Custody problem solved: centralized and insured

[legiteum]

Recently we've read a lot of stories and there has been much discussion here as well about how best to secure your investment in Bitcoin.

The stories about self-custody are not new: people have been losing their Bitcoin due to theft or accidental loss since Bitcoin began. And this has not just been due to their own direct actions, but the failure of self-custody products are well.

Self-custody has always been a bad idea for the simple reason that most people are not security experts, they do not live their lives in a high security context, and most importantly they do not want to. What good is having more money when that money diminishes your lifestyle? Living in constant fear that you may accidentally lose your life savings, or that you may be beaten or killed because of that savings is no way to live. If you have to wake up every morning and check to make sure your self-custody product(s) are still secure, your life is diminished.

This is all why almost everybody in developed countries use banks and other entities to guard their money for them. They leave the problem to experts and pay them a small fee of some kind (often just in the form of interest spread). That way the individual can live their own life comfortably, and focus on their own area of expertise.

Centralized custody, however, has its own problem: the institution can fail to protect your money. I won't rehash all of the failures, because we've read all of the stories.

There is, however, a solution to centralized custody failure: insurance.

Insurance, as a human innovation, has been around for thousands of years. Insurance basically says, "if this unusual things happens you'll pay me for my losses, an in exchange I'll pay you a little bit". The insurer, on the other hand, tries to make sure the unusual thing doesn't happen so they profit.

In the context of an entity holding your money, you want them to be insured against something unusual happening, e.g. an attack on their storage of your money. This costs more money, of course, but economies of scale mean that the cost to you will be minimal.

But the rewards to the consumer are excellent: you research an entity that has a good record of keeping people's Bitcoin secured, and you research their insurance as well: does the insurance company have the assets to cover your CEX in the event of a total loss? Does the CEX have the proper relationship with the insurance company? And is all of this properly regulated by a government to insure that you are not being defrauded. This requires some initial overhead on the individual's part, but it's a one-time expense.

Everybody wants a "set it and forget it" approach to holding your savings. We want to save, invest, profit, and then spend our money and enjoy it. We don't want to think about guarding it. There's no "perfect" solution, but the very closest thing to it that humans have created thus far is a CEX that is insured by a strong insuring entity.

[Accardo]

It makes no difference, whether the exchange is insured or not, walking upto the insurance company yourself is more ideal than relying on a centralized body. Unfortunately, some insurance company won't insure your crypto, because the price shift isn't under their control, so, you'd find yourself insuring fiat than crypto, dealing with an insurance company in summary means leaving the shores of cryptocurrency to a full fiat savings course or plan.

[DubemIfedigbo001]

Self-custody remains the best way to hold your Bitcoin, centralized platforms aren't to be trusted. People should learn to take responsibility for their finances which includes storing their seed phrases securely offline, you don't need to be a tech guru to be able to do this.
The best insurance is being in charge of your funds, access it when you want and spend it how you wish.
Bitcoin was created to eliminate the party interference, centralized platforms defeats that purpose, self-custody remains the best.

[ZeroVinsonN]

Looking back over the years and seeing the number of times some CEX more or less disappeared from the face of the earth I would say there is not even much to argue about here but the world isn't back and white so what I'm just going to say is that it self custody is what you think will be good for you are you asset then Keep it safe yourself, but if you are incapable of safeguarding your asset yourself then you can decide to leave to an insured centralized institution to hold it for you.
But about having to leave in fear of losing your coin if you are a self custodian, you could try to keep much of the fact that you are holding to yourself, at least the general amount of coin you are holding, people tend to only go for things they know they van get their hands on, if they don't even know it's there they won't come for it, CEX simply cannot offer that anonymity for your coin.

[tbct_mt2]

This is all why almost everybody in developed countries use banks and other entities to guard their money for them. They leave the problem to experts and pay them a small fee of some kind (often just in the form of interest spread). That way the individual can live their own life comfortably, and focus on their own area of expertise.

