This is an opinion editorial by Joseph Tetek, Treasure Brand Ambassador of SatoshiLabs.
Bear markets can be scary, bitcoin has plummeted to unimaginable levels, leverage has been exhausted and custodians are failing on their promises. When FUD replaces FOMO, luck is easily lost. It is imperative to keep your mind cool and keep your bitcoins in cold storage to survive in this unpredictable environment.
“Banks must be trusted to hold our money and transfer it electronically, but they lend it in waves of credit bubbles and with barely a fraction of that in reserve.”
-Satoshi Nakamoto
The current situation is that some bitcoin exchanges and custodians are facing solvency issues, colloquially known as “bank runs”.
Running a bank is nothing new. Well documented banks are over 200 years old; The first US bank run occurred in 1819, a few decades after the Declaration of Independence (for curious readers, I recommend Murray Rothbard’s “The Panic of 1819”), The bank run is the result of an age-old story of greed and the opposite of the notion of “getting away from it”. Bankers have always lent some of their customers’ deposits to generate revenue, but doing so puts them at risk of drowning if depositors want their money back. collectively,
In a fiat economy, bank runs are prevented in a typical statistical fashion: the practice of fractional reserve banking that leads to bank runs becomes sacrosanct, and unavoidable losses are reduced by printing more money. And while this practice has mostly been hidden from the public eye for much of the 20th century, it became quite clear after 2008: Banks that should have failed were only allowed through taxpayer money and a zero-interest rate policy. was granted bail. , which ultimately saw inflation levels not seen since the 1980s.
But even then, bank runs in the fiat economy are mostly a thing of the past, although they are still highly likely in the “crypto” economy.
In Bitcoin, Shires Face the Music
In many ways, bitcoin is the direct opposite of fiat currency. The definitive issuance of 21 million coins is widely mentioned, but the fact that there are no leaders and no bailouts is less important to bitcoin’s long-term success. However, this does not prevent some risk-prone characters from re-creating legal entities. “Cryptocurrency lending” shops like Celsius are theoretically fractional reserve banks; However this time around, there is no “lender of last resort” in the form of a central bank to bail out the founders and their customers when things go wrong.
Let’s make one thing clear: A produce must always come from somewhere. In order to generate positive yields on scarce assets such as bitcoin, the institution said the yield has to be leveraged from customers’ deposits in a variety of ways. And while banks face strong regulatory requirements for what they can do with customer deposits (such as buying treasuries, facilitating mortgage loans, etc.), cryptocurrency lending companies have no such regulatory requirements, so they Basically go and put your clients’ deposits in different types of casinos – DeFi yield farming, betting, betting on obscure altcoins.
Otterooo as Twitter User recently mappedCelsius lost hundreds of millions of dollars in user deposits on various badly placed bets:
As of the time of this writing, Celsius has stopped all user withdrawals and appears to have a serious solvency issue. With no bailouts coming, all hapless users can grab some popcorn and watch the Celsius team fight for their half-billion leveraged position, the liquidation of which could mean the evaporation of most of its users’ funds:
Celsius is not alone
“You never know who’s swimming naked until the tide goes out.”
-Warren Buffett
It’s quite disappointing to see people lose money in basically the same way that Mt Gox users did in 2013. Exchanges and custodians fall for the same temptation that bankers have had for centuries: service fees to squeeze out more than they used to earn by taking advantage of user deposits. It is quite paradoxical that bitcoin (and most altcoins) offer a direct way of offering self-audited proof of self-audit via cryptographic signatures of addresses with sufficient balance, yet no exchange, with a few exceptions, can provide an exchange of reserves. Such evidence does not.
It could very well be that all exchanges are completely solvent, but the point is we have to trust that. As the “Oracle of Omaha” famously quipped, we’ll never know who’s naked until the tide goes out. Therefore, when one of the largest exchanges in the world, Binance, bitcoin withdrawal stopsWe will never know if this is really just a temporary technical hiccup, or a much more sinister liquidity problem.
How can we protect our coins?
While we can collectively ask exchanges to offer proof of reserves, the only real mitigation of counterparty risk that exchanges offer is the capture of our coins. The only way to really be sure that nothing shady is happening to our coins is to get hold of the private key itself. Bitcoin is unique in the way it makes it easy to manage one’s own funds, and ever since the first hardware wallet in the form of Trezor was introduced in 2014, there has been no excuse for not carrying your own keys. .
Buying bitcoin in a peer-to-peer fashion is preferable from a privacy standpoint, so if you can find a trusted seller – usually through a bitcoin meetup – make regular purchases via the same channel and stack directly into a hardware wallet. There is a way. , ATMs can also allow the purchase of bitcoins up to $1,000 with good privacy. But, if for some reason you prefer to shop through exchanges, there is no reason to leave your coins with your own wallet.
And if you’re just keeping your coins on the exchange, it’s a good idea to consider withdrawing to your wallet. Even if you earn a return on your coins, the long-term risk of losing 100% of your coins is simply not worth it.
Hardware wallet makers can’t gamble or bet with your money
Surprisingly, many people misunderstand the nature of hardware wallet devices and the business model behind them. Some believe that hardware wallet makers are in fact in possession of users’ coins and that they can recover coins if the user loses their recovery seed or passphrase – this couldn’t be further from the truth! It is the wallet users who are always in sole and exclusive possession of their coins. The manufacturer’s business is to sell equipment; Not to lend or otherwise take advantage of your users coins!
Unlike exchanges and other custodians, there is no counterparty risk in using a hardware wallet. If Trezor or any other creator goes bankrupt tomorrow, users will be unaffected, as they are the sole owners of their coins. Compare this fact with the disclaimers of the major bitcoin exchanges, which can tell thatIn case of bankruptcy, users’ coins are basically confiscated.
Nightmare for some, Opportunity of a lifetime for others
The discovery of fractional reserve practices being pursued by some of the major conservatories in the space may have come as an unpleasant surprise to many newcomers, who were seduced into earning a yield on their otherwise “unproductive” properties. The further pursuit of no bailout could turn into a nightmare. Yet this is the nature of bitcoin: unlike the fiat system, bitcoin rewards the prudent and punishes the frivolous. And through that mechanism, bitcoin helps create a more responsible world.
This is Joseph. There is a guest post by Teteco, The opinions expressed are solely their own and do not necessarily reflect the views of BTC Inc. bitcoin magazine,