Ok, so you’ve bought a few Sats on an exchange, and you went as far as moving them off-exchange, and now you’re confidently walking around as a new bank owner feeling safe from a financial collapse. Well, I have news for you. Albeit an excellent start, there is more to it than owning your keys to your bitcoins.

Being your own Bitcoin bank comes with a few risks that you should address thoroughly and responsibly before you can rely on your newly found banking capabilities. As a way of introduction, here are some of the risks that you now face:

Wallet key loss with no backup or no abilities to restore correctly;

Not letting anyone know where things are in case of death or disability;

Insolvent exchange with a loss of client assets;

Exchange wallets hacked (SMS-based 2FA, SIM swap, social engineering, etc..) resulting in loss of client assets and leaked personal information;

Businesses and people coerced or misled into sending their coins to hackers (virus, blackmailing, phone fraud, etc..);

People getting mugged and physically coerced into sending their coins;

Poor crypto-related tax knowledge and planning putting people at risk with unforeseen tax liabilities;

By now, you get the idea. It’s not just about owning some crypto. If you still want to run your Bitcoin bank, here are five essential things to know before you proceed.

First and foremost, have a plan in place to securely manage the private keys to your bitcoins

Just like in real life, you should not handle your day-to-day petty cash like the bulk of your savings. The same applies to your bitcoins. At a minimum, consider using a hot wallet for your everyday transactions and one or more cold storage wallets for your long-term savings. The difference between the two is about where you store the private keys.

Hot wallet: stores your private keys on the same device that prepares and sends the transactions. If someone hacks your device, you could lose the coins controlled by the keys stored on that device.

Cold wallet: stores the private keys on a separate device that is not network connected. Therefore, once a transaction is ready for signature, it is transferred over to your air-gapped device to be digitally signed. The transaction is then brought back to the first device for broadcasting to the Bitcoin network.

Make sure you have a documented backup of the seed that will serve to restore your private keys. Some people are very creative when storing their backup seed. Please, don’t turn this into a treasure hunt. There are plenty of reasonable ideas and solutions on the Net on how to do this. Keep in mind that you also want your estate to be able to access your backups if need be.

You may also want to consider implementing multi-signatures. Just like a joint bank account, a multi-signature Bitcoin transaction will require two or more private keys for a transaction to be valid, and this could be an option to consider. Should you choose to go down this path, you need to understand the additional complexity involved in using multi-signature wallet technologies, including collecting the signatures, and of course, the other backup and restore requirements that might apply. Multi-signature wallets can also act as a backup in and of itself, and there are commercially available solutions today that make use of this feature for that purpose. I’m thinking of Casa Keys, Unchained Capital, and to some extent GreenAddress and perhaps BitGo with its Pay-As-You-Go wallet offer. Keep in mind that you may have to reveal some personal information to make use of those services in addition to sharing the transaction with the other signatories for signature.

Finally, practice restoring your keys from your seed until you feel confident with the process and with your abilities to perform the task without errors.

Second, seriously consider running your Bitcoin node

You must enforce the protocol of your bank yourself. It is not sensible to forgo such a critical responsibility. Running a Bitcoin node is like having your bank compliance department. You’d never contract that out, right? Your node ensures that the other nodes and your transactions follow the protocol.

By using your node to prepare and transmit transactions, you also gain a level of privacy that you simply cannot achieve with a third-party service. Exchange wallets keep all of your KYC data and Simplified Payment Verification (SPV)-based wallets see all of your transactions and can link them back to your IP address.

You should find a way to keep your node up and running as much as possible, as this contributes to maintaining the foundation for trust-less Bitcoin banking.

Below are different options available to you for running the Bitcoin Core reference implementation.

Option 1: Download and run the Bitcoin Core software on your Windows/Unix computer

Option 2: Buy a Bitcoin node appliance that comes ready-to-go. You just need to power it up and connect it to the Internet, and off you go. You also need to trust the vendor for providing you with a recent unaltered Bitcoin blockchain. Some vendors even include an LN node.

Option 3: Build your device for $200 (USD) using the latest Raspberry Pi 4, including a 500GB SSD drive to run your Bitcoin and LN node. Search your favorite technology store for a Raspberry Pi 4 fully loaded hardware kit to build your node.

Option 4: You can also get yourself a Unix or Windows node on the cloud with one of the hosting providers for a monthly fee, including network bandwidth and storage.

Please note that in most cases, you are going to sync up with the latest version of the blockchain, and depending on your computer power, the type of storage you have, and your network bandwidth, this could take a few days to a few weeks. There is also the option of getting a recent version through some of the torrent sites.

If you’re not sure yet about running a full node, you can always review your options and choose a Bitcoin wallet that still gives you control of your keys but at the expense of less privacy. Keep this in mind.

Third, explore the potential of a Lightning Network node (optional)

In a not-to-distant future, it will not be practical or financially justifiable to transact directly on the blockchain for some or most of your transactions. For most people, they may never deal with the actual Bitcoin blockchain. Still, since you are reading this, I presume you have the bitcoins to back your claim to a full Bitcoin Bank, and as such, you will also be providing ample liquidity through many well-funded channels that will connect the financial world of tomorrow thanks to your node. On a more serious note, here are a few points for your consideration before you chose to run your own LN node. Please keep in mind that you can skip this section for the time being and come back to it later.

How many channels and how much funding for each are you prepared to commit. There are some risks with using a hot wallet, and this implies the possibility of losing your liquidity.

