The Unicity of Bitcoin Brings a New Paradigm of Ownership

Bitcoin is a truly unique asset.

Satoshi Nakamoto, the anonymous founder of Bitcoin, successfully resolved the problem of digital scarcity and centralisation of money. This means that for the first time in history, humans have access to a digital form of money that isn’t controlled by a central party.

Bitcoin gave us back the amazing powers of independence and financial freedom.

Great power always comes with great responsibility.

By using cryptography, Satoshi has implemented the concept of Bitcoin wallets which are specialized software implementations that give you the power of holding your own Bitcoin.

The term self-custody is used to describe the act of holding your Bitcoin by yourself and not handing out that power to a third party.

However, that means that if you don’t take care of your wallet properly, your Bitcoin can be lost or stolen forever — the cost of sovereignty is responsibility.

Bitcoin’s transactional finality makes the custodial model obsolete

The launch of Bitcoin has coincided with new business opportunities and models. The most needed one was providing secure and reliable fiat on and off ramps, also more commonly known as Bitcoin exchanges.

In order to be tradeable, liquid and easily convertible into fiat currencies, Bitcoin needed online marketplaces. The wishes of bitcoin sellers and buyers are gathered together into a common ledger called an order book. This interaction between buyers and sellers creates the fiat denominated price dynamics of Bitcoin. These kinds of Bitcoin exchanges can also be called Custodial Exchanges, which means that the exchange will hold the financial funds (both fiat and bitcoins) of their clients.

There are some blatant issues and vulnerabilities with that business model.

The custodial model reproduces the old financial model of banks where all of the clients’ money is held and controlled by a singular entity. Often these funds are held as promises with very little to back them. Many bitcoin exchanges run fraudulent fractional reserves. The problem is that you never know for sure until it’s too late. In 2013, the world’s largest bitcoin exchange, Mt. Gox, we discovered to not hold all of the bitcoin it was supposed to be holding for its clients. And in 2019, Canada’s largest bitcoin exchange, Quadriga, was discovered to be running a similar scheme defrauding many hard working Canadians who trusted them with their savings.

And this phenomenon is not unique to bitcoin. History is filled with legacy financial institutions who run fractional reserves. Satoshi said it best himself:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

Talk is Cheap, Building is Hard

All modern exchanges will repeat the mantra “Not your keys, not your coins”.

That famous expression means that if you don’t hold the private keys associated with your Bitcoin wallet, you don’t really own your Bitcoin.

We take our words seriously.

That’s why since day one, Bull Bitcoin decided to adopt a non-custodial model to force its users to self-custody by default. This is the real disruption that bitcoin offers the world — true financial disintermediation and the enabling of a strictly peer to peer money.

If you’re still holding your coins on an exchange, you should definitely read the rest of this article…

Seven Reasons Why You Should Self-custody Your Bitcoin

1. Custodial exchanges are big honey-pots and they’re constantly targeted by hackers

If you’ve been in Bitcoin long enough, you probably heard about important hacks where billions worth of Bitcoins have been stolen.

The most famous hack happened in 2014, when close to 850,000 bitcoins were supposedly hacked on a Japanese exchange called Mt. Gox.

These 850,000 bitcoins are worth close to $50 billion USD at the time of writing. Just recently, the plan to compensate Mt. Gox creditors has finally been settled, 7 years after the infamous event. However, only $9 billion will be distributed amongst the creditors.

Canada’s Bitcoin Horror Story

Canadians have also had their own exchange horror story. QuadriguaCX was one of the most popular and used Canadian custodial exchanges before its founder and CEO Gerald Cotten suddenly died in India in December 2018.

The circumstances of his death are still questioned today. The main issue was that he brought all the necessary access data and private keys of the exchange with him to his grave. As a consequence, more than $250 million worth of bitcoins and other cryptocurrencies are still inaccessible today. It was also discovered that they had been running a fraudulent fractional reserve and didn’t have nearly the amount of client bitcoin deposits they claimed to. Over 100,000 Canadians were affected, and many lost their life savings.

The story is so strange and interesting that Netflix will soon launch a documentary about it.

It Happened, and it Will Happen Again

Big hacks are less common today, but you should never put your guard down. It’s only a question of time before the next big hack strikes an exchange. Simply hoping you won’t be a victim is reckless and dangerous.

Withdraw your coins into your own wallet now because it might be too late tomorrow.

2. Your Own Self-custody Solution is Way More Secure

Some exchanges have ambiguous security measures to protect the funds of their clients. Some of them won’t even tell you how they’re keeping your coins safe. If you’re not a technical person, you cannot imagine how many possible methods exist to penetrate a custodial exchange to steal clients funds. But most importantly, an account with an exchange is much easier to hack than a private bitcoin wallet.

