What Is Money?

For many people, their first sense of Bitcoin is that it is magic internet money—something easily ignored and certainly not worth the time needed to understand it. Many of the people I talk to about Bitcoin say that their “plan” is just to ignore it until it goes away. As we will learn throughout this book, that isn’t really an option. Most people also laugh when presented with their first opportunity to exchange “real money” for bitcoin. But bitcoin is real money; better money than any of us have had in our lifetimes—and it is so much more.

Both Bitcoin the network and bitcoin the digital token can be hard to define because they don’t just replace one thing and make it better. Bitcoin is the new, better version of gold from the ground and the paper dollar bill. Bitcoin is also the new, better version of your savings account and your checking account and your credit card. It is also the new, better way to send money internationally and to buy a cup of coffee down the block. Bitcoin doesn’t just replace the hard asset money and the currency, but also the payment rails, the political monetary policy, and even the central bank—all in one fell swoop. It is a completely new thing.

To truly understand Bitcoin, you must understand the thing it aims to replace: money. What is money? Oddly enough, despite its centrality to almost everything we do, we rarely pause to consider the question. But we have to if we really want to understand what Bitcoin actually is.

In the most fundamental form, money is any object that is used for some combination of the following purposes:

1. A medium of exchange (folks can buy stuff with it);

2. A unit of account (folks can reliably use it to price stuff); and

3. A store of value (folks can buy stuff with it later).

Over the years, many different objects have been used as money: sea shells, salt, large stones, gold, and the $20 Federal Reserve Note currently in your wallet. If you’re reading this book in prison, you might use cigarettes or packets of ramen as money. I encourage you to reflect on how and why people naturally converge on forms of money based on the time and circumstances they find themselves in and how technology has always played a role in the development of new money. Some things make better money than others. As we will see, the paper money and its digital copy you use every day is the latest form of money, but it isn’t the best—in fact it is far from the ideal.

To be considered a good form of money—something that accomplishes the three purposes listed above well—an object must have some combination of the following fairly intuitive properties:

1. Durability (It has to last, not spoil or deteriorate);

2. Portability (You have to be able to move it around);

3. Divisibility and Aggregability (You need to be able to buy little things and big things too);

4. Fungibility (The units need to be uniform);

5. Scarcity (If there’s a lot of something, it won’t maintain value);

6. Acceptability (People have to want it for you to use it); and

7. Verifiability (You don’t want a lot of counterfeit money).

You or I may have other properties that we think should be added to the list. For example, I think good money should be created fairly. But this is the list that economists have used for generations. In fact, the Federal Reserve Bank of St. Louis lists these properties in the teachers’ resources section of their website¹² and uses them to argue—correctly—that US dollars are better money than a cow. A cow seems like a low bar, but maybe they only want to make the arguments they can win.

Each of these properties economists use to decide how good something is as money is measured on a scale; none of them is a binary “yes” or “no.” If an object fulfills many of these properties, it would make for a good form of money. From this list, it is trivial to see what your intuition already tells you. Bananas would make a horrible form of money and coins made of gold would probably serve the purpose well. But what about the $20 bill in your wallet? What about bitcoin?

In a head-to-head competition, the $20 bill easily beats bitcoin in category #6: Acceptability. But acceptability can change and has many times throughout history, and the gap is narrowing every year as more establishments accept bitcoin. It’s not too hard to imagine that gap closing substantially over time. On a technicality, the dollar also has a slight edge in category #4: Fungibility. But this is only a small difference that most people would not notice, and technological methods already exist that close this gap completely.

As we will see as the rest of this section unfolds, Bitcoin walks away with the lead over dollars in all of the other categories. It’s not even close. Bitcoin is not just a little but a lot more Durable, Portable, Divisible/Aggregable, Scarce, and Verifiable. These aren’t properties I cherry-picked because they make Bitcoin look good. These are the old textbook properties economists have used for “good money” forever. We can add to this list the fact that since Bitcoin is natively digital and programmable, it seems like a better form of money right now and for the future. Nor is Bitcoin just better than the dollar: when comparing Bitcoin to other forms of money (e.g., gold) it still demolishes the competition across most or all of the categories. It’s simply the best money that humans have ever created.