How connected are you planning to be? Is it just to get your feet wet to understand the technology and its potential, or are you envisioning becoming a serious hub on the network? You may also want to keep abreast of upcoming development in the area of channel factories, which are promising a massive scalability boost.

If you don’t have answers to those key questions, I encourage you to start small by only doing the bare minimum to get you started with a few LN transactions and purchases. You can always take a few steps back later and think through your goals again.

The prerequisite to run your LN node is that you run a Bitcoin node under it and then fund a hot wallet, which in turn supports the liquidity of your channels. I suggest you review the few open-source implementations of the LN protocol that are available out there. Although they all adhere to the protocol, some are more fine-tuned in the area of transaction routing optimization or fee optimization, etc.. For everything LN, please consult the LN GitHub. Whatever hardware and OS you have selected for your Bitcoin node, you would need to make sure the LN implementation you choose is compatible. There should not be any additional hardware requirements, and you should be able to leverage what you already have.

Fourth, keep abreast of regulations, tax rules and the status of your preferred crypto exchanges

Banks must deal with this all the time, and for the time being, so will you. Here are some points for your consideration:

How do you plan on trading bitcoins and fiat back and forth, including spending your bitcoins? Your options are mainly: Peer to Peer (P2P), Distributed Exchanges (DEX), centralized crypto exchanges, crypto credit cards, and Over the Counter trading desks (OTC) if you have lots of coins to trade at once. Will you trust a single exchange, or do you prefer some redundancy and wish to establish multiple on-off ramps alternatives? Having alternatives become especially useful when there is a peak of volume or if one of your exchanges go down for unplanned maintenance. It seems that not all exchanges respond in the same way during peak events. Finally, How much coins and cash are you going to leave on the exchange? Ideally, it should be none, unless you’re a day trader. Even then, when not trading, your assets should be off-exchange.

When dealing with on-off ramps for fiat and crypto transfers, you will most likely have to maintain financial records of your transactions. What kind of transaction reports are available from the exchange? What tools are you going to use to minimize the time it takes for you to perform this record-keeping in anticipation of your tax reporting season? Fortunately, there are cryptocurrency tax software solutions out there available for many jurisdictions. Review them and pick one that suits your needs before you become overwhelmed with s large volume of transactions.

Are you going to keep your regular banking relationship separate from your Bitcoin banking? You should be prepared to have your bank account shut down or frozen while under investigation. It has happened before to people. Keeping accurate records of your crypto-related bank transfer transactions can help restore your account and maintain your existing banking relationship by proving your source of funds.

Last but not least, plan on ensuring the continuity of your operations

What if you’re disabled and cannot look after your node and your keys anymore. What is your plan to ensure continuity? You may want to entrust other parties to manage your coins on your behalf. Here is what you need to keep in mind:

Have a succession plan in place, and make sure the people you choose are aware of their responsibilities and that they are technically capable of administering your coins. Please, check with a local estate planning professional for advice. You should document a list of your accounts such as exchanges, banks, online wallet providers, the location of your wallet backups, your wallet devices, and wallet apps and how to access them.

Rehearse your plan and update it as needed. Make it so that your designated person can practice finding and following your instructions and sending, receiving, and cashing-in bitcoins without any adverse effects on your assets. If they can’t perform those essential tasks, you should then revert to trusted third parties to support your estate.

I found that this is an area where you need to achieve a balance between overdoing everything and being able to successfully hand over the administration of your coins to someone you trust.

Conclusion

It may seem like a lot of information to consider. Still, if you take a few steps back, it isn’t much more complicated than setting up an online banking account, dealing with credit cards, debit cards, GooglePay, etc., especially now with the availability of more mature apps. At a minimum, please begin with controlling the keys to your coins and taking some basic measures to back up your seed while you take the necessary steps to educate yourself in the other areas of being your own Bitcoin bank.

Happy Bitcoin banking!

References

Cam. October 29, 2017. 7 Scariest Bitcoin Horror Stories (And What They Teach Us About Bitcoin Security). https://cryptotothemasses.com/bitcoin-horror-stories/

Antonio Madeira, 2018, 6 Reasons to Run a Bitcoin Full Node. https://bitcoinist.com/6-reasons-run-bitcoin-full-node/

Bitcoin.org. Running a Full Node. https://bitcoin.org/en/full-node

Rakesh Sharma. 2019. Running a Full Bitcoin Node for Investors. https://www.investopedia.com/news/running-full-bitcoin-node-investors/

BitcoinWiki. Simple Payment Verification. https://en.bitcoinwiki.org/wiki/Simplified_Payment_Verification

BitcoinWiki. Multisignature. https://en.bitcoin.it/wiki/Multisignature

Wikipedia. Air Gap (Networking). https://en.wikipedia.org/wiki/Air_gap_(networking)

Jamie Redman. 2018. Tax Time is Here, and Lots of Cryptocurrency Holders Don’t Care. https://news.bitcoin.com/tax-time-is-here-and-lots-of-cryptocurrency-holders-dont-care/

Justin Caldwell. 2010. 9 Best Cryptocurrency Tax Tools in 2020. https://totalcrypto.io/cryptocurrency-tax-software/

Pamela Morgan. 2017. Inheritance Planning for Cryptocurrencies: 3 Steps in 3 Minutes. https://medium.com/@pamelawjd/inheritance-planning-for-cryptocurrencies-3-steps-in-3-minutes-83ebb3e916a2