Check out the impressive table below to see how varied the attack methods were to hack exchanges since 2011. Some hackers are getting really creative to put their hands on some precious Bitcoin.

From Hodl to Heist: Analysis of Cyber Security Threats to Bitcoin Exchanges, a study done by Kris Oosthoek and Christian Doerr, https://www.cyber-threat-intelligence.com/publications/ICBC-2020-bitcoinexchangehacks.pdf

As you can see, when you’re entrusting an external party to custody your Bitcoin, you simply don’t have any control over it. The expertise necessary to maintain a custodial exchange is extremely advanced and it’s really difficult to evaluate if an exchange maintains high grade security standards. And that’s if they have the bitcoin in the first place!

Self-custody risks are much more manageable and less costly to fix. There is certainly a learning curve, but the actual technical skillset to securely custody your Bitcoin (even for large quantities) is quite low. In fact, it’s been our experience that the most difficult thing about bitcoin self-custody is gaining the confidence that you’re able to do it. We promise, everyone can!

3. Exchanges might not actually be holding onto your Bitcoin

The numbers that your custodial exchange is displaying in your account is just a database entry, it’s a number on your screen, it isn’t proof of anything. Just like a traditional bank account isn’t backed with actual dollar holdings by the bank, many bitcoin exchange accounts aren’t backed by actual bitcoin holdings.

When an exchange platform says that you have 5 bitcoins to your name, you don’t really have 5 bitcoins to your name. The exchange is giving you a promise to hold 5 bitcoins for you, it’s a form of an IOU. You own a bitcoin denominated liability held by a third party.

And you don’t really have any way to know if it will fulfill its promise until you actually attempt to withdraw the 5 bitcoins from your account to your own wallet.

In most modern, legitimate, custodial exchanges you will most likely receive your 5 bitcoins if you try to withdraw them from the platform. It is only at that moment that the exchange will respect and fulfill its liability to you. However, let’s think this through a bit further:

You’re probably not the only client of the exchange, which means that if all the customers of the platform wanted their bitcoins at the same time, the exchange better have full reserves of the coins, if not they will turn out to be insolvent.

A custodial exchange is as good as any other bank, they run on fractional reserves

This is similar to a Run on a Bank phenomenon. All banks function on a fractional reserve system. That means that they actually hold only a fraction of the total funds they owe to their clients. If all of their clients decided to withdraw their money at the same time, the bank would not be able to pay everybody — it would simply collapse.

A custodial exchange is basically like any other bank and it’s not a secret that they’re also likely to be running on a fractional reserve system. Once you have bitcoin sitting on a custodial exchange, it won’t simply be sitting in a vault waiting for you.

They will often leverage that money and try to make a return on it. They will assume risk for your savings that you aren’t being rewarded for except for the short-term convenience of not having to take responsibility.

Can exchanges simply prove that they’re really holding the client’s deposits they are pretending to hold?

Many have tried, but it turns out it is not that simple.

The Proof of Reserves Challenge

The idea of exchanges proving that they really hold what they should hold has been proposed a long time ago in the Bitcoin industry. This idea made itself prevalent after years of deception and financial losses.

However, even if this has been discussed for years now, a ridiculously small number of exchanges regularly conduct “Proof of Reserves” audits.

There are actually many reasons why they wouldn’t conduct this kind of audit:

Privacy and technical issues

Proving your reserves without revealing information about your customers is rather challenging from a technical point of view. Numerous developers, notably Gregory Maxwell, have tried to propose a range of cryptographic verification tools. However, none are perfect and they also pose privacy issues.

Trust issues

In most Proof of Reserves schemes, an external auditing party is employed as a source of truth and trust. That auditing party can be corrupted, misled or wrongful.

Costs issues

These kinds of audits are rather costly since you need to employ vast internal and external resources to conduct them.

Strategic issues

As an exchange, you don’t want to reveal crucial information about your business and make it public, or entice attackers to take a deeper look at your operations.

Nic Carter, a Bitcoin researcher, partner at Castle Island Ventures and cofounder of the blockchain data aggregator Coinmetrics, has been exploring the subject of Proof of Reserves for years and has been an advocate to encourage exchanges to adopt it.

You can explore the subject further and read his research by going on his website here.

You might quickly realize however that despite his efforts a small number of exchanges actually adopted this kind of measure. Check out the list below:

*PoR stands for Proof of Reserves.

Further, It’s extremely difficult to verify the liabilities of any financial institution. Ultimately you’re always placing your trust in third party audit firms (ahem Enron) and potentially corrupt regulators — remember, trusted third parties are security holes!

We’re not saying you should be worried, but yeah, you should be worried.

What is the solution?

It’s simple, have no reserves on an exchange.

The solution to the Proof of Reserves problem is having no reserves at all. Bull Bitcoin understood this early on and that’s why we decided to adopt the non-custodial model from the beginning.

