The HiFi Bitcoin Letters
The HiFi Bitcoin Letters
Letter #145: Not Your Keys, Not Your Coins - Mining Pools

Letter #145: Not Your Keys, Not Your Coins - Mining Pools

Read now to learn how your Bitcoin aren't as safe as you may think when someone else custodies them, no matter who it is on the other side.

Dear Readers,

“Not your keys, not your coins” is a topic that we address quite frequently in this newsletter, but usually in the context of asset custodians. A lot of Bitcoin users, even veterans in some cases, have limited desire to custody their own Bitcoin and are perfectly happy to allow someone else to control their holdings for them.

In light of the numerous business failures throughout the crypto industry in recent months, users are learning that entrusting one’s assets to someone else can be a quick way to lose money. And developments from early this week are proving that “not your keys, not your coins” applies to more than just asset custodians.

Pooling Your Bitcoin, Losing Your Wealth

News broke on Monday that one of the largest Bitcoin mining pools in the world had suspended external withdrawals, blaming liquidity problems and limiting some of the arguably speculative services they had been providing. An interesting development to be sure since you’d think that a Bitcoin mining pool operator wouldn’t have much incentive to engage in speculative financial offerings (like crypto banks often do).

Most miners who join Bitcoin mining pools probably aren’t looking for speculative mismanagement of their earnings. Instead, they most likely joined for one of the following reasons:

  • To decrease the amount of effort they have to expend fully managing the mining process themselves.

  • To smooth out their earnings so they can have income more regularly, albeit in smaller amounts.

  • To benefit from economies of scale, such as with hosting, equipment, or energy costs.

Pool operators get compensated for the service they provide, typically through fees paid by the pool participants themselves. So the idea that a pool operator could be risking participants’ hard-earned Bitcoin to further enrich themself is concerning to say the least. But you can bet that if one pool operator is making speculative investments with someone else’s money, other pool operators either already are or soon will follow suit.

Don’t Risk Your Bitcoin

The fact remains that your Bitcoin are at risk any time you leave them in someone else’s hands. No matter how authoritative the person or company on the other end may be, or how solid their promises regarding the security of your assets may seem, there’s never any guarantee that your holdings will be safer than they could be if you held them yourself.

Lest anyone get confused, this article isn’t meant to be a diatribe against mining pools themselves. They offer a service that is highly valuable to a large number of people and companies, and it isn’t hard to see why since Bitcoin’s hash rate is astronomically high these days. While solo miners and small mining outfits do from time to time beat the odds and confirm a block on the blockchain, the majority of miners will see limited income, if they even earn anything at all, unless they band together in pools.

So, if anything, this article should serve only as a further call to arms in the context of custodying one’s own Bitcoin rather than leaving them with someone else. It’s true that many mining pools have minimum balances that have to be reached before withdrawals to non-pool wallets can be initiated, but ask yourself: once the minimum balance is reached, is there any benefit to leaving Bitcoin on the platform? Since now even mining pools can apparently suffer liquidity problems, I believe that the answer to that question is a resounding “no.”

A Clarion Call For Self-Custody

I often say that Bitcoin is revolutionary for financial self-sovereignty, and I mean that 100%. Custodying one’s own Bitcoin is a huge piece of that, since giving control over your wealth to someone else means handing over your financial security to them.

If you haven’t yet taken steps to take custody of your Bitcoin holdings, now could be the time to see which setup is best for you. Whether you’ve heard a lot about Bitcoin custody on the internet or you’re not sure at all where to begin, I highly recommend that you check out the series I wrote a few months ago on Bitcoin custody. It’s definitely worth the read:

Start Your Self-Custody Journey

Read the next article in this series:

The HiFi Bitcoin Letters
Letter #180: Not Your Keys, Not Your Coins - The US Judicial System Agrees
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This is not financial or business advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.