Audio by @DelioPera
#1 – If your coins are on an exchange, you need permission from the exchange to spend them. In your own custody, you can do whatever you want and pay whoever you want, whenever you want, at the fee you want.
You will understand this if you’ve ever wanted to move your bitcoin from an exchange, and you were blocked, because you needed to provide more identification documents, or prove your source of income. You may have been blocked because you reached a 24-hour limit of value you are permitted to withdraw. Your funds may have been unavailable due to unscheduled “system maintenance”. It is YOUR bitcoin, and you are in a powerless position.
Bitcoin doesn’t actually care who you are or how much you are transacting. You can move 100,000 bitcoin and you’ll be free to do that without any resistance any time of the day, even on Christmas Eve – if the bitcoin was in YOUR possession.
#2 – Your coins might not really be there. What you see is an account, a promise, that if you ask for your bitcoin, they will give it to you. But if the exchange gets hacked, or if the CEO fakes his death and takes the private keys, or if the government steps in, all coins could go bye-bye.
Newcomers log into their exchange and see “Balance = 1.0 bitcoin” and they think THAT is their bitcoin. It is not. That is a number on a screen. The bitcoin is on the Bitcoin Blockchain, the ledger. The entity that can move that bitcoin from one address to another, is the entity that has the private key to the address where the bitcoin is. The user does not have the private key, the exchange does! It is THEIR bitcoin. The bitcoin belongs to whoever has the private key. This is crucial to understand, and explained more here.
The exchange just has a legal agreement that it belongs to the user, and they show the user his/her balance on their web page, under the user account. The user just has a login name and password. Not a private key.
A little sinister trick that blockchain.com employs is a 24-word password to log in to the website. This LOOKS like a bitcoin private key, but it is not. It is just a website-password. Blockchain.com has the private key. This is quite misleading, and confuses beginners as to the true nature of how Bitcoin works.
Many exchanges have been hacked, and coins have been stolen from those exchanges, and therefore, users:
- Mt Gox is the first and most famous.
- Quadriga CX, a Canadian exchange went bust after the CEO, the only person in the company with access to the private keys (allegedly), died while on a trip to India (body not found, I recall). The users lost all their bitcoin.
- Cryptopia, an exchange in New Zealand. They got hacked and users lost their funds.
- Binance. $30 million worth of Bitcoin was stolen, but Binance was wealthy enough to make their users whole. Embarrassingly, the CEO called for a rollback of the Bitcoin Blockchain to recover lost funds, but was laughed out of town.
- Most recently to my knowledge, the CEO of a Turkish exchange fled the country with $2 Billion worth of Bitcoin.
- There have been many others that I have not even heard about.
There is no way to tell if an exchange really got hacked or if it was an inside job from a rogue employee(s). The bottom line is if they hold your bitcoin, you are trusting them to act honestly, and safely.
You might not trust yourself with self-custody. That is understandable. It is your responsibility then to find a company you can trust, or educate yourself to self custody. Most early Bitcoiners will have a lot of bitcoin, relatively speaking. They must step up and look after their coins. The ones that come into Bitcoin last will have the least coin, and possibly be the laziest. They can store small change on exchanges and it won’t matter too much. But you, you are early, you must take responsibility. All the information is available online and free.
#3 – If coins are left on the exchange, they can engage in fractional reserve lending, inflating the supply of bitcoin. If there is a mass withdrawal by the public (Jan 3 – proof of keys day), exchanges can (and have) gone bust, because they don’t have the coins that were promised. Coins go bye-bye.
Fractional reserve is the fraudulent practice (common and legal in banking) for accepting a deposit, and then lending it out, BUT, the depositor is given the illusion that his/her money is still available. If one bitcoin is deposited, and then it is loaned out, the depositor should not have access – similar to a term deposit. This would be full reserve, or 1-to-1 banking.
If the depositor requests their funds, then what is given is another depositor’s funds instead, and no one is hurt. But if many people want their funds at once, then the obligations can not be fulfilled.
This practice not only inflates the supply of money, but is a systemic risk.
By withdrawing your coins, you eliminate the risk to you of a Bitcoin “bank” run.