Let’s further explore the problem of exchange holding onto your coins.

4. You’re Not Exposed to Confiscation

The infamous “Executive order 6102” is feared amongst Bitcoiner.

For those who don’t know, the US President, Frankling D. Roosevelt, issued the order on the 5th of April 1933.

American citizens were instructed to give out all the gold to the US government and the hoarding of gold coins, gold bullion and gold certificates was deemed illegal.

It’s rather unknown how effective that governmental measure was to seize the gold of its citizens. However, a significant number of people got prosecuted, received heavy fines or went to jail because they wanted to circumvent the law.

One thing is clear, if you were holding your gold at home, it would have been way harder for the government to seize it!

It’s a whole other story if you were holding your gold at the bank. At that time, banks were refusing gold withdrawal requests from their customers and were forcing them to convert it into dollars at the rate fixed by the government.

The parallel with today’s Bitcoin situation is clear

Nothing stops your government from executing a similar type of order and making personal ownership of Bitcoin illegal.

If you’re self-custodying your Bitcoin, chances are the government will have a hard time seizing it. It’s way easier ordering custodial exchanges to force their customers to exchange Bitcoin or seizing them totally.

If done right, nobody will know (except the people you want to know) how you are self-custodying your coins (or even if you have any).

Laws change all the time because they’re written by humans. Your private keys will last forever because they’re generated with mathematics.

5. You Can Only Preserve Your Privacy if You Self-custody

If you custody your coins on an exchange, they will know everything about your holdings and may require you to constantly prove your identity so you can have access to your funds.

Once you have your bitcoins in your own wallet, intrusive surveillance will be a thing of the past. There are numerous free and open-source tools that you can use in order to obfuscate your bitcoin transactions.

Also, by self-custodying your coins you have plausible deniability regarding your coins. Nobody can be sure if you’re still in possession of your coins from a blockchain analysis point of view.

It is also important to remain private with your bitcoins from a security point of view.

If you want to learn more about privacy implications, read the article we wrote about the subject here.

6. Nobody Can Censor You If You Self-custody

The true power of Bitcoin lies in the fact that nobody in the world can stop you from realizing a Bitcoin transaction whenever you want.

This is an incredible power in a world where financial censorship and surveillance is on the rise. When you’re holding your coins in a custodial exchange, you need to ask permission to the exchange each time you want to do something with your funds.

Remove these barriers from your money by self-custodying your Bitcoin in your own Bitcoin wallet. Be amazed each time you realize a transaction and understand that nobody in the world, no matter how powerful they are, could have stopped it.

7. Self-custodying Empowers You and Transforms You into a Sovereign Individual

Sovereignty is described as supreme authority over a territory and is a political term that entails independence and autonomy of a state from other independent states.

Bitcoin brings a new meaning to this as it significantly lowers the requirements for an entity to be considered as sovereign.

In fact, it lowers it to the smallest entity possible: the individual.

Bitcoin gives the individual sovereignty that was previously reserved for larger political bodies.

By having a form of money that is out of the control of central banks, censorship and artificial debasement, you gain significant individual financial and monetary power.

However, it is crucial to know that these characteristics are only valid if you self-custody your coins. Otherwise, custodial exchanges gain these powers over you.

A lot of Bitcoiners will testify how holding their coins brings them a sense of sovereignty and empowerment. For the last generations, humans were conditioned to believe that it was normal and desired that the government hold the complete monopoly on the production and management of money.

Removing yourself from this system by self-custodying your wealth is truly a game changer. This additional responsibility often leads to additional reflections. Perhaps, once you gain complete control over your money and wealth, you will also like to take back power in other aspects of your life.

Conclusion

It’s clear now how many advantages you gain by self-custodying your coins instead of leaving that responsibility to others.

We know that the switch can be rather difficult and stressful and that’s why Bull Bitcoin constantly develops resources and services to help you transition from one to the other in a safe and empowering way.

Don’t hesitate any longer. Every second you’re giving out the custody of your bitcoins to somebody else, you’re risking never being able to self-custody them again.

There is a ton of free information and guides to help you learn how to properly install a wallet and self-custody your coins.

However, we noticed there was a big void with regards to reliable and trusted services that help new Bitcoiners to approach self-custody the right way.

That’s why we launched Bitcoin Support by Bull Bitcoin.

It’s a complete set of self-custody tools and detailed guides, but most importantly a whole team of dedicated security and custody experts that will help you install a wallet tailored to your needs, step by step.

It’s the only service of its kind on the market. By developing this solution, we’re doubling down on our mission to provide the best and safest way to buy, sell and hold Bitcoin worldwide.

We hope to gain your trust to direct your friends and family to properly onboard them into Bitcoin, starting today!

Check the website right now with the link below!

https://www.bitcoinsupport.com/