Before I explain why that is true, I want to pause and make sure we also understand what money isn’t. You will notice that the properties listed above for something to serve as good money do not require the item to have a physical form you can hold in your hand. Nor do the properties suggest that something used as money needs to have some other intrinsic value. Nor do the properties suggest that money must be issued by a government. All three of these things are often cited as reasons why Bitcoin cannot be real money, yet none of them really have anything to do with the actual definition of money. These are things people reference because they are important to their experience with money, but they aren’t intrinsic to that experience. Just like how what has served as money has changed over time, so too has our experience with money.

For example: It is not necessary for money to have a physical form that can be touched or held. Indeed, you have never held most of the dollars you have earned, spent, and saved in the last 20 years. They have just been numbers on a screen. Digital money, dollars or otherwise, is perfectly functional as money. And the same is true of Bitcoin; just because you can’t touch it doesn’t mean it’s not real either. Hopefully this is reassuring, since this is typically the very first argument offered by well-meaning folks when they first start to grapple with Bitcoin. But the simple fact is that you don’t need to be able to touch something for it to be a good form of money.

Nor is it necessary for money to have an intrinsic value. In fact, because money is used to communicate price information from one market participant to another, it is better that it not have other use cases. Money having intrinsic value would add “noise” to the signal and make every economic decision more difficult. Imagine having to weigh every purchase you make with your money against the value of its other uses. It would cause economic activity to grind to a halt as everyone debated whether to use the money they had for purchasing goods or this other use. Some people don’t realize that the numbers on their screens that represent the dollars in their bank account don’t have an intrinsic value either. Bitcoin’s lack of intrinsic value is another very common argument launched against it, when in fact that turns out to be a valuable feature and not a bug. The fact that Bitcoin doesn’t have some other intrinsic value means it is able to provide price information for economic decisions without noise or manipulation.

Finally, it is not necessary that money be issued by a government. For many centuries it wasn’t. People would use various media of exchange and stores of value without the government interceding in any way. It was only in the last couple of centuries that it made sense for governments to get into the money game when it was difficult to trust and verify the purity and weights of coinage. Stamping the king’s face onto a coin served a purpose at that point. Since then, the intertwining of government and money has been so complete that most folks have a hard time imagining that money can be something separate from the government. This misunderstanding has repeatedly been manipulated for the sole benefit of the government that controls the issuance of money. But despite our experience, there is no need for money to be issued by the state to be valid. Bitcoin is the best hope humanity has of severing the ties between government and money.

At the very least it will serve as a check on how the governments discharge their responsibility as stewards of monetary policy.

The good news is that people understand the seven properties of good money listed above on an intuitive level. In other words, people do not need to read an economic textbook to recognize “good” money. They just start gravitating toward it over time. People won’t need to know why Bitcoin is better to know that it is better. Our recent monetary experiment with unbacked paper money is only 50 years old, and paper money owes most of its success to the privileged legal status paper money enjoys through the governments that issue it. But absent coercion people will always choose a better form of money, as shown by the fact that they did for thousands of years by using gold. Before Bitcoin had been invented, Jörg Guido Hülsmann explained, in his book The Ethics of Money Production, that in the case of “gold and silver—and whatever else free men might discover and develop for monetary services . . . there is a natural tendency in the market to spread the use of the most useful monies over the entire world.”¹³ Bitcoin is better money and because of that, Bitcoin adoption is very likely to grow and spread for the foreseeable future.

This article is an excerpt fromA Progressive’s Case for Bitcoin: New Revised Updated Edition, available now for pre-order at a discounted price of $21 through November 15, 2025.

12 Federal Reserve Bank of St. Louis, “Functions of Money,” Economic Lowdown Podcast, https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money.

13 Jörg Guido Hülsmann, The Ethics of Money Production (Auburn, Ala.: Ludwig von Mises Institute, 2008), 197.

Snore of Value: Bitcoin’s Sleepwalk Towards Stasis

You know how the dodo bird became extinct? It became too fat to fly.

In fact, the name ‘dodo’ likely originated from the Portuguese word, ‘simpleton’. The dodo bird lived very comfortably for much of its existence on an isolated island that lacked any natural predators. Over time the dodo bird grew bigger, and its wings grew smaller. Growing larger while having no predators emboldened the mighty dodo bird to become increasingly fearless.

And then humans showed up. And everything changed. Instantly.

The rapid and dramatic environmental changes left the dodo bird helpless. Because it was flightless, it couldn’t escape. It needed wings to survive but evolutionary processes don’t occur overnight, they take thousands of years. From happy, fat, and thriving to extinction. In the blink of an eye.

