on-one, these individuals and businesses, how do you recommend these people store their own keys? What are some best practices on how those should be stored or what people usually do?

Tyler Campbell (39:39):

When you think about those four things that you need to secure and protect, both of your devices, both of your seed phrases, whether you’re a business or you’re an individual, the pinnacle of security with this setup is going to be four separate geographic locations, right? One for each of these elements. It’s my greatest fear doing a concierge onboarding, as we call them, spending time with an individual, setting them up with private keys. Then, as soon as we get off the call, they just open up their desk drawer and put everything in it. You definitely do not want to be doing that. You don’t want to be co-locating any of your two elements. If you have four separate locations, could be safe at a home or an office, could be a safety deposit box at a bank, could be a trusted friend or family member.

Tyler Campbell (40:18):

With that one, you really want to know that individual knows the importance of what they’re securing, so maybe add a little asterisks there. If you’re fortunate enough to have a vacation home or a cabin, there’s a bunch of options available to you. Keeping things geographically separate is incredibly important, right? If there’s one area that’s compromised or if you have just one element of your setup up in your cabin, like my family has a cabin in Northern Wisconsin, if there’s a fire up there, okay, that’s just one element out of the four that I need to protect. I have that fault tolerance.

Tyler Campbell (40:49):

Everybody’s situation is a little bit different, right? If you’re not in the position where you have just four locations right off the bat, well, security is an evolution. What works for you now in May of 2022 might not work in May of 2023. You can always be changing this stuff. At a minimum, core principle is don’t be co-locating any two elements, right? If both of your seed phrases are in the same safe and the safe gets stolen, well, what was the point of storing them there in the first place? That’s really, really important to focus on is keeping things physically secured. Your seed phrase is written down or stamped into steel, not just in a Microsoft word document on your computer, physically secured, and then geographically separated.

Clay Finck (41:26):

This might be a silly question as I’m more of a finance-minded person, would it be possible for a regulator to go to a company like Unchained and shut down your operations? And how would customers be able to get access to their Bitcoin if they can’t get access to your website or something to that effect occurs?

Tyler Campbell (41:45):

This is where Murphy’s law rears its head again, right? You always want to be thinking especially when it is, again, your generational wealth, right? Your life savings. You act and prepare as if that can happen. Right? It’s my personal belief that we have US congressmen and women holding Bitcoin. There are nations that have made it legal tender, right? There are things going on with this asset, with this new emerging money, where I think regulatory capture of any specific company is probably unlikely. You want to be on the defensive, thinking as if it can, right?

Tyler Campbell (42:17):

So an important part about using Unchained Capital as a collaborative custody partner, holding one key in your set of three is that we talk all the time about eliminating single points of failure, well, we’d be remiss if we didn’t look ourselves in the mirror and say, “Okay, how could Unchained be a single point of failure?” Right? What happens if our website goes down? What happens if, poof, we’re just gone one day, right?

Tyler Campbell (42:37):

An individual goes to our website, if they can’t find it. Well, we always want you to be able to access your Bitcoin. We don’t want to be the gatekeeper to your funds. So with your two keys and your multisignature setup, there are, and this is a really powerful thing about just the Bitcoin protocol, right? Unchained didn’t invent multisig or it’s not proprietary. It’s just open source. Multisig is at the Bitcoin protocol level. That’s where you can allow for multisig setups.

Tyler Campbell (43:02):

If something drastic were to occur, you as just a Bitcoin user holding your own keys, you would be able to rebuild your multisig setup. You’d be able to rebuild the vault that you create with us in another Bitcoin wallet we call a coordinator, like a multisig coordinator software. It would take your key information, coordinate it all correctly, and you’d be able to see all of your balances and still use your two keys.

Tyler Campbell (43:23):

Now, that’s where it still does get a little bit technical, but that’s why we’re here. We’re trying to provide really awesome educational resources. We want to be that navigator to help people learn how to do this stuff. An open source tool that I work in all the time is called Caravan. It’s out on GitHub. It’s worked on by our engineers plus others in the community. Really, when you set up a vault with Unchained Capital, especially going through the concierge process, we make sure to touch on this, you get a special file, a wallet configuration file. It’s like a backup file for your vault. It looks like a bunch of code. It contains some information about your hardware devices as well as our key as well.

