About digital asset hosting services, you want to know are here.

About the author: Rohan Barde is the research and innovation manager at Blockchain Zoo. He is a passionate professional with more than five years of relevant experience. The background of business administration has given him a deep understanding of the needs of the company. He is currently exploring how to meet the needs of modern business through the use of machine learning, big data, artificial intelligence and blockchain technology.

Bitcoin has a unique advantage: self-hosting, which is unmatched by traditional financial systems. Importantly, in order to compete with the traditional financial system, the Bitcoin ecosystem maximizes this competitive advantage.

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Image source: pixabay

Hosting solutions are important both for traditional and innovative financial markets, but historically Bitcoin has been limited in this regard. So why do institutional investors need hosted services? What are the unique challenges facing Bitcoin hosting?

Why institutional investors need hosting services

There are two main reasons why institutional investors need hosted services: risk reduction and compliance requirements.

By separating the entities that store assets from the entities that manage assets, financial institutions can focus on the areas they are best at. This separation also reduces the risk of employees running with all their money. Usually, the hosting service providers are financial institutions with a certain historical accumulation. If they act in violation of the interests of customers, the impact on reputation will not be worth the candle.

In terms of regulation, the world's leading regulators, the US Securities and Exchange Commission (SEC), the Financial Conduct Authority, and the Monetary Authority of Singapore, require institutions. Investors keep client funds in the custody of regulated custodians. Typically, a regulated custodian is a broker or a bank.

The unique challenge of Bitcoin hosting

Providing hosting services for traditional financial instruments is inherently challenging, and its work becomes more complicated when the target becomes bitcoin and other cryptocurrencies. Retail investors and professionals face unique challenges in the secure storage of Bitcoin.

Bitcoin hosting challenges

First, the cryptocurrency is an unregistered asset, which means who owns the control of the asset and who owns the asset. In other words, if you lose Bitcoin or someone steals it, there is no way to get back those assets. This is different from a bank account or credit card, and the bank can simply reverse the transaction.

Most retail investors store their bitcoins on exchanges or hot wallets with hacked history. For professional investors, this is not a suitable option. Some smart retail investors use hardware wallets to keep their Bitcoin private keys offline, which is much safer than storing them on the exchange.

However, from an institutional investor's perspective, a single USB hardware device is still too risky to manage client funds. What if an employee runs with a hardware wallet and all the money? Instead, investors should separate power so that no one has the ability to do anything.

The encryption hosting industry is growing rapidly, but it is still young and inexperienced compared to traditional finance. In order for large financial institutions to consider investing in bitcoin, it is necessary to solve the problem of hosting. In addition to hosting, investors also need insurance products that protect Bitcoin and other cryptocurrencies from theft.

Institutional hosting solution

Professional investors need reputable brand companies to provide compliant cold storage services and insurance products. Although there are many native encryption solutions, they are not able to meet the largest financial players.

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Image source: Cointelegraph

Native encryption hosting services include Coinbase Custody, Xapo, Onchain Custodian and more options listed in the chart above. So far, despite the limited scope of these services, they have been successful because smaller, progressive capital configurers have taken advantage of these services. However, most large institutions are still waiting to see.

Fortunately, large financial institutions are entering the custody space, such as Fidelity, which launched an agency hosting solution in mid-2019. Although traditional financial institutions hosting Bitcoin is a good sign, it is too early to predict how this will affect the market.

Than coin ETF

Bitcoin exchange-traded funds (ETFs) are a hot topic in the field of encryption. It is widely believed that ETFs are a way for investors to more easily enter the field of encryption. For example, if you have a Bitcoin ETF, anyone can easily buy Bitcoin through e-Trade, Fidelity or other brokers.

So far, the United States has not approved the Bitcoin ETF, one of the reasons is that there is no third-party hosting solution that the SEC can trust. However, Fidelity and the upcoming wave of institutional hosting may help with the approval of future Bitcoin ETFs.

The truth is that the encryption field is still an emerging industry and there are many obstacles to overcome. Fortunately, more and more people are leaving the traditional financial industry and switching to a parallel financial system with Bitcoin. A well-established ecosystem of custody and insurance services, allowing family offices and hedge funds to securely and conveniently allocate some of their money to Bitcoin. Will traditional finance embrace Bitcoin in a meaningful way? The truth remains to be seen.

Personal hosting: be your own bank

In addition to institutional hosting, retail investors are also looking for better ways to securely manage their bitcoin assets. If you can become your own bank, the results must be very attractive. However, this requires significant personal responsibility.

In the early days, storing Bitcoin private keys was very challenging and could only be used by users with a technical foundation. However, in recent years, the hosting options of retail investors have improved significantly.

There are now a range of solutions, from hard-core password-punk storage to fully trusted "encrypted banks," such as Coinbase. It is important that users understand the risks and technical maturity of the chosen hosting organization.

Nodes go into the homes of ordinary people

Now, there is a popular saying in the field of bitcoin that every household will have its own bitcoin node, which is trusted by family and friends. In this way, each user will have a dedicated hardware wallet to manage their private key. Although this sounds complicated, it just means installing a hardware device next to the Wi-Fi router.

This setting will enable users to fully verify all Bitcoin transactions while minimizing technical challenges. In the future, if users are willing, they can have financial autonomy.

Multi-signature solution

After setting up the primary node, the next step in personal hosting is to set up a multi-signature account. This is not required, but it greatly improves security.

Skilled users can set up their own multi-signatures using tools such as the Glacier Protocol. However, most users may use a simpler bitcoin multi-signature service. For example, Casa has created a master node and a multi-signature solution called Keymaster, and currently offers two of the three multi-signature tools for users who want to build a more advanced security model. Another option is the managed solution of Unchained Capital. Unchained is a semi-trusted Bitcoin bank that provides self-hosted software and financial services such as loans.

As a cryptocurrency investor, it is important to identify your own security needs and choose the solution that best meets these needs.

Although hosting may not be an interesting topic, it is an important part of a successful financial system. Fortunately, we are seeing an explosion of new hosting services to meet the diverse needs of retail and institutional investors.