These people and companies do the same with their investment through Bitcoin Spot ETFs. They avoid to take care of their funds by themselves and want to hire someone, some companies like Bitcoin Spot ETF companies, and Coinbase as custodian to secure bitcoin. Spending money for investment but leaving the remaining tasks for Bitcoin Spot ETF companies and wallet custodial providers like Coinbase is very risky.

Centralized custody, however, has its own problem: the institution can fail to protect your money. I won't rehash all of the failures, because we've read all of the stories.

They can fail to protect user money or they scam exit or they get problems and bankrupted.

There is, however, a solution to centralized custody failure: insurance.

Banks have insurance and audits but many banks got bankruptcies so insurance and audits can  not solve the issue completely.
Choose Bitcoin, use Bitcoin self custodial wallets, be your own custodian, and secure your Bitcoin wallets and bitcoins by yourself. Get off grid from banks, you will not have any centralized issues and will not lose your money or bitcoin by trusting them.

[Ambatman]

Living in constant fear that you may accidentally lose your life savings, or that you may be beaten or killed because of that savings is no way to live. If you have to wake up every morning and check to make sure your self-custody product(s) are still secure, your life is diminished.

You don't have to live in fear of being robbed or killed if you don't announce that you have such an amount lying around with you.
Many would assume even if you wealthy that it would be in a bank except you announcing this is Bitcoin money.

Self-custody has always been a bad idea for the simple reason that most people are not security experts, they do not live their lives in a high security context, and most importantly they do not want to.

I would rather agree that Self custody is not for everyone Now
You don't have to be a security expert to own or use Bitcoin
Just have to be ready to take responsibility for your funds.

There is, however, a solution to centralized custody failure: insurance.

Oh please
I don't know how it works over there
But I know people that work in insurance company
Their job isn't really how to protect you but how to find a way to give you the least support possible.

There's no "perfect" solution, but the very closest thing to it that humans have created thus far is a CEX that is insured by a strong insuring entity.

Good luck convincing FTX customers about this.

[Livingleged]

~snip
Recently we've read a lot of stories and there has been much discussion here as well about how best to secure your investment in Bitcoin.

Reading through your post I realised you are basically trying to say we should all forget about self custody and have faith in centralised authority to help us handle our funds. Which is very wrong awareness you’re putting out there. there is No how you will want to put it that self custody will ever be less of advantage than non self custody.

I understand that the self custody also comes with challenges if you do not go through the right channels, first all you need to understand entropy and how those seed are generated on the wallet you are using. You should also go for reputable wallet that their seed phrase were generated form at least 128bit or 256 bits of entropy and I don’t think you’ll ever encounter any issues with your self custody or any form of cold storage.

But this agenda of people trusting non self custody is not what I will ever be cool with, you talk about insurance, what is the incidence have to do with loss of user data how do they get their costumers data to even repay them?.

[legiteum]

I m on the team building HadesDex, a no-KYC swap interface, so I am obviously on the self-custody side of this argument. But I would hold the position anyway: the failures that erased entire customer bases were custodial, and no insurer made those users whole.

Yes, there were a lot of failures out there, especially in the beginning of Bitcoin when the market was new, and for small companies who had not been around for very long.

Today there are many excellent companies that have been around for a long time, and have a good reputation. CoinBase is one of them, as is Binance, Robinhood, and many others. The ETFs are mostly very good since they are underwritten by big companies.

We're 17 years past MtGox, folks .

It makes no difference, whether the exchange is insured or not, walking upto the insurance company yourself is more ideal than relying on a centralized body. Unfortunately, some insurance company won't insure your crypto, because the price shift isn't under their control, so, you'd find yourself insuring fiat than crypto, dealing with an insurance company in summary means leaving the shores of cryptocurrency to a full fiat savings course or plan.