Tyler Campbell (43:59):

And when you have this file, this backup file, you know that you could take this backup file and go over to Caravan, or another popular option is Sparrow wallet or Electrum. These other open source wallets could see this file, all of a sudden they read the file, your funds appear, you’d be able to use your two keys. Unchained is not going to be a single point of failure. Now, I know that’s a mouthful. I know for the listener at home, they’re like, “What?” But this is incredibly fun. This is really powerful. This is you being able to take your two keys.

Tyler Campbell (44:26):

Let’s say Unchained Capital goes away, “Okay, I’m going to take my two keys. I’m going to go to an Internet cafe in El Salvador. I have my backup file. I’m going to completely restore my multisig vault and send my money how I so please.” It’s not the plot of a sci-fi book. It’s real life, and it’s happening right now. I help clients do it every single day.

Clay Finck (44:44):

Yeah. I can definitely see the value with Unchained, especially with the personalized service you offer. If you onboard someone, you’re hopping on a call with them, you’re answering any of their questions. So I’m curious, how much does it cost for a retail investor to work with Unchained to store their Bitcoin through this multisig solution?

Tyler Campbell (45:03):

Because multisig is embedded in the Bitcoin protocol, creating a multisig address with your own keys is free, right? So our vault product at its core is free. You sign up for an Unchained account, there’s no yearly charge or anything like that for an individual who wants to create a vault.

Tyler Campbell (45:17):

Now, we do have our concierge service where you can get on the phone for multiple calls with my team, and we go through everything. We go through a device setup. If you’re setting up a brand new Trezor, we’ll walk you through that. We’ll build your vault. We’ll help you download that special backup file. We’ll talk about how to use your vault. We’ll help you do a deposit from Coinbase into your vault. That’s one of my favorite things to do.

Tyler Campbell (45:37):

We have these educational sessions, and those are called our concierge onboarding sessions. Now, they do start at $1,250. That is a scenario where you already have two hardware devices, you’d be able to just order a concierge onboarding package scheduled some time with us, be ready to go, but we also do provide hardware devices for individuals who don’t have any. So if you need a Trezor, we have Trezor model ones that we’ve sent you for an additional $75 per device. So you tack onto that 1,250 depending on how many devices you need.

Tyler Campbell (46:08):

Now, the cool thing about the concierge onboarding process is, let’s say, that base level of 1250, that 1,250 bucks, after the vault setup, we deposit a thousand dollars worth of Bitcoin into your vault to get you started, right? At its core, it sounds like a Bitcoin rebate. So at its core, it’s 250 bucks to get on the phone with us, talk about this stuff, and have a Bitcoin partner.

Tyler Campbell (46:28):

Now that’s for individual accounts. Business accounts do have a yearly maintenance fee, and we do have other products, right? We earn revenue because people hear that all the time, and they’re like, “Wait, so vaults are free. We pay for the concierge onboarding service, but it’s not a yearly subscription, how do you make revenue?” So we generate revenue from our financial services, right? Interest payments on loans, trading for when we help folks set up their Bitcoin IRA. There’s other things that we make money on, but we really think that Bitcoin’s security, having the most secure setup possible, is going to be free.

Clay Finck (46:57):

I love that Bitcoin rebate you do. Someone might have just listened to this whole conversation, and they’re just like, “Man, I am not ready to take self-custody in my Bitcoin.” Or like, “I am just not a tech savvy person.” There’s going to be some people out there like that, I’m sure. So I’m curious what your thoughts are on owning a Bitcoin proxy, for lack of a better term, such as MicroStrategy or the Grayscale Bitcoin Trust, holding something like this as opposed to holding Bitcoin on an exchange or taking self-custody.