That’s the harsh reality of evolutionary biology – it only optimizes based on the past and present, never the future. Evolution is a reactive process. Environments can increase a species’ resiliency over time, or it can change so rapidly that it rids itself of them completely.

Bitcoin in its current state is a dodo bird.

The evolutionary checkpoints for money are universally understood as:

1) Store of Value: you can preserve purchasing power with it

2) Medium of Exchange: you can use it to buy and sell things

3) Unit of Account: you can use it to measure the value of other things

Bitcoin is firmly sitting on first base regardless of what its lazy critics claim. Price volatility does not negate the store of value property and there is no question that most current bitcoin adoption is related to saving. Bitcoin as a medium of exchange is a work in progress as the reality is very few users are engaging in any kind of commerce with it.

If bitcoin is only capable of serving as a store of value and nothing more, then it cannot become money. Aspiring to be the best store of value is aspiring to be a fat flightless bird. Bitcoin is on a lonely island of less than 2% global adoption, emboldened by price appreciation, with no concern of outside predators as glowing endorsements roll in from Wall Street – flourishing and unbothered like the dodo bird.

“Like you said, evolution takes time! Bitcoin will become a medium of exchange and later a unit of account. It’s just too early right now but it will happen eventually.”

Will it? Why is bitcoin as a medium of exchange a foregone conclusion?

Put down the orange pom poms and look around today. Bitcoin’s current landscape has it waddling down a path that leads to nothing more than becoming a captured amorphous digital property token. The lack of situational awareness and adversarial thinking amongst bitcoiners is at embarrassingly all-time lows and seemingly getting worse the further bitcoin sleepwalks towards stasis.

If it’s not clear to you, let me wake you from this slumber so you better see the signposts:

Signpost #1: Stablecoins

Remember the bitcoin rallying cry, ‘separate money from state’? If you’ve forgotten it, then it’s hard to blame you with the amount of self-described bitcoin maximalists head-scratchingly rallying behind stablecoins at worst and apologizing for them at best.

“Bitcoin is too volatile!”

“The global south!”

And my personal favorite, “Stablecoins are a gateway to bitcoin!”. Hard to say that with a straight face.

Here’s the wakeup call. Stablecoins are fiat money. They are a gateway to fiat money. They are an adaptation of everything bitcoin was designed to escape from. They are bitcoin’s biggest sheep in wolf’s clothing competitor. Full stop. They mostly run on Ethereum and Tron. If people want to use them that’s totally fine – but enough with pretending that stablecoins complement bitcoin in any constructive way.

Do you think the US Treasury is going to just idly sit by without sinking their talons into these stablecoins? The path of least resistance for the government to introduce a CBDC is to simply regulate stablecoin issuers with an iron fist. Their money, their rules.

What happens when we’ve sleepily conceded bitcoin’s medium-of-exchange evolution phase to heavily regulated stablecoins? Will people suddenly become enlightened and retreat to bitcoin overnight? It’s a warm and fuzzy thought until you consider that the government would unquestionably restrict stablecoins being exchanged for bitcoin. Their money, their rules.

And what’s to stop stablecoins from covering so much surface area as a medium of exchange that it never concedes any ground? Gresham’s Law posits that “bad money drives out good” which means people tend to spend the bad money and save the good money. However, in absence of legal tender laws, Thiers’ Law comes into play where “good money drives out bad” as the superior form of money is naturally preferred. If we abdicate bitcoin as a medium-of-exchange to stablecoins, then what incentives will there ever be to scale bitcoin as a medium-of-exchange? Gresham’s Law will take root and Thiers’ Law will be little more than an idealist fantasy relegated to underground markets and fringe circular economies.

“The market is signaling they prefer stablecoins for spending.”

This isn’t pearl clutching over the market being wrong. It’s an ominous warning that bitcoin’s destiny is not written in stone. If it is never optimized to be used as a medium of exchange, it will never be used as a medium of exchange. If we are not relentless in our pursuit to advance bitcoin’s monetary evolution, then it will not happen.

Signpost #2: Bitcoin ETFs

Wall Street’s foray into bitcoin was an inevitability at some point in its life cycle. But what is striking is how quickly Wall Street arrived (less than 15 years of bitcoin’s existence) and the velocity of their entrance (daily trading volume in the billions of dollars). While today many bitcoiners applaud the new Bitcoin ETFs as a welcomed milestone for the ‘normalization’ of bitcoin, down the road this likely plays out differently from what they hope.

