Letter #226: Not Your Keys, Not Your Coins - Trust In Custodians Is A Subprime Idea

Read now to learn how storing your Bitcoin with a "trusted" custodian is anything but risk-free.

Dear Readers,

Commentators in both the traditional and “crypto” spaces often rail against self-custodying one’s assets, opting instead to try to convince the masses to store their wealth with any number of “trusted” custodians.

That type of misguided advice is also prevalent within the Bitcoin space, even though the very ethos of Bitcoin naturally guides users towards the self-sovereignty enabled by self-custody. A true shame if you ask me, especially in light of current events…

Can You Trust A ‘Trusted’ Custodian?

Proponents of giving your wealth to custodians for “safe-keeping” can often sound like they have a well-formed foundation for their argument. After all, people around the world have been successfully convinced that self-custody is too difficult for non-technical people (it’s not, by the way). Plus, custodians are supposed to be highly regulated, not to mention well-funded thanks to their connections with VCs and large investment managers.

What could go wrong?

Apparently a lot.

Just last week, a major custodian failed after becoming technically insolvent and receiving an order to cease operations from regulators in the State of Nevada. “Insolvent”, meaning that the company doesn’t have sufficient assets on hand with which to meet depositors’ withdrawal requests.

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How can that be? Custodians are just supposed to keep our money in a vault somewhere right, since that’s what they’re being paid to do? Apparently that was too much to ask for.

The Bitcoin community is (unfortunately) learning once again the meaning of the phrase “not your keys, not your coins”, as many of that custodian’s depositors are faced with the likelihood of not receiving all their Bitcoin back, if indeed they receive anything at all.

Not Your Keys, Not Your Coins

Investment funds can’t be trusted with our Bitcoin.

Hosting providers can’t be trusted with our Bitcoin.

Exchanges can’t be trusted with our Bitcoin.

Crypto banks can’t be trusted with our Bitcoin.

Mining pools can’t be trusted with our Bitcoin.

Governments can’t be trusted with our Bitcoin.

In case it isn’t clear, there’s overwhelming evidence to suggest that all the entities we’re supposedly able to trust with our Bitcoin are actually highly untrustworthy. And since Bitcoin transactions can’t be reversed, nor can more Bitcoin be created out of thin air, there’s little hope of getting our Bitcoin back once a “trusted” counterparty loses or steals them.

My Opinion? Self-Custody Is The Way Forward

I won’t lie to you, nor will I present you with an overly rosy assessment: self-custodying one’s Bitcoin comes with its own risks. We have to keep our private keys safe from those who want to steal them, which could mean hackers over the internet or thieves in the physical world. We also have to keep from forgetting or otherwise losing access to our private keys — we’ll be just as hard-pressed to get our Bitcoin back if we lose them as when a custodian loses them.

That said, no one should be more incentivized to protect our Bitcoin-based wealth than we are. Self-preservation is a powerful instinct — when it comes to our Bitcoin, we’ll actually bother to protect them while custodians will just protect themselves at our expense.

What Will You Choose?

While my position on the matter is obvious by this point, the decision of what to do with one’s Bitcoin is overwhelmingly personal. While there are powerful arguments on both sides, in the end only you can make the decision for yourself.

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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.