Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
Providing safe sanctuary for bitcoin has matured in a multi-billion-dollar race with companies scrambling to secure pole position. But with the stakes ever-rising, who's leading the custodial pack?
For ultra-high-net-worth individuals (UHNWI)—along with their corresponding money managers and family offices—bitcoin custodians aren't just practical, they're mandatory. Per the Dodd-Frank Act in the US, institutional investors holding over $150,000 in assets are obligated to store their funds with a qualified custodian. A PWC report from 2019 affirmed that bitcoin-centric hedge funds are opting for safe methods of custody. And while a sizable amount of these funds (48%) still go for self-custody methods (i.e., holding the private keys of their investors themselves), more than half (52%) are turning to external custodians.
The past year alone has witnessed bitcoin-based custodial services grow significantly. At current estimates, there are around 42 bitcoin custody services available on the market. According to The Block Research, these services have been responsible for a combined $1.8 billion in investment throughout their existence.
The Lion's Share
With well over $7 billion of retail assets under custody (AUC), the most prominent of all bitcoin fiduciary services is Coinbase Custody. Launched in 2018, Coinbase Custody touts institutional-grade offline storage, regulated by the New York Department of Financial Services (NYDFS).
In 2019, Coinbase expanded its market share with the $55 million acquisition of rival Xapo—one of the earliest bitcoin custody services in the ecosystem. This was a significant turning point for Coinbase Custody, seeing it add approximately $5 billion to its total AUC.
The firm not only services the Coinbase exchange itself but also a litany of hedge funds and institutions, including Polychain Capital, a16zcrypto, Prime Factor Capital as well as Grayscale Investments which recently announced a milestone $3.7 billion assets under management—89% of which is purely bitcoin.
Digital asset custodian Bitgo stands among the more matured custody services in the ecosystem. Arriving on the scene in 2013, Bitgo boasts the business of some of the cryptocurrency industry's biggest players, including Bitstamp, SBI holdings, and the Chicago mercantile exchange (CME) group. The firm alleges to process more than 20% of all bitcoin transactions, and while its latest figures are unknown, as of 2018, it held more than $2 billion AUC.
Of course, not all offerings are one-dimensional custody-only services, most exchanges act, in some capacity, as a custodian. A prime example is Binance, which, according to CryptoCompare, reports a current 24-hour trading volume of 176,000 BTC—the USD equivalent of $1.6 billion.
A more recent custodial arrival came in the form of the Bakkt warehouse. An enterprising brainchild of the intercontinental exchange (ICE)—the parent company of the New York Stock Exchange—Bakkt's warehouse utilizes the safeguarding controls of ICE, storing bitcoin in a combination of warm and cold wallets, the majority of which is held offline. Bakkt warehouse also works in conjunction with financial services firm BNY Mellon, offering geographically-distributed storage of private keys.
While estimates on its current holdings are scarce, given the breadth of its parent company, it's likely Bakkt's nascent custody service will bring a sizable amount of capital into the sector.
Much like Bakkt, Fidelity Digital Assets is another relative newcomer. Arriving in 2019, the custodial offspring of Fidelity investments offers insured enterprise-grade cold wallets storage, backed by a firm with over $7.8 trillion in traditional AUC.
Enter The Custodians
According to a study by KMGP—one of the 'big four' accounting firms—bitcoin custody has "tremendous" potential for growth. With the bitcoin markets and surrounding ecosystems developing at an unimaginable rate, an uptick in custodial offerings is inevitable, says the report.
However, it isn't just bitcoin's proliferation touting the need for custodians. On top of heightened demand for bitcoin, KPMG highlighted a pressing need for private key security, relaying that hackers had stolen nearly $10 billion since 2017. As a result, a further report from BNY Mellon recommended that due to the ease of entry, and protection rendered by safe custody, custodians could act as a linchpin between institutional investors and the bitcoin market.
Between latent attack vectors and institutional obligation, custodians are more in vogue than ever.