“Now that bitcoin is mainstream and in people’s retirement accounts, the government will never be able to ban it. It will be too politically untenable.”

A comment almost as ridiculous as thinking stablecoins are a gateway to bitcoin.

There’s not much debate that it is more convenient to purchase a Bitcoin ETF than it is to self-custody your own bitcoin. Market forces always compel people to seek the most convenient solution, especially when they have no consideration for the associated tradeoffs.

The hard pill to swallow is the fact that most people are not interested in self-sovereignty. They don’t want to become their own bank. And no, they don’t want to hear your long winded histrionic about fiat currency.

It boils down to:

1) Click a few buttons in my retirement account?

or

2) Go through a KYC/AML process on an unfamiliar bitcoin exchange, buy an unfamiliar hardware device, research how self-custody works, safeguard and manage private keys, etc.

If self-sovereignty disinterests you and all you want is bitcoin exposure – it’s a no brainer. You choose Option 1. And over time what this looks like is the next wave of adopters will seek exposure through ETFs – not taking direct custody of bitcoin themselves. Admittedly this concern doesn’t exist for the parts of the world that lack access to US financial markets – however allow me to point back to Signpost #1: stablecoins. The global south will seek refuge in stablecoins before pursuing bitcoin. The dollar isn’t hyperinflating any time soon and those who claim it will have been wrong on that call now for decades.

Now play this out. The next broad wave of adopters buying a financial product accelerating the amount of bitcoin held by the most regulated institutions on the planet.

The act of self- custodying bitcoin will be reduced to a suspicious and odd exercise.

“That’s weird. Nobody uses it as money. What’s the point of holding it yourself?”

And as the coffers of regulated custodians fill up with bitcoin supply, the surface attack density for those who self-custody will increase. And increase.

Financial institutions will not rally behind the self-sovereign bitcoiner. They do not care that the entire purpose of bitcoin was to disintermediate trusted third parties (i.e. literally them). In fact, their financial incentives are such that they have minimal interest in supporting self-custody as they make money on you giving your bitcoin to them. When the time is right, they are more likely to lobby against self-custody than to support it. And that time is when there are enough bitcoiners whose sole exposure is through these ETF’s and consequently wouldn’t care about defending the right to self-custody. Remember, you’re the weird one now doing it the wrong way.

This isn’t conjecture; self-custody is already under attack. The self-sovereign bitcoiner will become low hanging fruit. And saying you lost your bitcoin in a “boating accident” when you’ve purchased all your bitcoin on a KYC exchange is going to do you as much good as the dodo bird’s stubby wings.

Signpost #3: Ossification

The race for monetary supremacy is in full force. Where are we at? Stablecoins are dominating bitcoin as a medium of exchange and ETFs already hold close to 5% of total bitcoin supply in less than three months of trading.

Cool. So what are we doing about it? The price of bitcoin as a representation of purchasing power is paramount but it has become a sedative for adversarial thinking. Don’t get it twisted – the bitcoin price is a magnet, not a shield. As the price climbs so will the insatiable desire from governments to capture it. Do you think they will just let you opt out and ride into the sunset so easily? Oh, you sweet, summer child.

Sedated by paper gains, a non-insignificant amount of drawbridge bitcoiners are advocating for bitcoin’s ossification. Bitcoin, which *checks notes* is supposed to be money, is still not yet a medium of exchange, but is now somehow good enough as-is?

I’m willing to acknowledge that there are probably well-intentioned bitcoiners in the ossification camp who simply believe bitcoin can only be destroyed from within via protocol changes and that the battles to come can be won with bitcoin as it exists today. I’d respond to such line of reasoning with a quote from Sun Tzu,

“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”

Put simply – you do not win battles without preparation. Failing to plan is planning to fail. Bitcoin has not won. There’s less than 2% adoption globally and the wolves are at the door. Bitcoin hasn’t even surpassed the market cap of Amazon and you want to spike the football?

And for those in the pro-ossification camp purely out of selfish motivations because you got your bag and you’re just biding time to dump it later – are you certain it will be that easy? Wouldn’t your motivations be better served if bitcoin didn’t become low hanging fruit for government capture? Do you think in an increasingly adversarial environment, with no vibrant bitcoin circular economy, you will just be able to unload your stack on Coinbase sight unseen, no questions asked? Woof.