I was talking about an insured centralized custody holder e.g. CoinBase. Yes, it would be very difficult for an individual to get in insured for a lot of reasons.

There is, however, a solution to centralized custody failure: insurance.

Oh please
I don't know how it works over there
But I know people that work in insurance company
Their job isn't really how to protect you but how to find a way to give you the least support possible.

This is true for every single human on the planet being that does work for another human being for money. And yet, you buy your breakfast from a vendor who is "just in it for the money".

Maybe you want to live like the Unabomber, but 99.9% of the world's people living in developed countries do not.  

Of course if you do, then why do you dare use something as dangerous and reliant on others as... the internet?  

If you don't trust anybody, you should get off the internet because there are literally thousands of companies that are involved in making it work to the point where Bitcoin actually works.

Don't get me wrong, I understand that there are countries out there that lack the infrastructure that we have in developed countries, and then this discussion is totally different. But today most of Bitcoin's market value is based on mainstream consumer investors who live in developed countries. Take that money away and Bitcoin falls by 99%.

There's no "perfect" solution, but the very closest thing to it that humans have created thus far is a CEX that is insured by a strong insuring entity.

Good luck convincing FTX customers about this.

For every negative high-profile example of an old CEX that went down, there are a thousand cases of people who used self-custody and lost everything. And in some cases, they not only lost their Bitcoin, they lost... their lives.

[Die_empty]

Recently we've read a lot of stories and there has been much discussion here as well about how best to secure your investment in Bitcoin.

The stories about self-custody are not new: people have been losing their Bitcoin due to theft or accidental loss since Bitcoin began. And this has not just been due to their own direct actions, but the failure of self-custody products are well.

If you are careless with your exchange password, your funds can still be stolen. And insurance doesn't cover losses caused by your fault or act of carelessness. If you cannot keep a seed phrase safe, maybe you might not also keep your password safe.

Self-custody has always been a bad idea for the simple reason that most people are not security experts, they do not live their lives in a high security context, and most importantly they do not want to. What good is having more money when that money diminishes your lifestyle? Living in constant fear that you may accidentally lose your life savings, or that you may be beaten or killed because of that savings is no way to live. If you have to wake up every morning and check to make sure your self-custody product(s) are still secure, your life is diminished.

Do you really need to be an expert to use a self-custody wallet? Mastering a simple process is not too much for the benefit of controlling your money. I am even more scared to keep my money on centralized platforms where the workers have access to my information. These employees can give out customers' information to criminals.

This is all why almost everybody in developed countries use banks and other entities to guard their money for them. They leave the problem to experts and pay them a small fee of some kind (often just in the form of interest spread). That way the individual can live their own life comfortably, and focus on their own area of expertise.

Centralized custody, however, has its own problem: the institution can fail to protect your money. I won't rehash all of the failures, because we've read all of the stories.

Everyone? Do you have data to back up this claim?

There is, however, a solution to centralized custody failure: insurance.

Insurance doesn't cover loss of funds due to personal errors or if the cause of loss of funds is from the customer.

, as a human innovation, has been around for thousands of years. Insurance basically says, "if this unusual things happens you'll pay me for my losses, an in exchange I'll pay you a little bit". The insurer, on the other hand, tries to make sure the unusual thing doesn't happen so they profit.

People use cryptos because they want to avoid government control. And they are willing to pay the price of enjoying financial freedom.

[marrcelo]

The self custody gave, for the first time, the freedom of administer our own money without leave it in the hand of third parties. But, many individuals dont want assume this responsibility and prefer leave everything with third parties. Is this a good idea? Examples like FTX, Mt. Gox, QuadrigaCX, Thodex, Celsius and Network show companies that went bankrupt or whose owners stole the investors. Besides that, still exist the risk of the authoritarian State confiscate the money or devalue the purchasing power with the inflation.
The self custody has its harms, like the recent case of the Coldcard, and still is a new system that can be improved with time. But is a evil take the right of the investor of have the own money and do what want with it. For me, this is privilege and freedom, with much more benefits than harms.

