Custody problem solved: centralized and insured

[PERtua]

I believe the key question is what is being insured and the word insurance is still a comforting word. Not all customers' Bitcoins are necessarily covered by an exchange with an insurance policy. Coverage, exclusions. Limits and who's covered by the policy are important. There's also a distinction between insurance in case of a security compromise versus insurance in case of insolvency or fraud. For me it's not just self custody vs insured custody. Whether the custodian can demonstrate its reserves, separation of customer assets. Security measures and the extent of coverage under its existing insurance plan. Those details may be more important than the term insured.

[legiteum]

And this has not just been due to their own direct actions, but the failure of self-custody products are well.

This is misleading.
Most of the money lose throug self custody are due to the direct action, or inaction, of the person. Only a few of them have been a result of the self custody product, like the ColdCard case.

I think the very sentence you quoted there made the point clear. I assume the majority of losses due to self-custody are from and individual's theft or mistake. I didn't imply that products are the main culprit.

I wish I was making this up, but just yesterday, my dad called me, and he was with my younger sister. They complained about how $500 was withdrawn from my sister's account as far back as March of this year, and she had no idea that kind of transaction took place. She wouldn't have known this if she had not requested the statement of account. The bank is claiming she made the transaction and has refused to show further proof.
Now there is going to be a lot of back and forth with the bank if that money is to be recovered.

Now imagine this was a large sum.

If it was a large sum then they wouldn't try it because they know it would lead to costly litigation.

Of course solving this problem would involve the legislation championed by a certain crypto boogieman ("boogiewoman"?) named Elizabeth Warren, who gave individual consumers power to fight back against small-dollar infractions like this. For a while US consumers had real recourse when banks pulled stuff like that, but Trump and the Republicans rolled it all back and if you get a mystery fee of $30 on your next bill there's not a thing you can do about it.

(Of course in the absolutely unregulated world of crypto, you have even less recourse).

My point is, don't make it seem like once your funds are insured, you have nothing to worry about.

Insurance isn't a panacea, but it reduces stress by quite a bit.

[Outhue]

OP are you from a developing country? Because insurance companies in developing countries operates differently, they are more corrupt than those in the western worlds, I've heard alot about insurance frauds and schemes in America alone but do not compare to those in developing country, they are more gruesome and bloody.

Also going for insurance protection means exiting crypto space completely, no insurance company what to insured Bitcoin or crypto here probably because of it's volatility and other, but that's not even why I would worry the most, insurance company knowing that you have Bitcoin is not safe, do you know how many people have been killed by insurance company so that they can take over their belongings?in my country the number is high.

[legiteum]

OP are you from a developing country? Because insurance companies in developing countries operates differently, they are more corrupt than those in the western worlds, I've heard alot about insurance frauds and schemes in America alone but do not compare to those in developing country, they are more gruesome and bloody.

Nope, I'm from the USA, where we supply about 99% of Bitcoin's market cap with our consumer's investments .

I agree that developing countries have a different set of realities, and Bitcoin can be an escape from that. But if that's the only true use case for Bitcoin, it's a pretty narrow one from the standpoint of investment.

Don't get me wrong, I'm glad you have at least something that will make your life a little easier in the face of a terrible situation.

[OsaiEmma]

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.

What you've said is mostly right, but there's a nuance. Self-custody isn't often necessarily to eliminate security risk in terms of hacks and all; it is also to eliminate unnecessary exposure of your wealth to this risk.

CEXs are usually a hot target to hackers. Putting your funds in such a pool that is often targeted sounds a bit unreasonable and risky compared to practicing self-custody.

[Comeacross]

Wow! This is just a long for nothing thread. I can see that your goal is just to promote centralized exchanges but I don't know what you're going to gain.

It baffles me how you still think the exchanges are the best solution to custody after several stories we have read here. Are we that daft to forget so soon what happened to FTX, Mt Gox, Bybit, Kucoin etc? You still want to encourage people to handover their coins to these platforms and rely on insurance to come and safe them if things gone wrong? You must be joking.

Insurance have limits too. They operate under policy, they don't just cover all risk the way you think. There is no magic they can perform without going bankrupt too if they want to cover every risk. People use both banks and CEX for convenient, not because they are better.

[legiteum]

Wow! This is just a long for nothing thread. I can see that your goal is just to promote centralized exchanges but I don't know what you're going to gain.

It baffles me how you still think the exchanges are the best solution to custody after several stories we have read here. Are we that daft to forget so soon what happened to FTX, Mt Gox, Bybit, Kucoin etc? You still want to encourage people to handover their coins to these platforms and rely on insurance to come and safe them if things gone wrong? You must be joking.

Again, for every anecdotal failure you can bring up about these new and untested companies that caused losses, there are 1000 instances of people losing their self-custody crypto by misplacing it or it being stolen or them being killed over it.

Insurance have limits too. They operate under policy, they don't just cover all risk the way you think. There is no magic they can perform without going bankrupt too if they want to cover every risk. People use both banks and CEX for convenient, not because they are better.

LOL, people use cars for convenience as well. Just because it is far better than walking 20 miles a day to work doesn't make them better!   

But yes, insurance can also fail after the CEX fails. There is no "perfect" solution. My advocacy is more about leveraging help from specialists in society to make your life better. Doing everything yourself is less advantageous no matter what the endeavor. If you have a disease, go to the doctor. If there is crime in your location, support the police. If your car breaks down, go to the mechanic. If you are hungry, go to a grocery store and buy food--don't try to grow everything yourself in your back yard.

And all the while do what you are uniquely good at, and enjoy doing.

This is how this thing we invested a few thousand years ago called, "civilization" works. 

[PVequalNRT]

I believe the key question is what is being insured and the word insurance is still a comforting word. Not all customers' Bitcoins are necessarily covered by an exchange with an insurance policy. Coverage, exclusions. Limits and who's covered by the policy are important. There's also a distinction between insurance in case of a security compromise versus insurance in case of insolvency or fraud. For me it's not just self custody vs insured custody. Whether the custodian can demonstrate its reserves, separation of customer assets. Security measures and the extent of coverage under its existing insurance plan. Those details may be more important than the term insured.

There is no centralized that has mentioned that customers Bitcoin are insured, none of that was promised, it's not in their terms and conditions, if you make deposit because of that be ready to deal with what comes later. If you look at the exchanges, they have large reserve of Bitcoin, how do you expect them to have such amounts of money and it's not like there is regulations that controls.

Assuming there is a regulation that controls exchanges like the banks, must of the exchanges that are live today might be there because before they open, insurance must be provided before they open an exchange for people to use.

[hadesdex]

The part of the proposal that never survives contact with reality is the insurance. Ask what the policy actually pays on: exchange hacks, maybe. Exchange insolvency, no. And insolvency is how most custodial failures actually end - the coins were not stolen, they were never fully there (Mt. Gox, FTX). No commercial insurer will underwrite 'the custodian lied about its reserves'. What you get is coverage for the rare failure mode and a fine-print exclusion for the common one.

There is also a distributional point the OP skips. Self-custody losses from forgotten seeds or bad products are individual and usually partial; custodial failures are all-or-nothing and hit every user at once, exactly when the market is down and the custodian's own incentives are worst. A correlated total-loss tail is not the same risk as scattered individual mistakes.

If someone genuinely does not want the responsibility, the honest version of this argument is 'use a regulated ETF where custody is at least audited', not 'insured exchanges solved custody'. The first is a real trade-off people can weigh. The second is a product that has never existed.