Scaling and enhancing bitcoin in a judicious manner so that it can mature into a medium of exchange should be paramount to bitcoiners. No, this is not a torn page from the big block, “buy a coffee with bitcoin” because “babies are dying”, playbook. The security and decentralization of the base layer is a non-negotiable primitive. You cannot have sturdy money on a wobbly base. However, we cannot be complacent with settling on bitcoin as just a store of value and then idly hope it becomes a medium of exchange when there is a dearth of layer two solutions beyond the Lightning Network which isn’t without its own limitations.

The introduction of ordinals has been a hotly contested cultural topic amongst different factions in bitcoin. The entire debate can be synthesized down to monetary maximalism (money only) vs platform maximalism (anything within consensus rules is okay). The debate is held at the margins and the overwhelmingly silent majority doesn’t really care for three main reasons:

1) they hardly know what ordinals are because it is such a niche subsection within bitcoin’s ecosystem

2) ordinals in their current format is just repackaged tech for people to gamble and engage in financial nihilism

3) bitcoin is still working just fine

The silent majority reaches the appropriate logical conclusion that expending mental bandwidth fretting over something that cannot be stopped and that doesn’t even hinder their ability to use bitcoin, is an utterly meaningless exercise in futility and virtue signaling.

The blind spot for the anti-ordinals crowd is the severe lack of introspection regarding the available block space due to a lack of ‘honest’ financial transactions. The pro-ordinals crowd doesn’t even dispute that all use cases other than bitcoin as money are unquestionably subordinate. People are inscribing nonsense because the barrier to entry is low enough to do so.

Every bitcoiner needs to eat this slice of humble pie: the apex use case for bitcoin is currently competing for block space with digital beanie babies.

Philosopher Epictetus said, “If you wish to be a writer, write.” The question we need to be asking is not “How do we stop the digital beanie babies?” it should be, “What are we doing to propagate more financial transactions?”

Unfortunately, the emotional response to ordinals comes with a call for ossification. Rather than harness the courage of a stoic competitor, some would rather take the ball and go home. For them, the specter of unforeseen consequences outweighs the benefits of bitcoin becoming money. The irony is that ossification kneecaps bitcoin such that it will become ensnared as only a store of value. No medium of exchange just means more available block space to incubate other arbitrary use cases.

Don’t like ordinals? Use bitcoin.

Sign Post #4: “Don’t spend your bitcoin”

There is a steadily repeating mantra amongst the bitcoin intelligentsia that you should not spend your bitcoin. “Savings technology”, “pristine asset”, “Buying land in Manhattan 100 years ago”, “store of value”, “Buy it and don’t touch it for 10 years”, etc. These are the prevailing bitcoinisms indoctrinating the latest waves of bitcoin adopters. The introductory value system individuals adopt when first arriving to bitcoin is demonstrably impermeable. Each cultural skirmish in bitcoin’s chronology is heavily influenced by whatever prevailing narrative surrounded bitcoin at the time they first became a user. It’s no coincidence that the existing ordinals squabble is a divide comprised mostly of longtime versus newer bitcoiners. People’s understanding of bitcoin is heavily influenced at the onset. If what they hear is “don’t spend your bitcoin” it reinforces the notion that bitcoin isn’t really money. Paring this with an explanation that bitcoin as a medium of exchange will happen at some point in the distant future, only perpetuates the falsehood that bitcoin is inevitable so there is no motivation for any change. Secure your bag and let some faceless future generation figure it out, eh?

Bitcoiners can agree to be disagreeable but can we at least agree to stop telling people what to do with their bitcoin? It’s supposed to be money. Do whatever you want with it. Don’t allow your actions to be enslaved by dogmatic rhetoric. Freedom money does not come with instructions.

Now what?

This isn’t a thesis to advocate for any specific BIP or scaling solution. It is a buck et of cold water to implore bitcoiners to have some self-awareness of the current path bitcoin is taking. Bitcoin is just software. What it eventually becomes is based on how users interact with the software. There is nothing inherent within the software that preordains bitcoin to become money. That outcome is completely dependent on the users – if they want it.

The dodo bird didn’t need wings – until it did. We can submit ourselves to the laws of evolutionary biology, do nothing, and see how this all plays out. Or we can do what the dodo bird couldn’t – adapt with foresight. Bitcoin does not win or reach escape velocity as solely a store of value. It is the foundation, not the destination. In the race for monetary supremacy, there is nothing the competition would want more than for bitcoin to stagnate as a store of value.

Because it’s at that point bitcoin will have become too fat to fly. 

The Ultimate Guide to Bitcoin Self-custody for Miners

Originally published on Unchained.com.

