How Not to Store Your Coins

I recently searched Devtome for some articles about Devcoin price development in the hopes that I could profit from the wisdom of those who have been around longer than me. My quest led me to this article by wiser: Will I too hoard Devcoins. He talks about price movements, his reinvestments and how he “hoards” his coins. And it seems he does the latter by sending them to an exchange and keeping them all there.

Here is my personal piece of advice on that matter: Nope. Don't do that. Abusing an exchange, or really any “service” where you are ultimately not in control of the wallet, as a means to store coins for longer periods is an absurdly bad idea.

Why, you might say, I can surely trust them. They have been around so long, nothing's gonna happen.

Wrong. While I'm relatively new to Devtome and Devcoin, I have been doing my homework on Bitcoin for a while now and my single biggest takeaway is the following: The best way to keep coins, bar none, is your very own wallet on your very own computer. The exchanges and services all die or screw up sooner or later and when they do, you better get acquainted to the idea that anything you've stored on the sinking ship is going down with it.

One of the fundamental benefits of Bitcoin and its offspring is that you don't have to entrust your wealth storage to a third party. You are in control as long as you practice good security. You don't need a bank, you are the bank. That's why banks and payment providers are so afraid of this revolution, not because they worry about your wellbeing. By keeping your stash on a platform you are effectively eradicating that benefit for the convenience of faster trades or whatever it is you hope to gain. The price for that minor convenience is that, as soon as the historical inevitable happens, your stored value goes to zero or you have to take an extreme cut if you are really lucky. It's like gambling where you repeatedly win small amounts, but when you lose, you lose it all. And you do lose sooner or later. In other words the expected long term value is zero.

Wiser also mentions in his article that he keeps his coins stored on an exchange to earn interest on them. Why do some virtual currency exchanges pay interest at all? They don't make money with coins they have stored (or at least they shouldn't), they make money with fees taken on executed trades and withdrawals. What's their incentive then to convince people to store larger amounts of coins with them than they would otherwise? I can only imagine two and both aren't very reassuring: They are either gambling with the coins or they run a fractional reserve scheme that's on really thin ice and they need more coins to keep the thing afloat. It's obvious that both are a house of cards and catastrophes waiting to happen. For that reason I trust exchanges that pay dividends on storage even less and keep the time of my risk exposure to them as short as possible.

Let'slook at some names: GLBSE, BTC-TC, Bitfunder (WeExchange), CoinLenders,, Mt. Gox right now. Those are only the big ones. I'm not even counting the likes of Trendon “Pirateat40” Shavers here. Some “services” disappear over night, some close shop on short notice causing a sharp drop of all asset values, some get robbed big time because their security squarely sucks or because they have abused the Bitcoin protocol, and some pretend to get robbed big time while their former owners sail off to their new privately owned islands.

If Cryptsy decides to disappear tomorrow, they are gone. Poof. Just like that. Houdini and the elephant couldn't hold a candle to them. And your stored coins: Gone, without recourse. Maybe they are good guys, but their security is coded by a high school dropout. When they get robbed hard, this is what you get: “Sorry, better luck next time.” And that only if they are really, really good guys. The point is that you can't know either way. was an offchain payment service with fast transactions and zero fees. Its founder TradeFortress (who also ran CoinLenders) was a well respected member of the Bitcoin community. Everything was splendid, man and nature were at peace. Then around 4,000 coins were “stolen”, while operations continued like nothing had happened. When crap hit the fan he first tried to soothe the mob with some meager pity payments and then disappeared for good. Later it came out that he had erased the posting history of his secondary accounts days before the alleged robbery and had happily accepted more deposits after the fact while pretending that everything was running smoothly. First class example of what can go wrong and what trust is worth in the realm of Bitcoin.

The reason you maybe trust a brick and mortar bank is that there are state imposed regulations meant to protect you and even then banks are not trustworthy. See the banking crisis or rather the long list of ongoing banking crises, ask a Cypriot how much he trusts his bank. Bitcoin and the whole cryptocurrency space are in their infancy right now. There are either no regulations at all in the countries many services are operating from, or the regulations are in their infancy too and will do little to actually protect anyone. In all likelihood unexpected state involvement would make matters even worse. If a government outfit, like the SEC, suddenly shuts down a platform over regulation issues, say goodbye to your coins.

There is only one entity you can trust and that is yourself. The Bitcoin technology makes it possible to eliminate the need for third party trust. Don't give that up for some gilded comfort and a variation of the gambler's fallacy.

Sure, you need to put your coins on an exchange when you want to trade them, but until you do, keep them in your wallet and most certainly don't trade with your whole coin wealth at once. When you are done trading, withdraw your coins back to your wallet. Keep your risk exposure to a minimum, don't put more trust than absolutely necessary into any service.

The bottom line is: The risk of bad things happening is always greater than zero, don't let it wipe you out when the day comes.


QR Code
QR Code how_not_to_store_your_coins (generated for current page)