Understanding custody: not your keys, not your coins

You can own bitcoin without a bank. Whether you actually do comes down to one question: who holds the keys? You don’t need any prior knowledge – we explain every term before we use it.

Whoever holds the keys holds the bitcoin

Your bitcoin don’t sit ‘in’ an app or on a device. The blockchain assigns them to addresses, and only someone with the matching private keyGlossaryPrivate keyA secret, randomly generated number that you use to sign transactions and so control your bitcoin. Anyone who knows the private key can spend the bitcoin that belongs to it – it must never fall into anyone else’s hands.On the learning path: Stage 5 · Step 3 – Backing up your seed phrase →In the glossary →× can spend them. A wallet is therefore more like a key ring than a purse. More in Keys, addresses & seed phrases.

There are two options:

• A provider holds the keys for you. You have an account with a password, and the provider is your custodianGlossaryCustodian (custodial)A provider such as an exchange or app that holds the private keys for you. Convenient, because support can help if you lose your password – but you don’t hold the bitcoin yourself and depend on the provider paying out.On the learning path: Stage 4 · Step 2 – Choosing a provider →In the glossary →×.
• You hold the keys yourself. This is called self-custodyGlossarySelf-custodyYou hold the private keys to your bitcoin yourself – in your own wallet rather than with a provider. Nobody can freeze your bitcoin. But nobody can help you if you lose your seed phrase and keys.On the learning path: Stage 5 · Step 2 – Setting up your first wallet →In the glossary →×. Only you have access, and only you bear the responsibility.

The rule of thumb: ‘Not your keys, not your coins’GlossaryNot your keys, not your coinsA guiding principle of the Bitcoin community: if you don’t hold the private keys yourself, you don’t own your bitcoin directly – you only have a claim against the custodian. Exchange collapses such as Mt. Gox and FTX show why.On the learning path: Stage 5 · Step 2 – Setting up your first wallet →In the glossary →×.

With a provider: convenient, but a claim

If you buy from an exchangeTermExchange (crypto exchange)A trading platform where buyers and sellers trade bitcoin with each other via an order book.On the learning path: Stage 4 · Step 2 – Choosing a provider →In the glossary →AdLicensed providers with a paid linkProviders from our comparisonKrakenExchange · MiCA (Central Bank of Ireland)Visit Kraken* (paid link, opens in a new window)BitvavoExchange · MiCA (AFM, Netherlands)Visit Bitvavo* (paid link, opens in a new window)CoinbaseExchange · MiCA (CSSF, Luxembourg)Visit Coinbase* (paid link, opens in a new window)All 7 compared – including non-partners →*Paid link: if you sign up or buy through it, we earn a commission. Your price stays the same. How we make money →18+ · Crypto assets are highly volatile; you could lose all your money. No deposit protection.× or app, your bitcoin initially stay there. That’s convenient: you log in with a password and a two-factor code, support helps if there are problems, and there’s no seed phrase to look after.

But the provider holds the keys. You have a contractual claim against it and depend on it paying out. Exchanges can refuse transactions or, in the worst case, close because of insolvency.^[6]

No deposit guaranteeGlossaryDeposit guarantee (deposit protection)Statutory protection for bank deposits: up to €100,000 per person and bank if the bank goes bust. It generally doesn’t cover bitcoin – and neither does investor compensation.On the learning path: Stage 4 · Step 2 – Choosing a provider →In the glossary →× applies to bitcoin. The statutory protection of up to €100,000 per customer and bank covers deposits such as account balances, not crypto assets.^[5],[6]

What MiCA and § 45 KMAG change

Since 1 July 2026, the transitional periods of the EU’s MiCA regulation have expired everywhere: anyone who holds crypto assets for customers in the EU needs MiCA authorisation; banks and investment firms only have to notify their supervisor.^[2],[1] How to check whether a provider is authorised is explained in MiCA & regulation.

MiCA requires custodians to keep customer holdings separate from their own and legally segregated from the provider’s assets. The provider’s creditors are not meant to have access to them, especially in an insolvency.^[1] In Germany, the KMAGGlossaryKMAG (German Crypto Markets Supervision Act)Germany’s act accompanying the EU’s MiCA regulation. It makes BaFin the competent supervisor, makes providing crypto services without authorisation a criminal offence and protects crypto-assets held in custody if the provider becomes insolvent.In the glossary →× (Crypto Markets Supervision Act) adds: crypto assets that an institution holds for you are deemed to belong to you – including your share of holdings kept in a pool.^[3] In an insolvency, they can therefore be separated from the insolvency estate (in German: Aussonderung).

Dive deeperTwo limitations in the law

• The rule does not apply if you have allowed your crypto assets to be used on behalf of the institution or third parties.^[3]
• If you refuse to let the insolvency administrator transfer your holdings to another institution, you bear the costs of the separation – unless the new institution’s terms are unreasonable for you.^[3]

Three collapses, one lesson

All three cases predate MiCA. They show what a balance on a platform is worth when things go wrong.

1. 28 February 2014

   Mt. Gox, Tokyo

   What was then the largest Bitcoin exchange first stopped withdrawals, then trading, and filed for insolvency. Around 750,000 BTC belonging to customers were missing – according to a later analysis, most of it stolen bit by bit from the hot wallet from late 2011 onwards.^[7] The deadline for repayments runs until 31 October 2026 (as of September 2026) – more than twelve years after the collapse.^[8]

2. 13 June 2022

   Celsius Network

   The provider, which had advertised interest on crypto balances, froze all withdrawals. It owed its customers around $4.7 billion. Chapter 11 proceedings followed on 13 July 2022, and distributions to creditors began on 31 January 2024.^[9]

3. 11 November 2022

   FTX

   The exchange filed for insolvency with around $8 billion in customer funds missing.^[10]

FTX shows the difference between a claim and ownership most clearly. Claims were converted into dollars at the price on the bankruptcy date: anyone who had one bitcoin there didn’t get a bitcoin back, but dollars based on $16,871.63.^[11] For comparison: one bitcoin currently costs $86,292. A recovery rate of ‘over 100%’ refers to that dollar amount, not to your bitcoin.^[11]

The lesson: a balance on a platform is a promise. A bitcoin in your own wallet is ownership.