Unchained is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on services offered, custody products, and the relationship between Unchained and Bitcoin Magazine, please visit our website. 

As a bitcoin miner, you have a lot to manage, from seeking out inexpensive electricity, to constructing facilities, to acquiring rigs and building a knowledgeable team that can keep them hashing. In speaking with mining companies over the years, we know that bitcoin custody is often an afterthought.

Here we’ll describe the process of securing your mined bitcoin in self-custody while managing a bitcoin treasury, CapEx, OpEx, OpSec, LP distributions, taxes, and more. Given the ever-present risks of hacks and suspended withdrawals, our goal is to explain the benefits and trade-offs of various approaches to bitcoin self-custody—regardless of the size of your operation.

Bitcoin self-custody considerations for miners

There are unique challenges miners face with self-custody in comparison to other types of bitcoin holders:

• Miners receive a high frequency of incoming deposits from mining pool payouts, which can increase transaction costs due to UTXO bloat (more on this below).

• Some portion of mined bitcoin must be sold to cover overhead.

Other challenges are similar to that of other businesses that hold bitcoin:

• Businesses may not have the in-house expertise needed to set up self-custody securely while minimizing complexity.

• Businesses generally have multiple operators and desire distributed control over bitcoin funds.

• Businesses want to minimize counterparty risk while eliminating the risks of malware, user error, storage media decay, phishing, physical attacks, and other security risks.

In all cases, holding the private keys to your organization’s bitcoin should be prioritized. As we’ll explain next, multisig can enhance the security of your bitcoin regardless of your organization’s size. While the details of your setup may vary, multisig helps to address many of the above concerns while allowing your bitcoin to touch exchanges only when necessary (e.g., for OpEx/CapEx).

Why miners need multisig

Better security than singlesig

Singlesignature (singlesig) wallets—controlled by a single key secured by a Trezor or Ledger hardware wallet, for instance—improve security, reduce counterparty risk, and remove exchanges as a single point of failure. With singlesig, however, your bitcoin is put at risk if a hardware wallet or seed phrase is lost or compromised. Just one or the other, in the wrong hands, could lead to permanent loss of funds.

Multisignature wallets, on the other hand, enable you to store bitcoin in a wallet controlled by multiple keys. They increase your security by ensuring more than one of those keys, held in different locations, are required to sign a transaction. If set up correctly, multisig can eliminate all single points of failure. For a miner, this means removing the risk of a single rogue employee moving funds, and creating redundancy so that the loss of a single hardware wallet or seed phrase cannot lead to a critical loss of funds.

Eliminates exchange custody risk

Exchanges can be a convenient place to send newly-mined bitcoin. They allow you to easily exchange bitcoin for your local fiat currency before sending funds to a linked bank account, and they even take care of things like UTXO management. In bitcoin, however, there is always a price to pay for convenience. The risks and potential downsides of using an exchange for key storage are numerous—the fact that they can cut you off at any time and the possibility of hacks and insolvency are only the beginning.

Flexibility to achieve an ideal balance of security and complexity

A 2-of-3 multisig quorum has three total keys where two are required to spend, which keeps your bitcoin secure even if one key is compromised. Many mining firms find that 2-of-3 multisig is the perfect setup for their corporate treasury because no single individual can compromise the entire treasury, while sending out LP payouts and monthly expenses is still kept straightforward (only two signatures required).

Higher-quorum multisig (e.g., 3-of-5, with five total keys and three required to spend) adds more keys and typically more individuals to the equation. This can technically improve the security of your bitcoin wallet in some cases—but also dramatically increases complexity. We wrote a comprehensive article explaining why this is the case, but for the purposes of this article, you just need to know the sweet spot for most individuals, organizations, and mining operations tends to be 2-of-3.

The benefits of collaborative custody

When using multisig for your mining company’s treasury, you might also benefit by including an institution (like Unchained) to hold one of three keys for your multisig setup.

In addition to the enhanced security that multisig provides, collaborative custody can also help with:

• Reduces the number of physical items (hardware wallets and seed phrases) you need to secure.

• Active monitoring over suspicious activity like unauthorized transaction signatures or account logins

• A partner that can help your team recover the wallet in the event where one of your keys has been lost or compromised.

Wallet management

Managing mining pool payouts

Every miner needs to make decisions on security, transaction cost, and counterparty risk when deciding which type of wallets to use for their newly mined bitcoin.

