A new week, a new cryptoexchange bankruptcy. This or something similar could summarize the past weeks. However, there is a good side to all this madness: People are finally dealing with self-custody and withdrawing their coins from exchanges. Therefore, this episode is entirely dedicated to the topic of self-custody: Why it is important and how you can do it without deep technical knowledge. Let’s dive in.

To briefly put the current events in perspective: The first thing to emphasize is that the Bitcoin network itself has nothing to do with all this madness. It continues to function smoothly. Moreover, Bitcoin was created in 2008 precisely against third-party risk, the risk that is now becoming more and more central to events. The second thing to take away is that it is even more important to finally store your Bitcoin, more specifically your Bitcoin private key yourself. We will discuss all of this, but one important message before we get started:

Earlier this year it was Celsius and Alex Mashinsky that blocked withdrawals for customers and never reopened until today, last week it was FTX and Sam Bankman-Fried. It is important to understand that the problem is not the Bitcoin Network, but the way many people use Bitcoin, namely with the help of third parties like exchanges or lending platforms. Moreover, the mess we see, is the very problem that Bitcoin is trying to solve: The trust we have to put up with individuals or institutions. The trust that these people and institutions abuse over and over again. Nakamoto himself described it this way:

In all cases where crypto exchanges and lending platforms have gone under, customer trust has been abused. And this is far from the first time that a large crypto exchange has gone bankrupt. In 2014 Mount Gox was by far the biggest exchange to buy and sell Bitcoin, and it went bust. Launched in 2010, it was handling over 70% of all Bitcoin transactions worldwide before it abruptly ceased operations amid revelations of its involvement in the loss/theft of hundreds of thousands of bitcoin.

With Celsius as well as FTX, this risk comes back into the main focus. The problem today, as it was then, is that central institutions and individuals cannot be trusted when it comes to storing hard-earned values. Every time it leads to the same problems: Central institutions over leverage or make a rug-pull, resulting in insolvency and lost customer funds. In fact, this is fiat mentality at heart and the root problem of all this is that we need to trust centralised institutions and individuals with our money.

Our whole fiat system is basically grounded on trust. Trust has its roots in the heart of our fiat system. The entire financial and banking system is fundamentally built on trust. It is precisely this trust that was abused in the 2008 financial crisis, as it so often was before. Had central banks not pumped billions of freshly printed money into the sector, the entire financial system, including all your bank savings, would have imploded. Trust that has been abused over and over again. Bitcoin fixes this, but how?

First things first: It is super important to distinguish between Bitcoin the network and the companies that built services on top of Bitcoin or Altcoins, i.g. the ‘Crypto industry’. Unfortunately, a lot of media lump all of this together. But, as you can see, none of this actually has anything to do with the Bitcoin Network itself, but are mistakes that are pre-programmed into our fiat system, that on the one hand requires trust from the users, and on the other hand abuses this trust again and again. In contrast: Bitcoin the network is functioning flawless, ‘tick tock, next block’. Miners are mining and validating transactions, nodes are enforcing the rules and users are transferring value. Business as usual, so to speak. But what are the main characteristics that distinguish Bitcoin from our trust-based fiat system?

Satoshi Nakamoto understood, that the root problem of our current financial system is trust in centralized institutions. He therefore coded Bitcoin to require as little trust in network participants as possible. How did he manage that? When using the Bitcoin Network, you don't have to trust any single centralized institution. All this is made possible by the timechain (colloquially called blockchain). The timechain is basically an irrevocable database that can be viewed by anyone, everywhere in the world. Due to the fact that every network participant can publicly view and control all transactions and all balances at any time, there is no need to trust anyone. This means the Bitcoin code itself, i.e. the foundation and the rules of the game, is open source and can be verified by all participants at any time. This immediately leads us to the next piece of the puzzle in the Bitcoin network.

One of the most important features of Bitcoin - and perhaps its true core innovation - is its decentralized structure. Bitcoin has no centralized control: no centralized information archive, no centralized management, and most importantly, no centralized source of error. Bitcoin miners and Bitcoin nodes are spread around the world. As Bitcoin's popularity increases, so does its decentralization. New miners and nodes are added daily, making the network even more distributed. As a result, no single entity or person can change the rules in favor of themselves or corrupt others. Quite the opposite of our traditional fiat system.

Not only has trust in institutions or individuals been eliminated, but also trust that the rules of the network cannot be changed by a single person to his or her advantage. In fact, the Bitcoin network is a true masterpiece of checks and balances, between miners who mine new Bitcoin and verify transactions and node operators who monitor and implement new rules. Because of this and the distributed nature of the network, it is very likely that in over 100 years, the same rules will still apply to the Bitcoin network as they do today, regardless of how much or fewer Bitcoin you own.

