Is “take your bitcoins off exchanges” advice pertinent?

We are going through tough times. So, now is the best moment to think about investing instead of running around like headless chickens on account of a harsh 2022 bear market. 

Most of the crypto influencers and financial gurus who praised the growth of FTX and its genius CEO, Sam Bankman-Fried, are the people not to listen to anymore. You are alone and you must Do Your Own Research (DYOR) before investing in the crypto space. You might have lost money because of them, and for that, I am sorry.

In the current economic context where the explosion of all speculative bubbles is feared, it is important to understand what is upsetting the small world of cryptocurrencies, and to identify the two antagonistic tendencies that are fighting for the future of crypto.

“Take your bitcoins off exchanges”

Let's get to the heart of the matter: libertarians hate intermediaries and third parties. They are the promoters of a tax-free political system where the state is reduced to its bare minimum (army and police). And the most radical among them advocate replacing the police with self-defense and the use of firearms held by citizens. When it comes to bitcoin, they recommend keeping the coins you own in cold storage and never using centralized exchanges.

They also praise the statement: “Not your keys, not your coins". They refer to the fact that when you give your crypto assets to a banking or financial institution, or any other custodial third party, the money (or whichever assets you give them) are technically an "IOU”. In other words, you are no longer the owner of your assets. From a technical point of view, they are right. The only way to keep your bitcoins safe is to put them into a cold storage device where no one can confiscate them (you control the private key. That is to say, you have full control over them: your keys, your coins).

Not sure what we are talking about…

Now, let's study the limits of this reasoning. The price of bitcoin is so high (even today, amid a harsh bear market) because a large majority of bitcoiners keep them in their wallets; they “Hodl” (Not a typo, just jargon).

In 2022, 60% of all bitcoins in circulation have not changed hands. The bitcoiners are waiting. But what exactly are they waiting for? That's an excellent question. Unfortunately, the answer is quite unsettling.

What are they waiting for? Is it a financial remake of Waiting for Godot? Well, they wait for the value of bitcoin to reach $100,000 or 1 million dollars before reselling it or asking for bitcoin backed loans. Let's imagine that bitcoin reaches 1 million by 2032. What would you do if you owned a bitcoin? There are several possible answers. Let's analyze them.

First possible outcome. In 2032 the global economy will certainly have evolved, but it is more likely that its structures will still be dependent on dollars and oil. What will you do if you still defend the mantra: “Not your key, not your coins”? Will you refuse to use this one-million-dollar bitcoin because you must go to an exchange? How could you sell it otherwise? Will you keep it in cold storage? In this case, you will remain a wage labor slave all your life. In an economy which is still based on the dollar, the Huan or any other fiat currency, you will have to go to a regulated and centralized entity to get your money.

Second possible outcome. You decide to wait until 2040 or 2052 and bitcoin is now so huge that it has become the world reserve currency. You are a billionaire. The lightning network replaced the banking system, and you can use bitcoin as a unit of exchange. Wait a minute! If you are one of the lucky guys owning a bitcoin (Only 21 million units, 10 billion people on Earth), it would be silly to sell even a single Satoshi. Picture it as gold 2.0. You would consider it a hard asset and you will be able to get bitcoin backed loans and live for free. Err… don’t forget that the market will also be highly regulated.

Getting a bitcoin backed loan means that you would go through a regulated, centralized institution. Back to square one. You could argue that all the exchanges will be decentralized, but we know as a matter of fact that the term “Decentralized Exchange” is an oxymoron. Smart contracts and stablecoins can’t be fully decentralized (unless we create an AI. In this case, we will be its slaves and bitcoin will be either destroyed or controlled by it). 

Third possible outcome. Today, you are an entrepreneur, and you want to do business with your bitcoins. The best way to grow the value of your coins is to lend them, stack, or apply for bitcoin back loans to buy more of them. All these activities are regulated and are controlled by third parties.

Fourth possible outcome. Running your own node. A bitcoin node is like a special bitcoin software with which you can store, validate, and distribute the bitcoin ledger, on a Peer-to-Peer fashion, to other nodes (no third parties involved as long as your transactions are on-chain). In other words, a full node is what the miners use to earn bitcoins. You can run it on your laptop or on a PC.

In each of these cases, if you want to sell or trade your coins, you must go through third parties.

What to do with bitcoin?

Does this mean that the people who defend the mantra: "Not your keys, not your coins" do not know exactly what they are talking about? The answer is complex but it is not impossible to structure, and is somehow surprising.

This mantra is true today in a world where bitcoin is at $17,000. Most of the ecosystem is unregulated and scams such as FTX are happening on a yearly basis. It is therefore normal to be suspicious. But where to draw the line between suspicion and paranoia?

What do bitcoiners want? What do they expect from bitcoin? Let's look at the medium, long term. It seems that most of them project the advent of this new paradigm on a horizon of pure freedom. Historians, sociologists, and philosophers know that this is a form of idealism. It is also to be deplored that those who only have the word “Freedom” in mind are singularly lacking in instinct because they do not associate it with the concept of equality. The omission of this obvious connection is a symptom of the individualistic ideology that underlies the ultimately unviable world of libertarian bitcoiners.

Paradoxically, this connection exists at the level of nations. El Salvador, a country that became famous for adopting bitcoin as a legal tender, is an example. Soon, other less developed countries will follow suit. On the international level, bitcoin is indeed a factor of equality between peoples because thanks to this new asset class, states can access a level of monetary independence that was unthinkable five years ago. These nations can hope to attain independence from the rich countries which traditionally control their sovereignty and resources through debt and dollar supremacy.

So, against all odds, it is nations (rather than bitcoin “hodlers”) that will produce moral conduct in the world of bitcoin trying to maintain the precarious balance between freedom and equality. This philosophical and moral struggle is no longer in the realm of utopia and idealism, and instead opens the way to a normalization of bitcoin within the financial and social systems of our economies.

The meaning of bitcoin

Bitcoin is just a hard asset – a new asset class, and possibly the best invented – but it is not the solution to every problem on Earth. For instance, it will never be the unique form of money in a future worldwide economy. The most probable is that it will be integrated into our value conservation systems, controlled, and regulated by national and international institutions.

Far from any idealism, it will allow less economically developed nations to organize their own progress with a certain freedom which they have not previously had. As for the mantra "not your keys, not your coins", it will continue to be a technical truth. But in order to be able to evolve, individuals and companies will have to do what they have always done up to now: carry out a risk assessment.

In sum, bitcoin holders are right to be cautious and reluctant to put their coins on centralized exchanges. It is fine for the time being, but what if bitcoin reaches 200,000 dollars? How will they get money from their BTCs?

Bitcoiners also make a mistake when they think that bitcoin will be the only currency of the future. It is likely to be the new world reserve currency, and, in that case, it will be stupid to sell even a single Satoshi.