Traditional vs. Digital Assets: Comparing Custody Solutions
With digitization, the concept of assets has significantly evolved. Moreover, where and how your assets are stored matter just as much as what you invest in. Whether you’re holding stocks, bonds, or crypto, understanding custody solutions is the first step toward keeping your money secure.
Let’s break down what traditional and digital assets are and how they differ in terms of custody solutions.
What are Traditional Assets?
Traditional assets are tangible, long-standing investment options that most people know. This includes:
- stocks
- bonds
- cash
- real estate
- mutual funds
- commodities
Traditional assets are typically backed by established institutions and are traded on regular markets. For instance, you can buy shares of a company by opening a brokerage account. This will allow you to hold and sell positions, while the brokerage will keep some percentage of your profits.
Investing and traditional assets are generally considered safe since they are widely accepted.
Traditional Asset Custody Solutions
Custody for traditional assets is a broad term that encompasses the safekeeping and administrative handling of investments. This is usually done by a third-party organization, such as a bank, brokerage firm, or specialized custodian.
As hinted earlier, these organizations do more than just store your traditional assets. They can process transactions, collect dividends or interest, and keep the records accurate.
Traditional asset custodians must comply with strict regulations and ensure compliance. For instance, in the U.S., the Securities and Exchange Commission (SEC) regulates financial institutions.
What are Digital Assets?
As the name suggests, digital assets are intangible assets that only exist in digital form. This includes:
- cryptocurrencies
- Non-Fungible Tokens (NFTs)
- digital files
- digital collectibles
- cryptographic keys
Digital assets are gaining steady momentum in the world’s financial system mainly because of their high liquidity. Compared to traditional assets that are impacted by market fluctuations and economic changes, digital assets remain decentralized.
Digital Asset Custody
Here’s a bitter truth: Investing in tokenized assets is not a risk-free activity. Cybersecurity threats are more sophisticated than ever, which makes your assets prone to theft, hacking, and misuse.
Moreover, with digital assets, ownership is tied to cryptographic keys. In simple terms, no keys, no assets.
Digital asset custody options include:
- Self-custody (using your own wallet)
- Hot wallets (connected to the Internet)
- Cold wallets (always offline, ensuring better security)
- Third-party custodians like BitGo
Partnering with a third-party custodian is by far the best way to keep your digital assets secure. They offer robust security measures, complete industry compliance, and numerous storage options, protecting your digital assets against theft and fraud.
Choosing the Right Custody Model
Choosing the right custody model depends on numerous factors, including:
- Your asset type
- Risk tolerance
- Personal preferences
If you’re investing in traditional assets, a third-party platform is the right choice. For instance, you can choose a trusted bank for investing in mutual funds.
When choosing a custody solution for digital assets, ask yourself, Can you manage your own crypto keys and wallet? If yes, go with a hardware wallet or hot wallet, depending on the number of transactions you normally make. If not, choose a reputable digital asset custodian.
