Bitcoin Maximalists…. Paranoid or Prudent?

Over the years, Bitcoiners have been accused of being many things. At first, we were ridiculed for believing that ‘magic internet money’ could ever be a reality. Our detractors would mock us for buying the equivalent of ‘internet beanie babies’ or ‘digital tulips’.

As Bitcoin continued to grow, we would then start to be accused of being confused conspiracy theorists. Apparently, pointing out that endless money printing by central banks is what drives inflation, wealth concentration and widespread poverty, does not make you particularly popular amongst those who benefit from it most. Go figure…

The amount of derision that we’ve had to put up with the last 15 years is remarkable. We’ve been called scammers, con artists, ponzi scheme enthusiasts, and even ‘impulsive psychopaths with dark triad personality types’. At a certain point these desperate attempts to disparage us just started to become amusing. My own personal favourite is when we were accused of being ‘white supremacists’.

All of these accusations are of course completely ridiculous. Calling an open-source software protocol ‘racist’ is the absolute height of stupidity. Apparently, these ‘journos’ chose to ignore how popular Bitcoin has become in the global south, and how it’s increasingly used for remittances. Maybe they’re holding stocks in Western Union. Regardless of what their motivations might be, they clearly have no qualms about making up any old rubbish to fit their agenda.

What’s consistent about these accusations and labels is that they are never substantiated with any strong evidence. Instead of trying to disparage Bitcoin through rigorous, well-intentioned debate, they instead revert to name calling and baseless accusation. It’s a classic example of trying to win an argument by ‘playing the man’ instead of ‘playing the ball’.

For any true honeybadger who’s done their homework on Bitcoin, it’s easy enough to ignore this nonsense and just file it under ‘State Propaganda’. Unfortunately, for people new to Bitcoin, this type of misleading information can cause a lot of confusion.

That’s why this week we wanted to discuss another label that was recently directed toward Bitcoiners looking to take self-custody of their Bitcoin. Apparently, anyone who won’t trust third parties or governments to be anywhere near their money is nothing more than fringe a ‘Paranoid Crypto Anarchists’.

We want to explain why this framing is not just unhelpful but unsubstantiated, and demonstrate that what looks to some like paranoia, actually looks a lot more like prudence if you’ve done your proper duediligence.

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Are Bitcoin Maximalists Paranoid?

The suggestion that Bitcoin Maximalists are ‘Paranoid Crypto Anarchists’ is a subtle style of messaging designed to persuade you into thinking that taking self-custody of your Bitcoin is unnecessary. It’s an attempt to suggest that being the sole custodian of your wealth and reducing your counterparty risk to zero is something you needn’t concern yourself with, because that’s how paranoid people think. This is misleading and does not reflect reality.

Paranoia as defined in the Oxford English Dictionary is an ‘unjustified suspicion and mistrust of others’. So, for the people espousing self-custody to be considered paranoid, their claims would need to be baseless. There would need to be no evidence that letting someone else secure your Bitcoin could go wrong.

But is that really the case?

You can probably tell where this week’s newsletter is going…It’s time to look back over some old receipts and learn a few lessons about counterparty risk…

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Counterparty Risk

Counterparty risk is something a lot of people who are new to Bitcoin vastly underestimate because they have no direct experience of what it’s like when something goes wrong.

In most developed countries, when a bank fails, the government will step in and quite literally paper over the cracks with freshly printed money. Account holders are made whole, and customers of the bank don’t feel any direct pain. The government solves the problem by printing money and socialising the losses. Everybody’s dollars became worth slightly less, but nobody gets completely wiped out.

The problem with this is that it means newcomers to Bitcoin have never experienced the true downside of counterparty risk. The money printer has always been there to save them from having to take their medicine, and from learning the true risk of letting someone else control their money.