[BlackHatCoiner]

This might be a good idea, but I think it largely defeats the point. And no, I don't mean that Bitcoin was designed to be self-custodied; it clearly was, but there's undeniably a market for custodying the bitcoin, just as with banks and funds.

The reason it defeats the point is that the real problem Bitcoin solves is inflation. If Bitcoin is not kept by the people themselves, and they need to trust a bank, then it allows for fractional reserve banking, and this will impact the price negatively. This is essentially what's happening with ETFs and gold. I have no doubt that the gold price would have skyrocketed if people actually custodied.

So Bitcoin will not have any tangible purpose if people will ultimately trust it to their favorite bank. The banks will just inflate the supply.

[Ruttoshi]

It doesn't make any sense to me, to put my bitcoin in the custody of a third party (exchange) it shows that it's no longer my coins and I don't have the freedom to use it whenever, I like until I take permission from a third party.

There's no difference with storing your bitcoin in a centralized exchange and keeping your money in the bank because they have full control over your funds and that defeats the purpose of creating bitcoin which is for p2p payment method. Get a noncustodial wallet and add passphrase to your seed phrase will give you the best security compared to centralized exchange.

[Alvin_talk]

From all indication, you are advocating against self custody, which means you're advocating against bitcoin. If  we allow CEX to manage all our coins today, how is that meaningfully different from the fiat banking system? The only difference will be the name, it won't solve any problem it was created for, therefore, their is a likely hood it will be devalued if we resort to this.

There is, however, a solution to centralized custody failure: insurance.

Insurance companies are not trust worthy, they will most likely milk you and offer no reasonable aid at the end of the day.

[sergiorus]

There's no "perfect" solution, but the very closest thing to it that humans have created thus far is a CEX that is insured by a strong insuring entity.

Good luck convincing FTX customers about this.

To be completely honest, FTX wasn't insured, it was incredibly shady and there was more than enough time to withdraw everything after the insolvency rumours started circulating (at least a few days).

And even then, all the creditors got their money back, although in USD at the prices after the market collapsed.

Anyway, FTX argument is not really applicable when we talk about holding funds on Coinbase or Kraken. Sudden freezing of funds, requiring a hundred of documents to prove your funds are legit, on the other hand, could be a very real problem here.

[Findingnemo]

Do we have any exchange that is fully insured for their holdings? Last time I read there is no insurance compnay is providing such service that is why exchanges created their own insurance, such as SAFU to compensate users in the event of hack, it is not perfect but it is closest thing to insurance.

However it is not a solution either, having complete control of your money comes with risks, and if someone can't handle that risks then they better stick with centralized banking system itself.

[ColdLava40]

Everybody wants a "set it and forget it" approach to holding your savings. We want to save, invest, profit, and then spend our money and enjoy it. We don't want to think about guarding it. There's no "perfect" solution, but the very closest thing to it that humans have created thus far is a CEX that is insured by a strong insuring entity.

I could have almost asked you whether you are for or against self custody, but your points are basically valid and convenient enough to start a discussion.

I understand your concern. Anyone can start thinking about this level of security because, at this point, it almost seems like self custody is no longer safe. That might make some people consider taking their chances with centralized platforms. But I think that could be even worse.

We can't allow a few incidents to completely change our view of how things work.

I would choose having control over my assets a million times over handing my coins to a third party for security. There isn't really much difference between us and them when it comes to human error. People can be careless in different ways, and that's why some end up losing their coins.

And now that we are not only talking about mistakes made by investors, I don't think CEXs are necessarily safer either.

As for insurance, I don't think we can simply assume that it will cover losses on exchanges. Even when an exchange is regulated, crypto still comes with risks that users knowingly take. An exchange may compensate users in certain situations, but that doesn't necessarily mean every loss will be covered by insurance.