Self-Custody

Why Does This Matter?

• 1

  FTX's 2022 bankruptcy wiped out hundreds of thousands of users. Bitcoin on an exchange is legally the exchange's asset — in bankruptcy, you wait in line as a creditor. The exchange holds all the power.

• 2

  Bitcoin's core value is permissionless money. The moment you leave it on an exchange, the withdrawal authority transfers to them. You become exposed to withdrawal limits, KYC demands, and account freezes.

• 3

  Holding your own keys means instant access to your Bitcoin from anywhere in the world with internet. No bank hours, no maintenance windows, no third-party permission required. This is how Bitcoin was designed to work.

Key Concepts

UTXO Model: Bitcoin Has No Balance

• Banks store a balance like 'Alice's account: 1,000,000 KRW.' Change that number and it's done — that's why banks run nightly reconciliations.

• Bitcoin stores no balance. Only ownership transfer records like 'address A sent 500,000 sats to address B.' These records are identically stored on 20,000+ full nodes worldwide.

• The sum of your Unspent Transaction Outputs (UTXOs) is your balance. Wallet apps add up your UTXOs and display the total. Bitcoin itself is not 'stored' anywhere.

• UTXOs are like cash bills. You can spend one 100,000 sat UTXO, or combine three UTXOs of 20K, 30K, and 50K sats. Change returns as a new UTXO to your wallet.

• UTXOs that are too large expose your wealth when spending. Too small means more inputs per transaction = higher fees. Splitting to roughly 1M-2M sats each is recommended.

• Reusing the same address links all past transactions and makes tracking easy. Wallet apps auto-generate new addresses — always use a fresh one.

Air-Gapped + Watch-Only: The Most Secure Combination

• Hot wallets are internet-connected and convenient but expose private keys to hackers. Cold wallets are offline. Air-gapped wallets are the highest-tier cold wallet — all connections (Bluetooth, USB, NFC) physically severed.

• Air-gapped wallets have no internet, so they can't check balances or broadcast transactions directly. They're always paired with a watch-only app (BlueWallet, Nunchuk, Sparrow).

• Initial setup: air-gapped wallet exports the xpub as QR, watch-only app scans it. Afterward, the watch-only app computes all addresses and displays your balance.

• Sending Bitcoin flow: ① Watch-only app displays unsigned PSBT as QR → ② Air-gapped wallet scans QR and signs with private key → ③ Exports signed PSBT as QR → ④ Watch-only app scans and broadcasts to network.

• The most popular air-gapped wallet for Korean beginners is Keystone 3 Pro — touchscreen, easy to use, reliable QR scanning. SeedSigner is an open-source option (assembled on Raspberry Pi Zero) for maximum security.

• Only buy from official websites or authorized resellers. Never buy used air-gapped wallets. During first setup, don't use the device-suggested mnemonic — always roll dice yourself to generate it.

Mnemonic Generation and Backup Principles

• Strongly recommended: generate your mnemonic by rolling dice. Using a machine-generated random number requires trusting that machine. Rolling dice requires trusting no one.

• Before generating a mnemonic, ensure no cameras are nearby. Don't read it aloud near any electronic device including smartphones — internet-connected devices can always record via microphone or camera.

• NEVER store on digital devices (phone, computer, cloud, notes app) or photograph. Write by hand on paper, or engrave on metal plates to survive fire and water.

• Store in at least 2 physically separate secure locations. Common approach: home safe + bank vault, or leave one copy with a trusted family member.

• No two words in the 2,048-word BIP-39 list share the same first 4 characters, so writing just the first 4 letters per word is sufficient for backup. The last word also contains a checksum to detect typos.

• After initial wallet setup, always do a recovery test — reset the wallet or enter the mnemonic on a different device and verify it restores correctly before sending any real Bitcoin.

Transaction Fees and Understanding On-Chain Transactions

• Bitcoin on-chain transactions pay fees to miners. Fees are measured per data size (sat/vByte). Block space is limited, so higher fee = faster confirmation.

• Check mempool.space for real-time network congestion and recommended fee rates. Set low fees when not urgent, higher when speed matters.