Self-custody: full control, full responsibility

With self-custody, your wallet generates the keys on your device. As a backup, you get a seed phraseGlossarySeed phrase (recovery phrase)A sequence of usually 12 or 24 words from which your wallet derives all its private keys. Anyone who knows the words has full access to your bitcoin – so they belong in an offline backup and never in anyone else’s hands.On the learning path: Stage 5 · Step 3 – Backing up your seed phrase →In the glossary →×: usually 12 or 24 words from which all the keys can be restored. Whoever has these words has the bitcoin – wherever the device is.

In return, there’s no support team to reset a password. If you lose both your private key and your seed phrase, you can no longer get at your bitcoin.^[6] The typical risks:

• Loss: seed phrase mislaid, burnt, illegible or written down incorrectly. How to protect it: Backing up your seed phrase.
• Theft: seed phrase photographed, stored in the cloud or typed into a fake website.
• User error: bitcoin sent to the wrong address – transactions can’t be reversed.
• Device faults: in July 2026 it emerged that COLDCARDProvider · Hardware walletCOLDCARDBitcoin-only signing device from Coinkite (Canada) with an air gap via microSD, NFC and QR – more for advanced users.Hardware manufacturer – no financial licence required · reviewed Sept 2026Price: Q $319, Mk5 $219 (promotional prices, as of Sept 2026)On the learning path: Stage 6 · Step 1 – Hardware wallets compared →Our profile →Official website ↗Only buy hardware wallets from the manufacturer or an authorised reseller.× devices with older firmware had generated seeds that were too weak; attackers recalculated keys and stole funds. An update doesn’t repair seeds that were already generated; those affected are advised to move to a new seed.^[12] Details in Hardware wallets compared.
• Inheritance: without an emergency plan, your heirs can’t get at the bitcoin either.

Provider or yourself? The comparison

Question	With a provider	Self-custody
Who holds the keys?	the provider	you
Forgotten your password or PIN?	support helps after an identity check	recovery with your seed phrase
Provider bust or hacked?	balance blocked, outcome uncertain	doesn’t affect you
Account frozen?	possible, e.g. during checks	not possible
Seed phrase lost?	not relevant	bitcoin gone once the device is gone too
Inheritance	heirs contact the provider	heirs need your emergency plan
Effort	low	setup and practice, then care

Many people combine both: a provider for buying, their own wallet for saving.

The level model: four steps to your own custody

You don’t have to skip any level, and you can stay on each one for as long as suits you.

• Level 0 – with a provider: you buy from a MiCA-authorised provider and leave the bitcoin there. Protect the account with a strong password and app-based two-factor login. Good for getting to know Bitcoin and for small amounts.
• Level 1 – your own app wallet: a wallet on your smartphone; you write down a seed phrase for the first time. For practising with small amounts. Guide: Setting up your first wallet.
• Level 2 – hardware walletTermHardware walletA small dedicated device that keeps your private keys offline and signs transactions internally.On the learning path: Stage 6 · Step 1 – Hardware wallets compared →In the glossary →AdManufacturers with a paid linkProviders from our comparisonBitBox02Hardware wallet · SwitzerlandVisit BitBox* (paid link, opens in a new window)Trezor SafeHardware wallet · Czech RepublicVisit Trezor* (paid link, opens in a new window)Blockstream JadeHardware wallet · Canada/USAVisit Blockstream Jade* (paid link, opens in a new window)All 6 compared – including non-partners →Only buy hardware wallets from the manufacturer or an authorised reseller.*Paid link: if you sign up or buy through it, we earn a commission. Your price stays the same. How we make money →×: the keys stay on a dedicated device and never leave it; the seed phrase is kept on paper or metal. The usual route for long-term saving. Guide: Setting up a hardware wallet.
• Level 3 – advanced protection: metal backups in separate places, possibly a passphrase or multisig, an emergency plan for your heirs and, if you like, your own node.

There’s no fixed threshold. What matters is: how much would it hurt if you lost this amount?

Dive deeperGuidance in figures: the Sparrow developers’ suggestion

As a rough guide, the developers of Sparrow WalletProvider · Software walletSparrow WalletBitcoin desktop wallet with no purchase price and full transparency: coin control, PSBT, multisig and support for most hardware wallets.Non-custodial software – no financial licence required · reviewed Sept 2026Price: no purchase price (donations welcome); network fee when sending (as of Sept 2026)On the learning path: Stage 5 · Step 2 – Setting up your first wallet →Our profile →Official website ↗× suggest:^[13]

• up to about $10,000: withdraw your bitcoin from the exchange and hold it on a hardware wallet,
• up to about $100,000: your own Bitcoin node as well,
• above that: at least a 2-of-3 multisig with hardware wallets from different manufacturers in different places.

What does this mean for you?

A good first step: set up an app wallet, receive a small amount and practise recovery once. If you then want to withdraw bitcoin from an exchange, Your first withdrawal to your own wallet will help. The security check shows in a few minutes where you stand when it comes to protecting your bitcoin.

When you’re ready for level 2, you’ll need a hardware wallet – there’s no rush. Only buy it directly from the manufacturer or from a retailer the manufacturer names. The hardware wallet comparison covers the criteria and incidents for every device.