Why you MUST self-custody your bitcoin
Self-custody protects against financial censorship & seizure, and enables private property rights.
by Andrew Howard on 24 Jun 2022
Bitcoin is more important than just an investment. As it keeps displacing fiat currencies, it will eventually bring significant change to the lives of nearly every single person on earth, just as the wheel, the printing press, the airplane, the car, and the internet did before it.
Some people and institutions think they “own” bitcoin, but in reality, they own a bitcoin investment product which relies on a third party custodian to hold their private keys. Some people think they “own” bitcoin, but they keep it on the very exchange where they initially bought it.
Unless you are holding your own private keys (taking your bitcoin into “self-custody”), you don’t actually own bitcoin…somebody else does. This completely disregards some substantial factors which make it valuable in the first place: resistance against both censorship and confiscation.
Self-custody protects your private property rights.
With fiat currency, you have to keep your money in the bank. With bitcoin, you don’t have to trust a bank to hold it for you and instead, you can (and should) keep it in your own possession. Why? Because banks have a long history of violating the trust of their customers.
Think I’m being paranoid? Well, let’s briefly take a look at some historical examples of financial censorship/seizure.
Executive Order 6102
In the United States, most Americans trusted banks to hold their gold for them. Yet, in 1933, President FDR signed an executive order which quite literally seized all citizens’ gold…and what were they left with? Pieces of paper (US Dollars) that were supposedly backed by the gold. This is ironic, because the original point of those pieces of paper was to be notes that people could conveniently carry around instead of having to lug gold everywhere, and they were originally intended to be redeemable for gold.
Obviously, it wasn’t the paper that was valuable, since paper can be printed endlessly. It was the gold that was valuable, since gold CAN’T be created out of thin air, which makes it scarce.
An important thing to add is that Americans didn’t simply walk up to the government and hand over their gold - again, they kept it with the banks, which obeyed the orders of the government mandating confiscation.
This happened in the “free world”...do you think this sort of event couldn’t happen again with your bitcoin? The advantage of bitcoin is the fact that it’s much easier to store than gold is. You don’t need a vault in your house. You don’t need to use a vault in the bank. You don’t need to bury it in your backyard. All you have to do is simply protect 24 words. That’s it.
(These 24 words are what's called a "seed phrase", which represents your “private keys”)
Side note: before the US government seized everyone’s gold in 1933, it was worth about $20/oz at the time. Shortly after in 1934, the US government revalued it to $35/oz…effectively doubling their “profits” on the confiscated gold!
In 2013, during the financial crisis in Cyprus, banks did a “bail-in”, effectively seizing the funds of their customers. This was not a 3rd world country - this was a modern European nation in which people lost half their money in the bank.
Lebanon Debt Crisis
In 2019, during the Lebanon debt crisis, banks froze the funds of their customers.
Here’s an appalling personal case of the situation:
“During the first days of the civil protests, banks shut down and blocked depositors' access to their funds. They then moved to set some severe withdrawal limits on dollar accounts. Some banks have set a limit of USD 600 a month. Although there have been no severe limitations on accounts in Lebanese pounds, as of March 1 I am no longer allowed to spend more than fifteen dollars per month for international transactions using my debit card. Yes, you read that correctly! Fifteen dollars per month.”
Canadian Trucker’s Freedom Rally
In 2021, the Canadian government froze the bank accounts of those who donated to the trucker freedom rally. Even if you disagree with the protest, it’s naive to think that the government will only ever freeze the accounts of the side you don’t agree with. When the state takes this kind of power, everyone is at risk:
The “it could never happen to me” mentality is a dangerous one to have. Hopefully, these examples have helped you realize the importance of taking financial sovereignty into your own hands.
Why is it dangerous to leave bitcoin on an exchange?
The bitcoin network is extremely secure, however, bitcoin *exchanges* are companies, and companies get hacked. Bitcoin/crypto exchanges have a long history of hacks in which their customers lose quite a lot of money - all because they trusted the exchange to keep their coins safe.
Here are just a few examples out of many showing why you should take your coins off of exchanges:
2014: Mt. Gox loses 850,000 bitcoin in an alleged hack.
2015: Europe’s largest crypto exchange, Bitstamp loses about 19,000 bitcoin due to hackers.
2016: Hackers stole 120,000 bitcoin from Bitfinex, one of the world’s largest crypto exchanges.