• Setting fees too low can leave a transaction unconfirmed in the mempool for days. Solutions: RBF (Replace By Fee) to replace with a higher fee transaction, or CPFP (Child Pays for Parent) to speed up confirmation.

• More inputs (UTXOs) = larger transaction data = higher fees. Consolidating UTXOs during low-fee periods saves fees later when you need to spend.

• When a transaction enters a block, it has '1 confirmation.' Each subsequent block adds another confirmation. 6 confirmations is considered practically irreversible. Blocks are produced ~every 10 minutes on average.

Passphrase and MFP: Advanced Security

• A passphrase is a '25th word' added to the mnemonic. Same mnemonic + different passphrase = completely different wallet. There's no concept of 'wrong' — even a single typo creates a different wallet.

• Strongly NOT recommended for beginners. Many have permanently lost Bitcoin by setting a passphrase without fully understanding it. Gain experience without one first, then introduce it.

• Practical passphrase strategy: keep a small amount in the no-passphrase wallet, the bulk in the passphrase wallet. Even if forced to give up your mnemonic, the attacker only gets the decoy amount. This counters the '$5 wrench attack' (physical coercion).

• MFP (Master Fingerprint) is the wallet's unique identifier. When using a passphrase, always back up the MFP alongside it. A passphrase typo produces a different MFP, letting you detect the error immediately.

• If using a passphrase, don't write it on the same backup as your mnemonic. Store them in separate locations so both are never exposed simultaneously.

Korea's KYC, Travel Rule, and Withdrawal Flow

• Bitcoin's privacy comes from addresses not being linked to real identities. Governments mandate KYC at exchanges to create that link — one of the core reasons exchanges are so heavily regulated.

• Due to Korea's Travel Rule, you cannot directly withdraw Bitcoin from domestic exchanges (Upbit, Bithumb) to a personal wallet. You must route through an overseas exchange with the same KYC identity.

• Practical withdrawal path: ① Buy USDT on domestic exchange with KRW → ② Send USDT to overseas exchange (cheaper than BTC transfer fees) → ③ Buy BTC on overseas exchange → ④ Send to personal air-gapped wallet.

• Reverse path (personal wallet → KRW): ① Personal wallet → overseas exchange (on-chain or Lightning + Boltz swap) → ② Convert to USDT → ③ Send USDT to domestic exchange → ④ Convert to KRW and withdraw to bank.

• Some Korean exchanges demand excessive documentation (proof of funds, identity photos) for personal wallet withdrawals. Using Lightning Network with Boltz swap services reduces on-chain fees and speeds up the process.

The $5 Wrench Attack and Wealth Privacy

• Hacking a well-secured Bitcoin wallet via computer is effectively impossible. A brute-force attack would require more energy than our entire solar system produces to crack a private key.

• The cheapest hack is the '$5 wrench attack' — physically threatening you to reveal your mnemonic and passphrase. People known to hold large amounts of Bitcoin are targets for kidnapping or coercion.

• In Bitcoin culture, never disclosing your holdings is an unwritten rule. Boasting about your stack is literally inviting a physical security threat.

• Create a 'decoy wallet' using the passphrase strategy. Keep a small amount in the no-passphrase wallet (accessible with mnemonic alone), the bulk in the passphrase wallet. Under coercion, surrendering just the mnemonic gives the attacker only the decoy.

• Don't answer questions about your average cost basis. Knowing it implies you hold Bitcoin on an exchange. With a personal wallet, each UTXO was purchased at a different time — there is no single average cost.

• Can explain why the UTXO model differs from the balance model

• Understand the role division between air-gapped and watch-only wallets

• Generated mnemonic by rolling dice and recorded it in a camera-free location

• Written mnemonic by hand on paper or metal and stored in 2+ locations

• Completed recovery test (reset wallet and successfully restored from mnemonic)

• Recorded MFP alongside the mnemonic backup

• Successfully received and sent a small amount using the air-gapped wallet

• Checked mempool.space for current fees and set an appropriate fee rate

• Committed to never disclosing holdings to others