The illusion of safety

Last Wednesday, cryptocurrency exchange Coinbase, gave users a scare as many logged in to find “zero” balances where once their crypto sat.

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The situation worked itself out, as the glitch turned out to be technical in nature and not a matter of mysterious coin disappearances.

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But the event nevertheless created a moment of panic for many and gives us reason to reflect on how our wealth - the product of our labor - is stored.

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I’m going to set “crypto” aside for the moment, as it doesn’t concern me. Bitcoin is the true monetary innovation worthy of discussion.

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If you keep Bitcoin at Coinbase or any other exchange, saying that you “have Bitcoin” would be a dangerous mischaracterization of your situation. Instead, it would be precise to say that you are owed Bitcoin by the exchange. In other words, they have the keys to your coins and if you want it, they should hypothetically give it to you… assuming they really have it, the government hasn’t confiscated it, or the exchange doesn’t go out of business.

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The same is true for non-Bitcoiners in the land of fiat currency. The bank doesn’t have your money. They retain some meager reserve of cash to manage day-to-day withdrawal needs. They would be in a serious pinch if a substantial number of customers demanded large withdrawals simultaneously.

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This is what happened when Silicon Valley Bank failed just last year.

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Now, SVB had a large customer base of wealthy, well-connected types, so depositors were bailed out above the $250,000 traditionally allowed by FDIC insurance. But shortly after the SVB collapse, Treasury Secretary Janet Yellen evaded questions from Oklahoma Senator James Lankford about whether all community banks in his state would be similarly protected.

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The short answer is “of course not,” since small community banks in Oklahoma aren’t known for their strong lobbying efforts in DC, but even her real response offered little additional promise: “The [failing bank] only gets that treatment [if we feel like] the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences…”. So… no. Unless the bank is “too big to fail.”

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Safe to say the same response would be true for your state’s small community banks, too.

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When Lebanon’s currency hyper-inflated last year, there were a string of unorthodox “bank robberies,” as desperate people held up clerks at gunpoint in an attempt to get their own money back. They, of course, found out the hard way that the bank didn’t have their money to begin with.

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Part of the promise of Bitcoin is that you can store its value in “cash” (i.e., just hold Bitcoin), instead of gambling in other investment vehicles. You don’t need yield or dividends or cashflow from Bitcoin because it myriad properties make it programmatically inclined to appreciate in value over time.

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Another promise is that you can self-custody Bitcoin. No bank or trusted third party required; you become the bank.

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This is a great departure from our current paradigm, but it is one of real promise and importance - I can store my wealth on my own and sleep peacefully knowing that it is safe, regardless of the mess in the world around me.

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Unfortunately, the significance of this reality won’t likely resonate with most people until it becomes painfully personal.

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Adopted from Black Hat Bitcoin

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Michael is the Chief Revenue Officer of The Bitcoin Way and host of The Bitcoin Way Podcast.

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To schedule a call with The Bitcoin Way to learn more about proper Bitcoin self-custody, you can do so here.