But in some cases, even the money printer can’t prevent catastrophe…

Those of you familiar with our founder Tony Yazbeck will already know his story of being completely wiped out during the financial crisis in Lebanon. Tony was happily living the life of a successful entrepreneur before one day waking up to the news that the entire banking system has collapsed. He was left with nothing more than $70 in his back pocket. Unfortunately for Tony, in Lebanon the losses were too great to be socialised, this was a systemic collapse. People were completely wiped out and there was chaos in the streets. What happened in Lebanon taught Tony a very powerful lesson in the true nature of counterparty risk that few people have had to experience.

Ask yourself, do you think Tony would ever leave his Bitcoin with a third party or any type of ‘Bitcoin bank’ after that experience?  Would you call him paranoid for never trusting a third party with his wealth again?

When it comes to Bitcoin, counterparty risk takes on an entirely new meaning. One of the defining features of Bitcoin is that there is no money printer. If something goes wrong, nobody can just print more Bitcoin tor eimburse you. Just like in Lebanon, if the financial institution you are trusting with your funds goes under, your money will be gone for good too! If you’re not holding the private keys, it’s not your Bitcoin.

But is this just paranoia? Is it really that risky to leave your Bitcoin with a custodian? Well, we thought we’d let you be the judge….

To help you make your mind up, we thought we would share a list of 21 Bitcoin custodians that have failed in spectacular fashion over the past 13 years:  

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1)      Bitomat (2011): Lost access to its wallet file, resulting in the loss of 17,000 bitcoins.

2)      Bitcoinica (2012): Experienced multiple hacks leading to significant losses and eventual shutdown.

3)      Bitfloor (2012): Suspended operations after 24,000 bitcoins were stolen in a security breach.

4)      Mt. Gox (2014): Filed for bankruptcy after losing approximately 850,000 bitcoins

5)      Cryptsy (2016): Declared bankruptcy, citing a 2014 hack that led to the loss of 13,000 bitcoins. Later investigations suggested misappropriation of funds by the CEO.

6)      Bitfinex (2016): Suffered a hack resulting in the loss of 120,000 bitcoins

7)      BTC-e (2017): Shut down following the arrest of its operator on money laundering charges, with the U.S. government seizing the domain and funds.

8)      Youbit (2017): A South Korean exchange that filed for bankruptcy after suffering two hacks in the same year.

9)      NiceHash (2017): A Slovenian cryptocurrency exchange reported that hackers had stolen over $70 million using a hijacked company computer.

10)  Coincheck (2018): Lost $530 million in user funds due to a hack.

11)  Coinrail (2018): A South Korean exchange that was hacked, losing over $37 million in user funds.

12)  Bancor (2018): An exchange that suffered a theft of $23.5 million of user funds.

13)  Zaif (2018): lost $60 million in user funds due to a hack.

14)  QuadrigaCX (2019): Collapsed after the reported death of its CEO, who allegedly held the private keys to $190 million in customer funds that would never be retrieved.

15)   Cryptopia (2019): A New Zealand-based exchange that suffered a hack of $16 million, leading to its liquidation.

16)  Africrypt (2021): Founders are suspected of absconding with $3.6 billion worth of Bitcoin, making it one of the largest cryptocurrency thefts in history.

17)  Liquid (2021): A Japanese cryptocurrency exchange was compromised, resulting in a loss of $97 million worth of user funds.

18)  BadgerDAO (2021): Users lost around $118.5 million worth of Bitcoin and $679,000 worth of Ethereum tokens in a front-end attack.

19)  VoyagerDigital (2022): Filed for Chapter 11 bankruptcy in July 2022 after the collapse of Three Arrows Capital, which owed Voyager over $650 million.

20)  CelsiusNetwork (2022): A crypto lending platform that filed for Chapter 11 bankruptcy in July 2022, revealing a $1.2 billion deficit.

21)  FTX(2022): Once the third-largest cryptocurrency exchange, FTX filed for bankruptcy in November 2022 after a liquidity crisis revealed an $8 billion shortfall. Founder Sam Bankman-Fried was arrested and later sentenced to 25 years in prison for fraud.

That’s some list, right? It certainly makes you wonder who the next casualty on the list might be. Could it be Coinbase? Maybe Binance?  Either way, it turns out Bitcoin maximalists’ mistrust of allowing third parties to custody their Bitcoin is far from unjustified.