As you can see, the Bitcoin network was designed this way for the very reason to prevent the mistakes we are seeing now in the crypto industry, thus the abuse of trust. The question you should now ask yourself is how can I use Bitcoin the way it was actually anticipated by Nakamoto himself, thus without third-party trust. And the simple answer is: Self-Custody.

It’s not yours if you don’t hold your Bitcoin private key. The Bitcoin magic happens only with ‘Self-Custody’. There is no way around this topic if you are here for the long run. Besides running your own node, self-custody is the most important thing you should be working on. Because only if you have your Bitcoin key stored yourself, you can really dispose of your Bitcoin in your wallet and eliminate all the trust that is required in our fiat system. Not for nothing is one of the most popular and important phrases in the Bitcoin space:

Perhaps you have heard this slogan before. However, it is much more important that you truly understand the meaning. I try my best. Let's start with the basics of self-custody.

To participate in the Bitcoin Network you need, first and foremost, a Bitcoin wallet. You can think of a Bitcoin wallet as an electronic purse, something like your online bank account. It is the standard user interface to the bitcoin network. Digital wallets can basically be divided into custodial and noncustodial wallets, depending on who ultimately controls the purse. Most exchanges offer you a custodial wallet, with which you again have to trust the service provider with your coins. Only with a noncustodial wallet, you and only you have full control over your bitcoin associated to the wallet. You may now be wondering how to recognize a noncustodial wallet. It's very simple: Usually, with a noncustodial wallet, you have to write down 12-24 words, called the Bitcoin private key.

A Bitcoin private key is basically a randomly chosen number, often expressed in 12 or 24 words, a very complex password, so to speak. Possession and control of the private key is the basis for the user's control over all funds associated with the corresponding Bitcoin address. The private key is proof that someone has the power of disposal over the Bitcoin associated with a Bitcoin address. However, if the private key is lost, it is lost forever. No customer service, no refund! Key management is therefore key when it comes to Bitcoin custody. Broken down, it is primarily about security and the trust that one has in one's own safekeeping of one's private key. But that is exactly what Bitcoin demands of us: Taking our destiny into our own hands. And that usually starts when you get a hardware wallet (i.e. signing device).

Hardware wallets are basically devices that run a secure, standalone Bitcoin software on special hardware. They usually look like a small USB stick and are often controlled via a web browser on the computer. Since all Bitcoin-related transactions are then handled on this special hardware, these wallets are considered particularly secure.

It is important to know that you do not store Bitcoin on your hardware wallet, because they are always on the blockchain, but you store your private key, which allows you to control your Bitcoin. This also means that if your hardware wallet breaks, or you lose it, you can use the 12-24 words you physically wrote down when you set up the wallet. To restore control, you simply order a new one and type in your private bitcoin key.

One provider that I use for quite some time now and that I can recommend without reservation is the Swiss-based company Shift-Crypto, which offers a pure Bitcoin hardware wallet called Bitbox: A super simple and user-friendly hardware-wallet with open source software. Definitely take the Bitcoin only edition, less unnecessary code means more security. You will receive a step-to-step set-up tutorial with your purchased Bitbox. No deep technical knowledge needed. You can reach out if you got any questions. One more thing: Private key management.

Once you have put your hardware wallet into operation, the storage of your Bitcoin private key is of central importance. It is especially important that you store your key offline, on paper or better on something more durable like stainless steel and do not share it with anyone else. Because everyone, who is in possession of your private key, can also freely dispose of the Bitcoin associated with the Bitcoin address.

It is also very important, to speak to your closest people about the basics of self-custody and Bitcoin. Always keep in mind that someone needs to gain access over your Bitcoin once something unexpected happens to you. In addition, a very important thing to do is to write an instruction and attach it to your private key. And don't make self-custody too complicated, because otherwise there is a risk that you yourself will lose access or your closest ones will not gain access. If you did everything, and they still screw it up, always remember that:

Bitcoin knowledge is the key, not only for you, but also for those who can once take ownership of the valuable treasure. Therefore, self-custody your coins and discuss Bitcoin with your friends and family, but keep your private key a secret. Just make sure that your loved once, know what they need to do, to access your Bitcoin once you're buried under the ground.

That's it for this episode. Thanks for reading and see you hopefully in the next one. Until then, remember: "Not your keys, not your coins." ₿ critical, ₿ informed, ₿ prepared.

Stay tuned: Substack: https://carlbmenger.substack.com/ Twitter: https://twitter.com/carlbmenger