Nowadays, bitcoin has turned into a fashionable asset that traditional financial institutions make available to their clients. As of May 5th 2021, block height 682078, we have companies like Robinhood, PayPal, Revolut, and even regular banks which allow their customers to purchase bitcoin amounts. And according to recent news, “hundreds of US banks” are about to add bitcoin custody services.
Lots of people might argue that this is great for BTC adoption, since financial services that people have been using for years are now enabling the purchase and sale of sound money. But the argument which I’m going to present in this article is that, beyond the “not your keys, not your bitcoin” mantra, there is no way to prove that the financial institution actually owns the bitcoins that you buy.
In the case of fiat, you can always withdraw the money from your account. You go to an ATM, you insert your card and type your PIN, and then select the amount that you want to take out. But even in this scenario in which you can withdraw your money, it doesn’t mean that everyone else can. All of today’s banks use fractional reserves – so at any given time, there is only enough money available to support the bank run of a certain number of customers. If you deposit a lot of money, it’s likely that the withdrawal will get slow and burdensome.
But regardless of your financial situation, you are legally eligible to take your money out and use it for whichever purpose you deem worthy.
Theoretically, Bitcoin should fix all of these issues by offering a more transparent system. You know that the money is yours because you verify it with your full node. And when you want to spend your UTXOs, you don’t need anyone’s permission to proceed. You are your own bank and this is meant to be an integral part of your financial soverignty.
Unfortunately, it gets nasty when third parties from traditional finance get involved. Not only that they are accustomed to fractional reserve banking, but there is no authority to impose that they hold bitcoin reserves for all the units they are selling. We can end up with the artificial inflation paradox that I previously described in my article about ETFs: people buy and sell bitcoins that can’t be verified on the public blockchain, and for which there is no proof that they even exists. What prevents these companies from effectively inflating the bitcoin supply though a legal and institutional sale of unbacked assets?
It’s unlikely that there will ever be an audit of bitcoin reserves and verification of users’ accounts. And even if there is, these companies can operate without actually buying a corresponding about of BTC whenever a customer trades fiat currency for bitcoin on their platform.
So if you own bitcoins on PayPal, Revolut, Robinhood, or any other financial service that doesn’t let you withdraw, for the sake of your financial sovereignty, you should sell the coins for fiat and then transfer the money to an exchange that lets you withdraw the verifiably-real BTC. As long as you pay the same price as everyone else, you don’t want to get the shorter end of the stick and effectively get deemed a second class user.
Which exchange should you use? Well, I’d personally recommend you P2P ones like Bisq and HodlHodl. But if you want to take the centralized route, Kraken and Bitfinex are some of the oldest and most bitcoin-friendly choices on the market (I’m not getting paid to promote either and have no ref links).
After you’ve made the purchase of verifiably real and scarce BTC, take a look at the network fees, determine your time preference, and withdraw the coins to your own wallet. For extra privacy, you can CoinJoin with Wasabi and break the link between the exchange and your new wallet. And if you’re looking for better ways to secure your coins, get an open source hardware wallet like the Trezor, the BitBox02, or the Coldcard.
Just stop gambling money on companies that won’t even prove that your bitcoins were mined and exist in one of their wallets. It’s anti-BTC and against the principles of individual financial sovereignty.
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