Recently, cryptocurrency custody has become a topic of much discussion. But what exactly does it imply, and why does it matter?
Dive into the realm of cryptocurrency custody with us, an emerging service that is attracting significant institutional investments into crypto markets. It's a big deal, so let's break it down.
The Lowdown On Custody
At Blockonomi, we've been dedicating ample content to this subject, articles about custody lately which indicates its growing importance. Let's delve into the basic principles of custody and explore its potential impact on cryptocurrency over the long haul.
Custody, in a financial context, involves an entity holding and safeguarding another party’s assets. It's distinct from a standard bank deposit where the bank may extend your deposited money as loans to others. In a custody role, the institution solely maintains and safeguards your assets without leaning into them.
A crucial element of custody is that the custodian shoulders the responsibility for your assets if they're lost or stolen. If the custodian faces theft or your assets face destruction, the custodian is liable for reinstating them. That's why those offering custody services often carry hefty insurance to cover such risks.
Another key aspect is that custody accounts don't accrue interest. The custodian isn't lending out your assets, which typically results in the depositor being required to pay storage fees, known as custody fees, for safeguarding and insuring the assets.
Bringing this into the crypto realm, several companies now provide cryptocurrency custody services. Just like in traditional finance, they safeguard your digital assets for a fee, which can sometimes be notably high.
The Big Idea
It might seem mundane, but why's there so much chatter around it? The reason is simple, but let's get a few things straight first.
Financial institutions aim to profit by taking calculated risks. Cryptocurrencies, like Bitcoin, have been lucrative bets over time. Yet, their volatility keeps ultra-conservative entities, like investment and retirement funds, at bay. But that's changing with custody offerings.
Custody emerges as a brilliant strategy, allowing significant investors to delve into cryptocurrencies without direct interactions, maintaining a safe distance.
Moreover, cryptocurrencies require protection from theft or loss. Entrusting them to a custody provider with a solid track record negates those worries.
Piece of Stake
A fascinating factor about cryptocurrencies placed under custody is their ability to offer an interest-like benefit in some scenarios.
For example, Coinbase has revealed its custody service allows proof-of-stake cryptocurrencies to earn staking rewards, a concept that means these assets can flourish under custody while generating passive income.
Putting it all Together
The crux of the excitement around custody emerges from its ability to reel in cash-rich investors, expanding the crypto market’s horizons. With significant investments pouring in, custody is paving a way for previously untapped institutional capital to flood the cryptocurrency scene, amplifying market caps.
These massive investors may influence price stability by locking in large quantities of cryptocurrencies, minimizing rapid trades by smaller investors and aiding overall price consistency.
Furthermore, it might inspire long-term stakeholders to invest in proof-of-stake cryptocurrencies, benefitting from staking without operating their own systems or exposing themselves to potential wallet vulnerabilities. If custody services incorporate masternodes, cryptocurrencies like Dash that use the technology.
Though crypto custody might seem mundane initially, its assurance of injecting billions into the market is evident as we see it unfold.
