Bitcoin offers a promise of a decentralized monetary system that frees us from our reliance on centralized third parties and currencies that erode purchasing power over time.
A major roadblock in achieving this vision, however, are the massive reserves of paper bitcoin, held by third party custodians attempting to force the same old fractional reserve system onto this new emerging technology.
Far too many people are leaving bitcoin on centralized exchanges, and if people don’t learn to take self custody, achieving hyperbitcoinization will involve more pain for paper Bitcoin holders that could’ve been prevented.
This article aims to help you avoid making those mistakes, and give you steps to take action and secure the keys to your bitcoin.
Look At How Much Bitcoin Is Left On Exchanges
According to CryptoQuant, since peaking out in 2021, bitcoin reserves on exchanges have been falling consistently, with a massive outflow taking place alongside the FTX collapse in November 2022.
Which is a great sign.
But while real bitcoin leaves exchanges, these platforms store more bitcoin “on paper” for their users, the same way that banks store more money for people on their books than they actually have on hand. It’s fractional reserve banking all over again.
These structures historically only end in one way: collapse – unless bailed out by a Federal Reserve with an infinite money printer available to it.
Thanks to the Fed, fractionalizing our banking system has worked out in the past. The problem today is that you cannot print more bitcoin. Exchanges are trying to apply a fiat financial model to an absolutely scarce asset. That’s not how this new monetary paradigm works.
It’s a ticking time bomb for those who leave their bitcoin in the hands of other custodians, as there is no guarantee that they will get “their” bitcoin back if the exchange they hold it on goes belly up.
The Dangers of Leaving Bitcoin On An Exchange…And How To Avoid Them
This is exactly what happens if you keep your #Bitcoin on the exchanges.
Not your keys, not your #Bitcoin
— ⚡️ Oz ⚡️ (@imabearhunter) January 14, 2024
1. Bankruptcy
Just because a company is regulated, does not mean it’s safe.
Plenty of crypto companies demonstrated that this year, further highlighting why self custody is so important. When your bitcoin sits in someone else’s account, you cannot claim a right to it.
All within 2022, the crypto space experienced bankruptcies like::
- FTX, losing more than $8.7 billion in user funds.
- BlockFi, losing anywhere from $1-10 billion in its customer funds.
- Celsius, locking $4.7 billion away from its clients after going under.
- Voyager, holding withdrawals of more than $1.4 billion sitting after going bankrupt.
In all these cases, users were left anxious, robbed, and maybe even desperate to recoup their losses. And while bankruptcy proceedings are sometimes able to get your money back, the lesson here is clear: Not your keys, not your coins.
How to steer clear of bankruptcy: Stay away from lending platforms and other custodians looking to hold your bitcoin for you. There is no FDIC insurance on bitcoin, not even for Bitcoin-only companies like Swan, Strike, or River.
2. Rug Pulls & Hacks
Rug pulls and hacks are taking place every single day in the crypto space. Hundreds and thousands of them.
Typical crypto pump and dump schemes are run by people just as nefarious as the CEOs of the aforementioned exchanges. The only difference being that altcoins mostly silently and meticulously extract money from traders over time instead of making big splashes.
However, some altcoins like Terra (LUNA) have managed to make center stage in the past. Its founder Do Kwon rug pulled more than $60 billion in May 2022 between LUNA token holders and “risk-averse” investors holding UST stablecoins in Anchor Protocol to generate a passive yield.
The further you venture away from bitcoin, the more prone you become to rug pulls or cyberattacks that could sweep your money away in an instant.
How to avoid rug pulls: It’s pretty simple: Avoid altcoins. Avoid custodial bitcoin. Don’t get greedy. Don’t trade. Don’t leverage your bitcoin for yield. Take self custody. And even better: Air gap your bitcoin so that it never has to interact with online devices.
3. Regulatory Risks
KYC Bitcoin exchanges abide by the jurisdiction of the regions they operate within. By leaving your bitcoin on one of these exchanges, you are implicitly taking on the risk that the legal jurisdiction you reside in might turn hostile against bitcoin and attempt a 1930’s gold-style confiscation.
How to mitigate regulatory concerns: Keep your bitcoin safely in your own custody so that you can take it with you in case regulation is encroaching on exchanges. Bitcoin in self custody is the only instrument that allows us to protect our wealth without counterparty risk. It’s therefore better to hold bitcoin and not need it than to need bitcoin and not have any.
4. Loss Of Control
As exemplified by Bitcoin Spot ETFs, leaving your bitcoin in the hands of a custodian prevents you from being able to use the underlying technology that makes bitcoin so special. By holding bitcoin on an exchange, you cannot spend your bitcoin with other peers in the network. You cannot use it to integrate bitcoin into your own business or personal projects. Ultimately, you cannot use it to protect your wealth for the long term.
At some point, either you or the generations following you will have to sell that bitcoin back into fiat if you want to reap the purchasing power rewards for holding an ETF. But at that point, there may not be an option to swap fiat back into bitcoin. You certainly can’t bank on that.
How to take back control: Store bitcoin in a singlesig or multisig wallet. If you’re worried about only trusting yourself, you can configure a multisig setup in such a way that it keeps you in control while still allowing for a backup recovery plan in case you fail to keep your seed phrase safe.