2017: Japanese crypto exchange, Yapizon loses 3,800 bitcoin from a hacking incident.
2018: Although this isn’t a hack, QuadrigaCX - Canada’s largest crypto exchange at the time - lost over 26,000 bitcoin when the owner, Gerald Cotten allegedly died and was the only person who knew how to access the funds.
2019: The world’s largest crypto exchange, Binance loses 7,000 bitcoin due to hackers.
2020: Hackers stole 7,000 bitcoin from Italian exchange Altsbit.
Exchanges must also comply with government mandates to freeze their customers’ accounts upon the event that they are ordered to do so, or else they will be shut down. During the time of the Canadian trucker freedom rally, even the CEO of Kraken - one of the world’s largest crypto exchanges - had this to say on the matter:
You get the point. Regardless of how large or trustworthy the exchange claims to be, history proves that the safe option is to withdraw your bitcoin into your wallet immediately after you purchase it. This is why at Bitcoin Reserve, we NEVER hold your bitcoin for you and in fact, have a company protocol of ALWAYS sending your coins to your wallet after a purchase is made.
Unless you self-custody, you may be indirectly lowering the price.
When you buy bitcoin on an exchange, you are given an “I owe you” of that bitcoin in your account. The problem with this, is that we cannot verify whether or not the exchanges are issuing more “I owe you’s” to customers than they actually have themselves.
This is a reasonable concern to have - just look at the way banks handle your money today with what’s bombastically referred to as “fractional reserve lending”, which is essentially when a bank loans out its customer deposits, and loans out more money than they actually have.
Just look at the largest crypto exchange in the US, Coinbase. In a recent statement they made along with an earnings report, they said, “Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”
Essentially, this legal jargon boils down to the following:
-If you keep your bitcoin on Coinbase, it’s their bitcoin, not yours. You are an “unsecured creditor”.
-If the company goes out of business, you could lose your bitcoin.
There are still approximately 2.36 million bitcoin which are currently held on exchanges. It is unlikely that all of the people who keep those bitcoin on exchanges will withdraw all at once. However, if this were to happen, it is entirely possible that this could create a “run on the exchanges” scenario, just like we’ve historically seen with a “run on the banks”. In such a situation, all customers go to the bank and attempt to withdraw their money. Unfortunately, not all of them were able to do so, since the banks lent out more than they actually had.
The same principle is even worse with a bitcoin investment product, in which many high-net-worth individuals and institutions buy into a bitcoin fund, or a bitcoin ETF - these are essentially “paper bitcoin”.
The problem with this is the fact that we can never actually verify whether or not the notes of ownership being issued is proportional to the amount of bitcoin that the fund/ETF holds in reserves. This is the same problem with the “I owe you’s” on exchanges, except investors can’t even withdraw the bitcoin to their wallets since it is purely an investment vehicle from a company, and not actually a real purchase of bitcoin itself. Investors in a bitcoin fund or ETF can't actually use bitcoin.
The only way you can truly know for a fact if the bitcoin is indeed yours, is if you withdraw it into your own wallet.
When you self-custody your bitcoin, you are limiting the circulating supply and therefore making it more scarce. This helps you and everyone else who holds bitcoin, as it increases the price in accordance with its scarcity.
Bitcoin is not just an investment. It’s freedom-centric money.
The beauty of bitcoin is the fact that it is objectively the strongest form of private property that mankind has ever possessed. Think this is an exaggeration? Consider every other store of wealth; real estate, gold, equities, bonds…etc. They all either require trust in third parties to “keep their word” and do so in perpetuity, or, if you hold the assets yourself, they can be taken from you through force. History has numerous examples of people losing their wealth through breaches of trust or violence.
Bitcoin’s strong form of private property makes it “the money of freedom”, which nobody can seize or censor, unlike anything else. So, why not treat it as such? Why limit yourself and treat bitcoin just like another investment, in which the only benefit you gain is simply exposure to the price going up?
Bitcoin provides so much more than just an investment. It allows refugees to flee their tyrannical states and take their money with them. It allows people to hang onto their wealth and prevent nation-states or thieves from stealing it. It allows families to pass down generational wealth, without the worry of external factors from a chaotic world interfering.
Bitcoin cancels cancel-culture. But, only if you care enough to hold your own private keys!