Trace Mayer, a once loved Bitcoiner who popularised the notion of “network effects” of Bitcoin, now fallen from grace for pushing a scamcoin, started “Proof-of-Keys” Day, on the anniversary of the first Bitcoin block, January 3. It started a movement where Bitcoin users celebrate by withdrawing all their coins from exchanges all at the same time, putting stress on the system, to keep them honest. One exchange fell to this (I forgot which).
#4 – One day governments may outlaw withdrawals to private wallets, and your coins will be stuck, and not valuable. The real Bitcoin Economy (the 15 million coins OUTSIDE exchanges) will be part of the peer-2-peer market, and coins inside exchanges will be useless.
I am fully expecting governments to make it extremely difficult, or outright ban, coins from leaving exchanges into private wallets. We will fight back, no doubt, and the effort by governments will be futile. Most of the bitcoins are not on exchanges. Most have been mined. My estimate is about 2 million coins of the 18.5 million mined are on exchanges.
Bitcoin’s future is a peer-to-peer money, with most payments made by Lightning. Coins on an exchange can not serve this function. Exchange coins will always have a middle man, that you will require permission from to make payments.
Coins stuck on the exchange due to laws, can not be used as Bitcoin is intended, and they will be less valuable. If I am to offer a service, and charge bitcoin, I will ONLY accept real bitcoin to my private wallet. I would not take payment with trapped bitcoin from an exchange to my own exchange wallet – and I will not be alone. Therefore, there will emerge a price difference between the two types of bitcoins.
I don’t think this futile attack is likely to happen, but it is a risk. It’s better to be on the favourable side.
#5 – Powerful people who want Bitcoin to fail may be naked shorting it on futures markets (my opinion). If we, The Resistance, buy bitcoin and extract it from the trading pool, we will eventually enforce a decoupling of the price of paper bitcoin vs physical bitcoin.
We are fighting the people who print fiat. It’s easy for them to naked short Bitcoin and suppress the price because they can print money, and therefore have no real risk. Well, actually there is the risk that they need to print so much they will destroy their currency fighting Bitcoin, but it’s unlikely it would come to that. They would be likely to be successful at spooking the majority of people and keeping the price low, if they tried.
Here’s why they’ll fail: There is an army of Bitcoiners, true believers, who are regularly buying bitcoin, and withdrawing coins from exchanges. Most of the coins are off exchanges already. The cheaper the price gets, the more bitcoin that would be removed from exchanges with the money that is flowing in from these people.
The coins on exchanges are being replenished by miners. Currently, an average maximum of 900 bitcoin per day flows into exchanges for sale. When HODLers remove 900 bitcoin a day on average, the price is relatively steady. Wild fluctuations in price can happen despite this, as traders buy and sell coins between each other. As more and more coins are removed, and as mining supply diminishes (halves every 4 years), there will come a point when not enough bitcoin is available. This will cause a decoupling of the paper price of Bitcoin (on the futures market) and real bitcoin that is demanded by HODLers or merchants.
Be a part of the army to bring this day forward, and make Bitcoin successful sooner. Regularly stack bitcoin (Dollar Cost Average), and remove the coins from the exchange.
#6 Unless you take coins into your own custody, you will never fully appreciate how Bitcoin works
If you don’t appreciate it, you won’t buy enough of it, and this you will regret.
You will need to learn more about storage, see here, and run a node, see here. This will also blow your mind and get you closer to the truth of how amazing this technology is. You might even start using Lightning, and be totally obsessed. In a good way.
Your #Bitcoin address on the exchange is not YOUR address. It's the exchange's address which they made with their private key.— Parman ⚡⚡ Bitcoin Private Key Whisperer #810 (@parman_the) April 30, 2022
If you want the bitcoin in that address, you must make your own private key (BlueWallet is good), it makes an address(es) and you request payment to…
not yo keys— Jameson Lopp (@lopp) May 14, 2022
not yo cheese pic.twitter.com/jZKGcjkIPR
If you buy gold, would you be happy to never see the gold? Just let the gold broker send you a photo of it?— Parman ⚡⚡ Bitcoin Private Key Whisperer #810 (@parman_the) July 8, 2022
When you buy #bitcoin and leave it with the exchange, that's what you're doing.
On-chain or Lightning