Tyler Campbell (47:28):

This is really interesting, especially when you see moves like MicroStrategy buying a ton of Bitcoin, it’s like, “Okay, well, is that just essentially a form of getting exposure to Bitcoin?” The thing I will say, before I dive into my thoughts on Bitcoin proxies, is if you have time at night or on the weekends to scroll through TikTok or Instagram, and you can go grocery shopping at the grocery list, you can follow a guide to set up a Trezor and write down a seed phrase. It’s going to pay so many dividends to you in the future if you take that step, so I would encourage those of you out there to really think about this stuff.

Tyler Campbell (48:00):

Holding your own keys to your Bitcoin? That’s why we’re Bitcoin. We’re out here changing the money, and we’re doing that by enforcing that strict supply of 21 million and holding it with their own keys, right? When we think about getting exposure to Bitcoin, these companies and even the Grayscale Bitcoin Trust, so there’s GBTC, there’s MicroStrategy, maybe there’s Bitcoin mining companies that you can invest in.

Tyler Campbell (48:20):

Not investment advice, people can certainly do what they want with their money, but I will always choose actually buying the underlying asset 10 days out of 10 just because, if you think about it, if it’s desirable enough for MicroStrategy to go put on their balance sheet and you have the access to just buying that underlying asset and taking full custody of it with your own keys, why not do it now? You also need to value these companies in terms of net asset value.

Tyler Campbell (48:45):

So you’re not only taking the market, you’re also not just taking the Bitcoin exposure, but you’re also taking the market sentiment for a particular company, right? You’re also exposed to all of the risks inherent to a given company, right? MicroStrategy, if they have bad earnings or if, it’s really morbid and crazy, but if Michael Saylor something happens to him, that market sentiment is what’s driving the price alongside Bitcoin price action. So if you really want true Bitcoin exposure, just buy Bitcoin. Hold it with your own keys. The community is incredibly helpful. There’s so many knowledge resources out there that are just for free.

Tyler Campbell (49:18):

That’s why I particularly think about Bitcoin proxies and investing in them. I think they’re interesting. I think it’s a nice maybe a gateway drug to learning more about Bitcoin, but at the end of the day, I’m always going to be holding my own keys.

Clay Finck (49:29):

Yeah. Again, it goes back to that counterparty risk. You’re taking additional risk and different types of risks when you’re buying those Bitcoin proxies. So Tyler, thank you so much for joining me today. This was such a valuable episode, just jampacked with knowledge. I hope we can bring you or someone else from Unchained back on in the future. Before we close out the episode, where can the audience go to connect with you and Unchained?

Tyler Campbell (49:56):

First of all, thank you, Clay, for having me on. I know talking about this stuff, if there’s one goal of mine with this episode is that there’s a listener out there who’s been thinking about doing these things. I want to just tell you again and stress, take the dive. It doesn’t have to be all or nothing. You can familiarize yourself with these concepts. You can set up a Bitcoin hardware device, write down your seed phrase, play around with it. It is really, really powerful.

Tyler Campbell (50:18):

So thank you, Clay. This was an awesome opportunity for us to jump on and talk about self-custody. Unchained is pumping out awesome content. Not only do we have these services from a multisig and IRA and loans perspective, but we also have an incredible blog and knowledge base, right? We have articles that talk about power Bitcoin fees on the Bitcoin network calculated. What do they mean? Just general Bitcoin knowledge. That’s going to be out on our blog and something I’m looking forward to contributing to more as well.

Tyler Campbell (50:45):

Definitely, unchained.com to learn more about the company. I primarily hang out when I’m not helping folks, when I’m not putting private keys in people’s hands, I’m usually hanging out on Twitter. I’m @clockwork_prior. That is my Twitter handle. I usually try to do an educational thread every week about a different topic in Bitcoin. So if you have any ideas, just shoot me a DM. I’ll absolutely write about it. I learn as I write these threads too. But yeah, that’s where you can find us. Thank you again, Clay. This was really, really awesome.

Clay Finck (51:11):

You bet. It was a pleasure having you on. Thank you, Tyler.

Tyler Campbell (51:14):

Awesome. Thank you.

Clay Finck (51:16):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There, you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios.

Clay Finck (51:50):

And with that, we’ll see you again. Next time.

Outro (51:52):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, We Study Billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional.

Outro (52:18):

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