5. Lack Of Privacy
By keeping your bitcoin on a KYC exchange, you associate your identity with all of your Bitcoin purchases.
Even if you withdraw all your bitcoin from the exchange, CoinJoin your stack, and send it off to cold storage, the exchange may lose track of your wallet identity. But regardless, they still know exactly how much bitcoin you purchased using their platform.
And if you forget to take additional measures to protect your privacy like CoinJoining, and send your bitcoin directly to cold storage, then the exchange now can link your cold wallet and any subsequent transactions from that wallet to your identity.
On top of all of this, by signing up for KYC exchanges, you’re essentially giving up your personal information to the dark web. There are countless instances of centralized platforms losing private data to cybercriminals, and no centralized KYC exchange can guarantee protection from such data leaks.
How to take back your privacy: If this is something that concerns you, avoid buying bitcoin from KYC exchanges and take advantage of the many peer-to-peer non-KYC exchanges out there, such as Bisq, HodlHodl, Robosats, or my affiliate AgoraDesk.
6. Hindering Hyperbitcoinization
As mentioned, by leaving bitcoin on exchanges, it exacerbates the problem of paper bitcoin.
The more paper bitcoin there is, the further we are from achieving a properly hyperbitcoinized world, where no authority has the means for monetary manipulation.
Leaving your bitcoin on exchanges delays a self-custodial financial system, suppresses natural fiat price discovery, keeps your financial data in the hands of third parties, and leaves you vulnerable to all the privacy problems that bitcoin is here to solve.
We can’t have hyperbitcoinization without more people taking the steps to get there.
How to push hyperbitcoinization forward: Follow these key steps to achieving hyperbitcoinization and help those close to you take them as well. Before focusing on hyperbitcoinization for the world, start with your own life and branch out from there. Collectively, these are the efforts we must take to regain our financial freedom.
Best Practices For Protecting You And Your Bitcoin
If you want to skip these dangers, the first thing you need to do is avoid KYC bitcoin altogether.
- Buy non-KYC bitcoin using one of the aforementioned non-KYC exchanges.
- Instead of buying bitcoin from another party, consider mining it directly instead.
- When you buy bitcoin or mine it, properly secure your seed phrase.
- Accept bitcoin for your business or services.
- Spend your bitcoin to maintain your privacy.
There are plenty of ways for you to not only take control over your own bitcoin, but also promote the Bitcoin circular economy at the same time.
If You Must Buy Bitcoin Through KYC Exchanges…
You can’t deny that, despite the downsides of KYC exchanges, these platforms offer incredible convenience and user-friendliness. For the everyday person used to navigating a fiat financial world, using a KYC exchange exchange will feel the most familiar.
If that’s ultimately what’s most important to you, and you’re willing to take the extra steps later on to mitigate privacy risks, then just be sure that you follow these guidelines for navigating KYC exchanges.
1. Enable 2FA for your account: Enforcing two-factor authentication (2FA) on your exchange account is a must. Bitcoin is a haven for thieves looking to take your bitcoin, and exchanges are naturally a hot spot for criminals looking to hack into these platforms. Don’t rely on weak 2FA like e-mail or text messages, however, as SIM swaps are relatively easy to enact for criminals that know who to target. So don’t make yourself a target to begin with.
2. Take advantage of auto-withdrawals: Some Bitcoin exchanges like Swan offer auto-withdrawal features that link to a Bitcoin wallet of your choice, so that every time you buy bitcoin, the exchange will automatically transfer it to the designated wallet. Don’t connect your long-term cold storage wallet to your exchange as that reveals how much bitcoin you hold. Instead, auto withdraw to a burner wallet so you can protect your privacy.
3. Stay informed: A primary goal of bitcoin is to make savings effective – set it and forget it, allow the purchasing power to accrue over time. Unfortunately, if you want to leave your bitcoin on an exchange, you can’t forget about it. If you don’t pay attention to your stack or the exchange it’s held on, you may log in one day only to find that the exchange went under, or an unexpected hack swept all the bitcoin off the platform. You have to actively monitor your position if you leave it with another custodian, unless you are okay with losing it one day. But the easiest way to avoid this is taking bitcoin off exchanges. Don’t get caught without any bitcoin in your custody.
4. Maintain extreme caution: Assume that most Bitcoin exchanges are likely scams propping up their numbers to attract unsuspecting clients. If you deposit money onto the wrong platform, it could vanish in an instant. You have to be very cautious and vet any and all platforms you choose to interact with.
Conclusion
Many people are used to the hand holding that traditional finance offers us, since they control everything we do with our money. With bitcoin, you are solely responsible for your own wealth. That comes with a great deal of responsibility, but also offers financial sovereignty for you and your family.
The dangers of leaving your bitcoin on exchanges are great, and can easily burn anyone if you are not careful. Even as simple of a mistake as sending bitcoin to the wrong address can cost you a great deal.
By avoiding KYC exchanges and ensuring that you maintain custody throughout the buying and transferring process, you save yourself from countless risks that plague traditional exchanges. That doesn’t mean you should be careless, however. If you’re ever confused or concerned about something, there are tons of great Bitcoin resources online, such as this website, that offer great information to help mitigate the problems you’re experiencing.
If you’ve typically been buying bitcoin through KYC exchanges but are ready to make the switch, then be sure to learn how to use bitcoin anonymously and enjoy a private financial life.
Thank You
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