Not Your Keys not Your Coins
Today we will cover another saying from the Bitcoin Space. The phrase "Not your keys not your coins" is essential to being a sovereign holder of your Bitcoin. The person who has the private key to a bitcoin is the person who is in control of the bitcoin. This is the only form of ownership which is enforced by the Bitcoin protocol and the consensus. All other scenarios in which you say that you have Bitcoin you don't really own the Bitcoin. Let's say you buy Bitcoin on an exchange and leave the Bitcoin in that account. You might have a claim to the Bitcoin through some contract that you made with the exchange. The problem is that this contract is not enforceable on the Bitcoin network. You can go through court and then let the government use force in order to get your coins but even then if they don't want to comply there will be no way to recover the funds for you.
Not owning the keys to your Bitcoin is a problem especially if you interact with untrustworthy counterparties. Numerous companies have gone bust in the Bitcoin space and large portions of the coins were gone with the failed company. Other companies were outright scams and just claimed that they have the bitcoin they promised holders. All in all you are adding counterparty risk to your Bitcoin holdings if you don't hold the keys yourself. Almost all assets have a counterparty risk but Bitcoin is designed to have no counterparty risk. It is a bearer asset which means that the person holding the keys controls the bitcoin and nobody can stop them.
Counterparty risk is an import property of Bitcoin. It enables people around the world to transact with each other without being exposed to the risk of their money suddenly being seized. Counterparty risk allows you to have your peace of mind. Nobody can take your bitcoin from you as long as you secure your private keys properly. Some people might prefer having their bitcoin with a custodian. In that case they trade the counter party risk for the risk of making a mistake themselves. Everybody has to make that decision for themselves but I would not recommend using custodians. You will most likely get handed out paper bitcoin because historically custodians have almost always done this. Paper Bitcoin means that you only have an uncovered IOU from somebody who promises you your funds in return for the IOU. In the scenario of a bank run there will be a large portion of people who will not receive their assets back. The custodian has either lent them out or used the funds in various other ways. The end result will always be the same, a large portion of the people will end up empty-handed.
Too many people using custodians also creates a bit of a systemic risk. If everyone were to use custodial solutions we would most likely end up in a situation similar to what happened to gold. Before Bitcoin gold was the hardest money known to man. Due to its physical properties gold needed an abstraction layer on top. This abstraction layer was a custodial layer. This enabled the manipulation of the money supply because only few people were using the actual physical gold but only derivatives of the gold. The gold was also easily seized. If you want to know more about gold seizing you can google "Executive Order 6102".
If 100% of people were to store their Bitcoin with custodians it would be likely that we would see some sort of large scale fractional reserve banking. This could potentially slow down the advent of a sound money standard. The banks/custodians would most likely over extend themselves and some would go bust. What would happen next is not so easy to describe. Some would say that on a long enough time horizon we would end up in a self custodial environment, this outcome is not guaranteed but it the most likely in my opinion. This only holds on a long enough time horizon because we could see a wave of manipulation and state intervention an thus more decades of a fiat standard reloaded. The mechanics here are complex and depend on several factors especially on how hostile the state is versus its people. Hence I would reserve this topic for its own blog post.
On the other hand if a significantly large enough minority of people uses Bitcoin mostly self-custodial from the get go it would act as a check on custodians. Custodians would then be forced to interact with actual bitcoin because people who use Bitcoin in self-custodial manner would only accept actual bitcoin. This would then force custodians to have a significant ratio of real Bitcoin on hand. Now their ability to just issue fake bitcoin is held back as they would have to keep a certain reserve ratio to not go bust. On this point it is also important to mention that bailouts in Bitcoin are not possible. At least not with actual bitcoin. The state could only bailout custodians with its own reserves or with paper bitcoin it creates. Both options are not sustainable in the long run if there is a significant economy using actual bitcoin.
Bitcoin gives us a chance to change from a fiat based system to a sound money system. If you don't hold your own keys you can easily loose all your funds because the custodian used your money for other things. Just google FTX, Mt. Gox, BlockFi and there are several more examples of custodians going bust because they used your bitcoin irresponsibly. Banks do the same thing but they get bailed out by governments and the central bank through printing new money. On that note remember to stay humble and stack sats self-custodial.
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