Fellow humans,
Most people will end up buying or earning bitcoin. Forget my opinions at the moment, and think about how revolutions happen. The old system has flaws, somebody builds a new and better system, and the adoption rate begins growing. At first, the user-base is concentrated with specific people who have a deep understanding of both systems. Then gradually, the user-base expands to people who have less of an understanding, but are very interested, and willing to learn. Eventually, the user-base expands to a majority of the population because of momentum. Finally, we look back in history, wondering how we ever tolerated the old system!
If you’re old enough, think back to 2010 — smartphones were available, but many people were hanging onto that flip phone! As I’ve mentioned in the previous letter, human psychology doesn’t change as often as the world changes. Although new toys and tools are always becoming available, many people are content with the old stuff, because the old stuff works for a while. However, a certain factor is often overlooked — even though we might not want that new thing, we might need that new thing as the old thing becomes obsolete.
The smartphone is one example. The earlier days of the internet (90s) is another example of a time when people couldn’t imagine a life when the internet would be a necessity. The mainstream narrative was actually making a joke of the internet. My favorite clip is Bill Gates being interviewed in 1995, and David Letterman was making fun of the internet. Fast-forward to 2021, and the number one place people watch this type of content is the internet! Ironic, but makes sense, because the internet solves a lot of problems from the old system. Physical letter mail vs. email, not even a fair fight. We weren’t around during the early 1900s, but I bet people acted the same way about electricity — fearing the unknown, totally common with human psychology.
Regardless of how resistant we are towards change, we end up using these beneficial tools. The FUD eventually wears off, and everybody has their own moment of validation. When that time comes, we should be prepared and ready to roll. I can only imagine how many people were electrocuted in the past century, or lost money on the internet in the past thirty years. We won’t be able to prevent every unfortunate event, but we can try to minimize damage. If we want to use these tools to our advantage, learning to properly use them only makes sense, and the earlier — the better!
Storing bitcoin is a very important part of the process. Even if we don’t want to participate, let’s at least arm ourselves with the knowledge. Using bitcoin without understanding custody is like using the internet without understanding passwords. At the end of the day, we should do whatever we want with our money, so I’m not here to tell you what to do. I’m here to help you understand the differences between the two types of bitcoin storage. Bitcoin is stored in digital wallets, and generally the two types of bitcoin wallets are custodial and non-custodial.
Technically bitcoin is always stored on the blockchain, but for the purpose of this letter, we’ll say it’s stored in digital wallets.
Think of non-custodial like storing gold in a home safe — the gold would be under our direct protection, and we would have unrestricted access. Think of custodial like storing gold in a safety deposit box — the gold would legally be ours, but would not be under our direct protection, and we would have restricted access. A simple way to recognize the difference between custodial and non-custodial:
When we have private keys, we’re using non-custodial — high security!
When we do not have private keys, we’re using custodial — low security!
When storing bitcoin on a hardware wallet like Trezor — we have private keys, and full control, security, and unrestricted access to our bitcoin. This method allows us to take advantage of the self-sovereignty and financial freedom of using the Bitcoin network. In this scenario, we are not depending on anybody else to store our bitcoin, therefore all of the risk lies with us. If we lose access to our bitcoin for any reason, nobody to blame but ourselves. Also, this method is considered cold storage or offline, which means the bitcoin is not really accessible for hackers.
When storing bitcoin on a platform like BlockFi — we do not have private keys, full control, security, or unrestricted access to our bitcoin. Although this method does not allow us to take full advantage of the Bitcoin network, we would have other advantages — like quickly selling, trading, and buying.
Platforms/exchanges are the number one way to buy and sell bitcoin, so they are a necessary part of the process, but not the safest method for long-term storage. In this scenario, we are depending on the exchange to store our bitcoin, therefore some risk lies with the platform, and some risk lies with us. If the platform has any major issues, our bitcoin could be lost forever. If somebody hacks our individual account by stealing our username and password, our bitcoin could be lost forever. If we lose access to our bitcoin for any reason, we could blame the platform, but in reality the fault is our own. Also, this method is considered hot storage or online, which means the bitcoin is accessible for hackers.
No need to understand all of these concepts immediately, but knowing the basics before buying bitcoin is wise. I believe most people underestimate the impact Bitcoin will have on our daily lives in the near future. Just like most people want electricity, internet, and a smartphone, most people will eventually want their own stack of sats, and knowledge is power. Better to have it and not need it than need it and not have it. Preparation is key, and private keys is key.
Until next time,
Salvatore Norge
P.S. — Watch The ₿ Word | Live with Cathie Wood, Jack Dorsey, & Elon Musk by clicking here. Was live yesterday!