Below are four example workflows that may help you determine which model is the best for your mining operation.

Workflow #1: Mining pool payouts sent to a singlesig wallet

In this popular workflow for smaller mining operations, you receive mining pool payouts directly to a singlesig wallet controlled by a single operator. Funds that need to be sold can then be sent to an exchange, while funds to be stored long-term are sent to a multisig wallet.

Workflow#2: Mining pool payouts sent to a multisig wallet

This workflow is the same as the workflow described above, except that mining pool payouts are sent to a multisig wallet instead of singlesig. A second multisig wallet is required for the corporate treasury.

Sending bitcoin payouts direct to multisig maximizes security throughout the workflow, but requires two people to approve each transaction to the exchange and treasury. As such, it is better suited for larger mining operations.

“With multisig you’re paying higher fees to remove counterparty risk.” – Griffin Haby, Mountain Lion Mining

Workflow #3: Split payouts from the mining pool

Some mining pools allow miners to split payouts between two or more accounts. In this workflow, we show automating the payout process to send a fixed percentage directly to cold storage, and the rest to an exchange to sell to cover overhead.

Workflow #4: Mining pool payouts sent to an exchange

In this workflow, bitcoin is mined directly to an exchange. This is far more convenient for the purposes of UTXO and fee management purposes, and allows immediate liquidation of funds, but leaves bitcoin in the most vulnerable state for the longest amount of time, with high counterparty risk.

Maintaining multiple fund buckets

Even within the above high-level approaches to bitcoin security, you may want to further separate wallets for separate purposes, like distributions, operating expenses, or corporate treasury. Keeping these buckets of bitcoin cryptographically separated from each other will make it far easier to keep track of your operation from a tax and accounting standpoint—and much easier to ensure those long-term satoshis aren’t being used for overhead!

Managing transaction fees

Miners are typically more concerned with collecting transaction fees from other users. However, when managing your bitcoin mining wallets, the fees you pay when sending bitcoin—whether to an exchange, cold storage, or investors/partners—should also be considered.

As we described in a previous article, bitcoin transaction fees depend on how congested the bitcoin network is at any given time and how much data is being processed in a transaction. One of the key factors behind the data size of a transaction is the number of UTXOs involved. Our article on the problem of too many UTXOs is a good primer on UTXO consolidations, payout thresholds, and how bitcoin transaction fees are calculated.

As a miner, there are four main ways you can reduce your transaction costs:

1. Increase payout thresholds from mining pools

If you use a mining pool, and take a high frequency of payouts, it’s going to result in a lot of small UTXOs in your destination wallet, which could be expensive to spend when the time comes.

To mitigate this, you can increase your pool payout threshold to reduce the number of deposits being made to your wallet (and therefore reduce the wallet’s UTXO count). This method is especially useful for future fee mitigation if you are pointing your payouts directly to a multisig wallet (which requires more data to make a transaction than a singlesig wallet).

2. Manually consolidate your UTXOs

You can further reduce the number of UTXOs in your wallet by periodically consolidating. This is a relatively simple process; you just need to author a transaction containing the UTXOs you wish to consolidate, and send them back to yourself. You can learn more in our article covering strategies to manage too many UTXOs.

3. Set a low fee…and wait

Block space is limited by design—the higher the demand for space (increased quantity of transactions), the higher fees will be. If you don’t need a transaction to be processed immediately, consider setting a lower fee rate than recommended at the time of sending. This makes the transaction take longer to process, but can help you avoid paying excessive fees during periods of high demand.

At any given time, there is a minimum fee rate the mempool is willing to accept. Typically, this stays between one to three sats/vbyte. Current fees can easily be viewed on most block explorers, such as mempool.space.

4. Batched spending

Miners who need to send multiple payments at the same time can reduce transaction fees by sending them all at once using a transaction method called batching. This method of consolidating multiple payments can be performed with many popular bitcoin wallets (such as Bitcoin Core, Electrum, or BlueWallet) and can be helpful for LP distributions or any other time you need to make multiple transactions at once.

Key management

Identify your keyholders

When your company decides to hold the keys to its bitcoin you will need to determine who at the company will physically hold the keys.

The goal is to distribute control over keys and seeds evenly. This gives no one person the ability to sign a transaction or move bitcoin on their own. What this looks like for your organization will depend on your specific circumstances, such as the number of principals, the number of keys, and whether the wallet is for long-term storage or simply distributing control over spends.

