Why Bitcoin Supporters Hosted a ‘Banking Race’ on Crypto Exchanges

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The winter holiday season may have just come to an end, but Bitcoin proponents had another curious tradition to carry out. On Tuesday, they celebrated a once-in-a-lifetime grassroots party known as “Proof of Keys,” started in 2019 by Bitcoin entrepreneur Trace Meyer.

In an experience that roughly mirrors a bank run, the community uses the day to encourage fellow Bitcoiners to withdraw their Bitcoin from exchanges and other third-party services so they can gain full ownership of their assets. The date was specifically chosen since it is the date of Bitcoin’s “genesis block”, the first Bitcoin block ever mined, in 2009.

The philosophy of the day is simple: Lots of people leave their Bitcoin (and other cryptocurrencies) on exchanges. But in doing so, they do not take full control of their funds. Instead, they trust the exchange.

“Not your keys, not your coins,” as the common industry refrain goes. (Or sometimes “not your keys, not your cheese.”)

As the recent FTX calamity showed, third parties cannot always be trusted. FTX has lost billions of dollars from cryptocurrency users and users of the exchange are unsure if they will ever get their money back.

“Everyone should take advantage of Bitcoin’s most important property, self-custody! [January] The 3rd became a ‘Bitcoin holiday’ when we remembered this important effort together,” Coinkite CEO and co-founder Rodolfo Novak said in an email to Decrypt.

He added that “self-custody has become so easy, no one has an excuse now”, pointing to hardware wallets (like his company’s COLDCARD), as a secure way to self-store funds. without the need for an exchange or other third party. .

To keep yourself or not to keep yourself

A “bank run” brings to mind the thought of the Great Depression, when many worried people lined up at their bank to withdraw their funds, fearing that their bank was not solvent.

The evidence of the keys wasn’t as dramatic. But it’s a similar idea. Browsing through Twitter, a number of users claimed to have withdrawn their funds from exchanges or set up new hardware wallets to secure their coins.

Hardware startup Foundation, self-preservation startup Casa and others have hosted Twitter spaces giving advice on how to get started with self-preservation funds in the safest way. A key recommendation was to store funds on a hardware wallet disconnected from the internet so it could not be hacked remotely.

But most of the discussion revolved around what users shouldn’t do. Novak warned against storing seed phrases in the cloud. Unchained’s vice president of business development, Justine Harper, said user error and over-complicating things were two of the main reasons she’s seen people lose funds through self-custody.

For example, a user might read something on Twitter about a more complicated self-guard mechanism, but that would be too complicated a setup for them, the user would mess something up and lose their money.

Such an example is reminiscent of equity risks. Namely, losing the Bitcoin keys (which basically work like a password) means losing the Bitcoin, forever. Just before the Proof of Keys “holiday,” veteran Bitcoin Core developer Luke Dashjr reported on Twitter that he had lost millions of Bitcoin dollars in a hack.

PSA: My PGP key is compromised, and at least a lot of my bitcoins have been stolen. I have no idea how. Help me please. #Bitcoins

@[email protected] on Mastodon (@LukeDashjr) January 1, 2023

Some have argued that if a long-time Bitcoin developer Dashjr can’t even manage to keep his Bitcoin himself, then the average Joe has no hope.

Dashjr has yet to fully explain how he secures his Bitcoin. But from what he shared, Dashjr may not have had the best setup. His funds could have been in a hot wallet connected to the Internet. This is discouraged by industry security experts.

As former Bitcoin Core contributor and maintainer Jonas Schnelli said, “Over-engineering and paranoid levels of complexity can lead to vulnerabilities. KISS your keys,” citing the acronym for “Keep It Simple, Stupid.”

This shows the importance of securely using standard bitcoin best practices. For those who want to participate, Decrypt offers a high-level guide explaining how to transfer funds in self-custody. In short, the industry standard has become the storage of funds on hardware wallets, as they are detached from the internet and cannot be hacked remotely.

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