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Censorship Coercion and Control

So, leaving your Bitcoin with a third party can lead to the total loss of your funds. But for a moment let’s put our tinfoil hats on just a little tighter and indulge our ‘paranoia’ a little further. Let’s explore some of the other problems that could arise from handing over control of your Bitcoin to a third party.

Working with any institution as part of your Bitcoin custody setup means giving up 100% of your privacy. Your identity will forever be attributed to your Bitcoin. Not only that, but if it ever boils down to it, regulated third party custodians will co-operate with governments if pressured. Involving third parties in your Bitcoin self-custody setup leaves you far more exposed to surveillance, coercion and control.

Take France for example. Their communist government is currently considering imposing unrealised gains taxes on Bitcoin holders. They dress it up as a way to release ‘unproductive capital’, but we can all recognise this for what it truly is; blatant theft of private property.

Or take a look at the Netherlands, where the commies in charge over there are talking about imposing exit taxes on anyone trying to escape their unique attempts at Marxism. If you try to leave, they plan on taking a big old bite out of your Bitcoin stack as you go.

And now for a moment imagine that new draconian rules like this are implemented by your Government while your Bitcoin is sitting on an exchange. Government pressure could force exchanges to put all sorts of limitations on the ways in which you can use your Bitcoin. They can censor you, impose new taxes on you, and you’re only ever one ‘national emergency’ away from the Government just straight up seizing your assets.

The bottom line is that working with institutions to perform any aspect of your Bitcoin custody setup opens up you up to more risk than is necessary. The best solution by far is to take full self-custody and reduce your counterparty risk to absolute zero. That’s not paranoia, in fact quite the opposite. By reducing your counterparty risk to zero, you can stop worrying all together.

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Satoshi –The Original Paranoid Bitcoin Anarchist

The next time you hear someone dismiss people who promote self-custody as being paranoid, you should also remember that Satoshi was the original ‘paranoid crypto anarchist’. If he wasn’t, then he would never have created Bitcoin in the first place.

It was Satoshi’s distrust of financial intermediaries that led him to Bitcoin’s trust-less design in the first place. Not wanting to reintroduce this trust when using Bitcoin is not paranoia, It’s the way Satoshi intended you to use it and the way he used it himself. To suggest that these features of Bitcoin are only for the paranoid is an incredibly silly argument to make.  

The creator of Bitcoin was also fastidious about his privacy and to this day nobody has been able to track him down since his disappearance. This seems to have been incredible foresight. Being known as the creator of Bitcoin would not make for an easy life. Satoshi clearly understood the value of privacy and the importance of maintaining it to protect his safety.

It's important to recognise the rhetoric being pushed by those that would call us paranoid and consider some of the motivations behind it. Anyone suggesting you are being paranoid for wanting look after your own wealth almost certainly has something to sell you or has an agenda to push. Chances are, they are going to offer to look after your Bitcoin for you. They might even try to lure you into their Bitcoin bank with bitcoin based financial products where you can get a Bitcoin backed loan or a mortgage or even earn some yield…

Whatever the pitch might be, don’t be so easily manipulated. The safest place for your private keys will always be with you. Remember the list we shared earlier? A lot of those entities used exactly the same rhetoric and play book, and it didn’t work out so well for anyone that trusted them.

The moral of the story is, self-custody isn’t for the paranoid, it’s for the prudent.

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Reduce The Paranoia – The Bitcoin Way

The reality is then that the best way to reduce your paranoia and sleep like a baby is to have a robust and well organised self-custody setup that you're confident using.

Our expert training ensures you know how to secure your critical data properly and that you only use the very best open-source hardware and software to secure your Bitcoin. In no time at all we will have you running your own node and broadcasting your own secure air-gapped transactions. Before long, you will be managing your Bitcoin UTXOs like an expert and will be fully prepared for life on a Bitcoin standard.

Reduce your paranoia by replacing it with knowledge. Our experts are ready to help you take full control of your wealth, all you need to do is book a free 30 minute consultation to start your journey toward true financial freedom.