In the above example where you’ve decided to use 2-of-3 multisig for your mining operation’s bitcoin treasury (we’d typically recommend this), you might select the company’s CEO and CFO to hold a key each, and a collaborative custody partner to hold the third key.

Properly secure your hardware wallets and seed phrases

There are typically two separate physical items to protect for each of your company’s bitcoin keys: a hardware wallet and a seed phrase. A critical element of implementing a secure multisig model is the geographical distribution of hardware wallets and seed phrases so that no single physical location is a point of failure for your bitcoin.

Seed phrases are worth particular attention because they are a phys ical and unencrypted copy of your bitcoin private keys. You should always retain seed phrase backups of your keys to reduce the reliance on sometimes finicky hardware wallets.

The location of the hardware wallets and seed phrases should only be known to individuals who will be expected to provide transaction signatures to move bitcoin. Keep in mind: When storing and securing these items, you may want to ensure that no single person at your organization has seen or knows the location of the necessary hardware wallets or seed phrases to spend—so that no single person can compromise your bitcoin treasury.

Ongoing key maintenance

Key hygiene

After you’ve properly stored your hardware wallets and seed phrases, there are a few best practices you should observe to keep the device and data on the device in proper working order:

• Keep the firmware up to date: This should be done roughly two to three times a year to ensure your hardware wallets have the best security, newest functionality, and will work to sign transactions when you need to.

• Perform key checks: At regular intervals, check that your hardware wallets are functional and check the physical security of your seed phrases. We recommend this should be done roughly four times a year.

Changing key holders

When a key holder leaves your mining operation, you should always replace their key as soon as possible. Don’t simply hand over the old key to a new key holder—that would be a a potential security hole. Even if the original key holder can be trusted and left in good standing, replacing the key reduces the risk that unauthorized signatures will be performed or attempted in the future.

Key replacements

To replace a key, you will need the new key holder to generate a new key, (if using multisig) create a new multisig wallet with the new quorum, and then (carefully) send all the company’s bitcoin to the new wallet.

If you’re using collaborative custody with Unchained Capital, our platform can safely guide you through the key replacement process. If you’re not using a collaborative partner, we’d recommend having someone technical on hand to help with the process.

• For Unchained Capital clients needing help with key replacements, reach out to your dedicated account manager or client services.

• If you are unsure whether or not you need to perform a key replacement, or if you would like to learn how key replacements for multisig work technically, you can refer to this article.

Other considerations

Bitcoin mining and taxes

Bitcoin miners are responsible for understanding and abiding by local and federal tax regulations. Taxes and accounting as they pertain to bitcoin mining are beyond the scope of this guide, but they are relevant considerations and you should consult with an accountant or tax professional to learn more.

For US-based miners, Unchained’s Head of Legal Jeff Vandrew briefly touched on the topic of mining and taxes in his piece covering what you need to know about bitcoin mining, IRAs, and taxes:

If a taxpayer obtains bitcoin through mining, they must recognize income in the amount of the fair market value in U.S. dollar terms of the bitcoin received on the date of receipt. That recognized income is subject to income tax at ordinary income tax rates. On top of income tax, the taxpayer may also be subject to self-employment tax.

Selling bitcoin

If you do need to convert bitcoin to your local currency to pay bills, taxes, or cover overhead, you may want to expedite the process by setting up an exchange account and linking an active bank account. Some exchanges can take days or weeks to approve new accounts, so plan accordingly, especially if you are up against a deadline like paying an invoice, payroll, or taxes.

Unchained Capital can help facilitate the purchase or sale of bitcoin straight to or from a multisig vault, within certain limits, for companies and individuals in the U.S. that reside in a state where our trading desk is active.

Collateralizing your bitcoin

Securing your bitcoin with a collaborative custody partner like Unchained Capital means you can easily use that bitcoin to access liquidity to reinvest in your mining operations—without ever selling your bitcoin. For more detailed information on bitcoin collateralized lending, visit unchained.com/loans.

Let Unchained Capital be your guide

Whether it be the daunting task of managing fees, advice on how to structure your bitcoin custody workflow, or access to a trading desk to buy and sell bitcoin, we’re here to help. Our multisig vaults for business give your organization complete control over your bitcoin while providing a trusted partner to guide you and your team through setup and to help with key replacements and wallet recovery if and when necessary.

Originally published on Unchained.com.

Unchained is the official US Collaborative Custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on services offered, custody products, and the relationship between Unchained and Bitcoin Magazine, please visit our website.