đ°Do you want a chance to win $25 in Bitcoin, paid straight into your wallet? Entry is easy so donât miss your chance to win!đ°
Life in developed countries these days is largely dominated by the financial industry. Even in the United States, which typically falls behind its peers around the globe as far as the volume of digital payments is concerned, itâs rather uncommon to see a large amount of transactions happening with physical cash. We instead rely on an ever-increasing amount of banks and fintechs to help us conduct our daily business. And the reality is that we have little option but to use their services. Good luck trying to make a purchase on Amazon or Alibaba without a bank account or credit card.
One of the primary services offered by many companies in the financial industry is that of accepting customer deposits. While we traditionally think of deposits primarily in the context of generating interest, in todayâs world of low-interest rates, that can seem far from reality. The truth is that the only worthwhile benefit received by most depositors relates to custody of their money. In other words, not having to secure or transport all of our money all the time is about as good as it gets.
That said, asset custody has a dark side: if someone else has your money, youâre at their mercy when you want to get it back. Hopefully most of us havenât had much, if any, trouble over the years withdrawing our money, but there are plenty of examples of people who did:
-
The failure of the Lehman Brothers investment bank in 2008 resulted in tens of billions of U.S. dollarsâ worth of losses for investors and creditors.
-
The Cypriot Financial Crisis of 2012-2013 resulted in portions of accounts with balances above âŹ100,000 at several large banks in the country being seized.
-
Governments around the world freeze billions in assets belonging to criminals and innocent parties alike annually.
Long story short, the benefits offered by banks and fintechs can easily be outweighed in the event your access to your funds is lost or revoked.
Bitcoin to the Rescue
Bitcoin was actually created to resolve some of the issues highlighted above as vocalized in the following quote from its pseudonymous creator, Satoshi Nakamoto:
The root problem with conventional currency is all the trust thatâs required to make it workâŠBanks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.
As a result, Bitcoin was originally created as a self-custodial asset, similar to cold hard cash. Anyone in the world can âbe their own bankâ, so to speak, and take advantage of the full capacities of the Bitcoin network without having to entrust their holdings to anyone. The majority of public cryptocurrencies have copied Bitcoinâs self-custody first approach on their respective blockchains, to the benefit of users the world over.
Enter the New (Crypto) Fintechs
That isnât to say that Bitcoin and other cryptocurrencies canât be custodied. In fact, itâs likely that most of us had our first experience with them in a custodial environment offered by cryptocurrency exchanges like Coinbase and Binance. As the industry has grown, the amount of money to be made by crypto-banks and other crypto companies has grown in tandem.
The benefits and drawbacks are largely the same when comparing custodial arrangements within the traditional and cryptocurrency spaces. Crypto companies can offer some level of security, convenience, or income to users, but also put users at risk of losing access to their funds for a variety of reasons. I personally believe that custody solutions in the cryptocurrency space are even riskier for individual users since there are limited regulations and insurance in place to deter bad actors and subsidize losses.
On top of that, itâs far more common for crypto companies to institute enterprise-wide limits on customersâ ability to access and withdraw their funds. Crypto.com, one of the largest cryptocurrency exchanges in the world by volume, provides a recent example, having suspended withdrawals for all customers earlier this week after reporting âunauthorized activityâ for a handful of users:
While some users may take comfort in the companyâs statement that âsecurity comes firstâ, their characterization of a total lockdown of customersâ access to their own funds as only an âinconvenienceâ is alarming to say the least. While Crypto.com reinstated access after less than 24 hours, there are plenty of examples of companies, like the infamous Mt. Gox, that never reinstated access at all.
The moral of this story? If you choose to entrust your holdings to a crypto company, proceed at your own risk and never deposit more than youâre willing to lose.
Like what you see, but not a subscriber yet?
Consider subscribing for:
đ§Two weekly emails on the topics of cryptocurrency and blockchain
đ°Subscriber giveaways for Bitcoin, Crypto Bestseller Books, Non-Fungible Tokens (NFTs), and more
đŁReal-time community discussions on the latest news within Crypto
Canât Get Enough Crypto In Your Life?
Consider joining my:
đ„Twitter. Where I share live news and thoughts about the goings on of the crypto-verse.
đžÂ Instagram. Where I share bytes of crypto knowledge about more topics than we can cover in a twice-weekly newsletter.
đFacebook. Where I share my latest content and engage the community on the worldâs biggest social network.
Support The HiFi Crypto Letters
Bitcoin is my passion and my mission is to give as many people as possible the chance to learn how it can change their lives for the better. If you feel like supporting that mission, a donation of any size is possible and greatly appreciated:
Blockchain Word of the Day
'
Learn more about hodling by reading Bitcoin - On the Origins of âHodlingâ
Want to learn more Blockchain words?
If you enjoyed the above article, please consider supporting me by providing a small tip at no cost to you and by subscribing to my free newsletter.
You can also take this 3-question survey to tell me how I can improve the newsletter for you.
This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.
