If your digital currency is sitting on an exchange, is it really yours?
That debate, which hits on themes central to the founding principles of Bitcoin, has been reignited after the collapse of Voyager, a crypto platform that filed for bankruptcy last week.
After a turbulent stretch for the broader crypto world, news that Voyager investors might lose their assets has further rattled the industry. As fearful investors pull back from crypto exchanges, some are falling back on one of the industry’s original mantras: “Not Your Keys, Not Your Coins.”
Despite the nostalgia around idea that investors should keep control of their digital currency, it’s not likely that the current turmoil will push the crypto world back to a simpler time, when the focus was creating a new financial system void of middlemen. While the current shake out is painful, landing hard on retail investors who plowed into the space last year when the price of Bitcoin peaked, some say it was precisely new creations like lending, staking and yield farming -- and their promise of riches -- that attracted new traders.
“For mainstream users, they're not coming in here because of the decentralization or the anonymity or the kind of the ideological agendas of people who started this movement,” said Dror Poleg, founder of Hype Free Crypto, an online education platform. “Most of the people in the last wave came for one main reason, which was financial speculation and different products that are not about anything that crypto was meant to be about to begin with.”
Original Pitch
Bitcoin was originally pitched as a way for individuals to control their money, away from third-party institutions and the whims of central banks. That decentralized vision has eroded with the industry’s expansion: As more money flooded in, a bevy of exchanges and trading platforms offering exotic ways to earn high yields have gained traction, particularly for newer investors.
Crypto investors in recent months have seen their assets disappear as several firms halted withdrawals or filed for bankruptcy. In addition to Voyager, other platforms that have trapped investor's assets on their platforms include Celsius, Babel Finance and Vauld, which also offered lending, borrowing and trading services.
The turbulence has pushed some crypto investors off exchanges and presumably into self-custody through hardware wallets. In early July, on-chain activity dropped by 13% from November’s highs -- levels last seen in the bear phases of 2018 and 2019 when Bitcoin was worth less than $10,000 -- according to a Glassnode analysis.
In some ways, crypto is being plagued by the same problems it was created to solve, said Scott Melker, crypto analyst and host of “The Wolf of All Streets” podcast.
“The major benefits to self-custody obviously are you’re opting out of potentially broken systems and your exposure to bank runs,” said Melker. “The reason that people believe in self-custody, it’s a hedge against the worst-case scenario, which we see play out all over the world on a daily basis.”
Wallets
Hardware wallets are one popular way to store crypto. The technology functions similarly to a USB key, where holders can safely store their coins and access them with a private key. The coins remain in the custody of an individual holder, instead of a third-party custodian.
Ledger, a company that develops wallets, said it has seen a sales surge during the last few months, with particularly large spikes after crypto lender Celsius froze withdrawals and again when Brian Armstrong, CEO of Coinbase, one of the largest exchanges, was forced to deny rumors that the company was going bankrupt.
2/ We have no risk of bankruptcy, however we included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties.
— Brian Armstrong - barmstrong.eth (@brian_armstrong) May 11, 2022
“It’s unfortunate, but I think people are realizing a core thing about crypto, if not self-custody, then why crypto?” said Ian Rogers, chief experience officer at Ledger. “A lot of people are finding out that it’s hard to know who to trust.”
Hardware wallets still carry risks. Investors have lost millions because they can’t remember their password or lose their private keys. And the assets don’t carry Federal Deposit Insurance Corp., which protects investors who have money in traditional banks. For many, those are reasons to stay away from the industry entirely.
“There’s a million ways you can lose your coins as a self custodian,” Melker said. “It’s very scary for most people, because it’s very daunting to become your own bank and most likely be your most viable, single point of failure.”
Cleanse
In the current market rout, exchanges have seen their balances drop more than 20% from the peak in January, according to Glassnode. Still, even as some investors show interest in wallets, the current turmoil won’t mean the end of crypto exchanges.
It’s more likely that companies including FTX and Binance, large exchanges with big balance sheets, will benefit from a “flight to quality,” according to Zachary Friedman, chief strategy officer of Secure Digital Markets.
While it’s been a rough ride for some investors, the current turbulence is a sign that the crypto world is growing up, according to Natalie Brunell, a bitcoin educator and podcast host for "Coin Stories.”
“I think ultimately it's like a healthy cleansing of this system,” she said. “It’s a good thing — it cleanses the bad projects out.”
Bloomberg News provided this article. For more articles like this please visit
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Read more articles by Misyrlena Egkolfopoulou
