In our piece on reeling in the bitcoin years we noted a number of incidents over the years which led to theft and loss of Bitcoin. Similar thefts of money and assets such as gold, art work and diamonds have occurred over time, there is a risk associated with not properly protecting any asset and in particular, Bitcoin.
A brief look at the history of digital assets reveals why it is dangerous to leave funds on an exchange. Since 2011, over $1.65 billion worth of digital assets have been stolen, and this number continues to increase.
Keeping Bitcoin on an exchange comes with added risks, deciding to leave it there for the long term is not a good idea and this piece will outline why.
Exchanges.
Exchanges have been known to mismanage, lose, and even participate in a style of fractional reserve banking. Fractional reserve banking is a system in which only a fraction of deposits are required to be available for withdrawal. Exchanges are overestimating how much Bitcoin they actually hold in reserve and some have been known to use customer deposits for unethical intent.
The now collapsed exchange, FTX was guilty of such practices and in November 2022 they filed for bankruptcy due to a surge of customer withdrawals in which the company did not have sufficient assets in reserve to meet these requests. A run was also made on the exchange by customers trying to take self-custody of their Bitcoin assets which was too late for many. The importance of avoiding this cannot be underestimated and is essential with holding such a valuable asset. Florin21 can assist with this process, guiding you through the process from purchase to protection.
Adding to these concerns, there is also the issue of hackers gaining access to exchanges. The Mt. Gox exchange was oblivious of ongoing hacks that lasted for more than two years while the exchange lost 650,000 BTC.
Regardless of all the security measures that exchanges employ, it’s still risky to trust them to hold your asset. No platform is hackproof, and issues can occur at any stage. Therefore, it is essential that Bitcoin is taken into self custody with the highest level of protection against theft and loss of the asset.
Self-custody via a non custodial wallet is the practice of removing your Bitcoin from an exchange or another third party storage platform and storing it yourself. This is seen as ‘best practice’ and ensures you have complete control over Bitcoin ensuring no other person has access.
Why is self-custody so important?
When something you own is in the possession of others this would mean you do not have control over whatever that may be. It could be sold without your knowledge, used for purposes of which you do not know or indeed lost.
Taking gold as an example, many countries around the world do not have custody of their entire reserves, one example is the Federal Reserve Gold Vault in New York which acts, on behalf of account holders as the guardian and custodian of the gold in its vaults. These account holders according to the NY Federal Reserve include the U.S. government, foreign governments, other central banks, and official international organisations.
According to Forbes, the Federal Reserve Bank of New York is the world’s largest known stockpile of gold, with in the region of 550,000 bullion bars stored in its Manhattan vaults. Of this estimated $203.3 billion worth of gold it is believed only 2% to 5% of it is owned by the U.S. government, the rest is owned by foreign countries.
This system is very much run on a trust basis as nations participating in this method of storage do not have direct control over their gold. This exposes nation states to risk of theft or loss of the asset and their access to the gold may be limited during times of need e.g. financial crisis. As a result, it is generally considered to be a good practice for nations to store their gold reserves in their own country, where they can be more easily controlled and protected.
The same applies to private individuals who are issued ‘paper gold’ or a promise of gold which is held by a trusted third party- a similar model to that of an exchange holding Bitcoin in a customer’s account. When you self-custody your Bitcoin, you are the only one who has access to the private keys that control your coins. This makes it much more difficult for someone to gain access to your Bitcoin.
Risk of loss.
To date, according to Chainalysis, it is estimated 25% of bitcoins are believed to be lost forever. An estimated 70% of those Bitcoins come from early investors and miners. Most of these coins were not properly stored. An early enthusiast from the UK lost in the region of 8,000 which the Guardian suggest were stored on a laptop that was discarded and eventually ended up buried in a dump. These coins cannot be recovered unless the hardware is found. Florin21 provide protection against hardware loss and failure to help recover coins in such situations.
Of course, there are also some risks associated with self-custody. If you lose your private keys, you will lose access to your Bitcoin. It is also important to store your private keys in a safe and secure place, as without proper protection they can be stolen and used to remove your Bitcoin. At Florin21, we provide a range of solutions which will suit your needs and maximise security against such events.
We highly recommend self-custody of Bitcoin no matter how small an amount it may be. In the case of a substantial amount of Bitcoin, it is vital that these are under self-custody with the correct procedures in place. With a larger and more significant amount we provide even greater methods of security and self-custody which we help to put in place with you ensuring best practices as you move forward.
In the words of Bitcoin advocate, tech entrepreneur and author, Andreas M. Antonopoulos:
‘Not your keys, not your Bitcoin.’
