The HiFi Bitcoin Letters Joshua Guest

Dear Reader,
As many of you know, I am a huge supporter of self-custody. I’ve written an entire series of articles dedicated to helping you understand self-custody basics, and I thoroughly believe that most, if not all, of our Bitcoin should be held by us.
We won’t convince everyone though. Some people will want to use custodians for one purpose or another. For example, earlier this week I wrote about the future of Bitcoin banks and how they may contribute to rewarding Bitcoin miners as the block subsidy ends.
Not So Stable Stablecoins
In a concerning turn of events, people have used custodians and technologies over the past few years to attempt to recreate Bitcoin’s utility on other blockchains. The most popular example is “bridging” Bitcoin over to the Ethereum blockchain in order to use one’s Bitcoin within Ethereum’s DeFi ecosystem, which occurs through the use of so-called Bitcoin “stablecoins”.
Trading your Bitcoin for an Ethereum-based token opens you up to a number of different risks that simply wouldn’t exist otherwise. For example, users expose themselves to risks inherent to the Ethereum blockchain, such as centralization and censorship. Ethereum-based stablecoins also rely heavily on smart contracts, many of which are infamous for being glitchy and susceptible to hacking.
The biggest risk of course stems from the fact that most Bitcoin stablecoins require users to give their Bitcoin private keys to someone else. There are a few different ways to create a Bitcoin stablecoin, and quite frankly they leave a lot to be desired in terms of allowing you to maintain sovereignty over your Bitcoin:
Custodian-Based Stablecoins
The most popular Bitcoin stablecoin is called “Wrapped BTC” or “wBTC” for short. Wrapped BTC can only be minted by sending your Bitcoin across its native blockchain to the wallet of a custodian enabled to “mint” wBTC tokens. Once the custodian has your Bitcoin in hand, it can send the minted wBTC to you across the Ethereum blockchain.
Proponents of custodial Bitcoin stablecoins claim that all is well because public blockchains allow some visibility into the underlying smart contract. I find it hard to agree with them though. The power structures behind the “Decentralized” Autonomous Organizations (DAOs) and custodians are often opaque, and it’s hard to understand exactly what their service entails without reading the fine print and without having the ability to review and debug their smart contracts.
“Decentralized” Stablecoins
Another common type of Bitcoin-based stablecoins on Ethereum are so-called “decentralized” stablecoins. Users call them decentralized because, rather than sending your real Bitcoin to a custodian, you send them to wallets controlled by a network of signers selected at random.
Contrary to what people might think, I actually find “decentralized” stablecoins to be a worse option than custodial stablecoins. At least you can look into the background of a custodian to perform some level of assessment of counterparty risk. Good luck trying to understand the motives and background of random people around the world to whom you’ve handed over your Bitcoin private keys.
Synthetic Stablecoins
Synthetic stablecoins have been created that attempt to peg their token to the value of Bitcoin without actually using any Bitcoin as collateral. Instead, their underlying protocols use native tokens as collateral.
On the one hand, users aren’t required to hand over any Bitcoin in order to access synthetic Bitcoin stablecoins. That isn’t necessarily better though, since instead of having the possibility of getting actual Bitcoin back when they want to exit the stablecoin or if the protocol fails, users are forced to buy niche crypto tokens that risk imploding from one moment to the next.
Bitcoin “Stablecoins” Are Not Real Bitcoin
The most important fault of all with Bitcoin-based stablecoins is the fact that they aren’t really Bitcoin to b

Dear Readers,
When people hear the words “Not Your Keys, Not Your Coins”, they naturally think of Bitcoin, as well as perhaps “Crypto” since that space has adopted the saying too given that many digital assets use public key cryptography like Bitcoin does. However, it seems unlikely that people think of traditional banks when they hear it. I intend to change that with today’s discussion.
The sentiment behind “Not Your Keys, Not Your Coins” reflects the fact that, if you leave your Bitcoin in someone else’s control, then you effectively hand them ownership over the private keys protecting your Bitcoin, and you can never be 100% certain that you’ll be able to get them back. That reality became painfully obvious to many people during 2022, as failure after failure among crypto companies led to massive user losses.
However, the idea that leaving your money in someone else’s hands carries risks that don’t exist when you hold it yourself applies to far more than just Bitcoin, as tens of thousands of customers in the traditional banking system found out just last week…
Want Your Deposits Back? Don’t Bank On It
I thought crypto companies failed quickly, what with several major companies failing over the course of 2022. However, traditional finance has seemingly put that to shame, as three major banks failed in just a handful of days last week:
* Silvergate Bank, a “leading bank for business & crypto” was the first to go down, announcing on Wednesday that it would wind down its operations entirely.
* Silicon Valley Bank, which claimed to be the bank of choice for over half of startups in the U.S., failed outright on Friday, quickly becoming the second-largest bank failure in U.S. history.
* Regulators announced Sunday evening that they had forcibly closed Signature Bank, one of the largest banks in the state of New York, apparently believing that it represented a potential systemic risk.
Depositors, shareholders, and bondholders are probably in various stages of disbelief, and many of them will likely not receive the full value of what they had put into the banks. They trusted those banks and the regulators overseeing them to protect their money and their interests. They’ve now learned the hard way that trust only holds its worth until it’s broken.
Regulation Is All About Control
As an outsider who has (so far) not been impacted by this situation, I’ve recognized a disturbing fact that many people may not think about: regulators are stepping in to seize banks’ assets, including customer deposits, and shut the banks down.
Some people may be relieved by that. After all, regulators have largely convinced people around the globe that they’re only interested in protecting economies, businesses, and everyday people. However, the fact remains that the government was able to step in and seize private assets from massive corporations with little pushback and little visible effort.
If this doesn’t alarm you, it should. It’s bad enough that banks can lose your money through rehypothecation, malinvestments, theft, or any number of other mismanagements. But it’s now painfully obvious that governments can step in from one second to the next and take your assets out of the bank and into their coffers. Today they’re doing so seemingly to protect your money from corporate mismanagement. Tomorrow they could be doing it because you said something they didn’t like or because their bills have come due.
Not Your Keys, Not Your Money
Bitcoin is the only money in the world that is truly decentralized and wholly resistant to confiscation, censorship, and debasement. If you protect your private key well, I believe there’s nowhere safer to keep your money. So why would I keep my money anywhere else?
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Dear Readers,
Humanity has had a variety of different monies over the years, like shells, livestock, precious metals, and more. But each of them eventually fell out of favor when societies found better money.
Perhaps no money in history has been as unfavorable as fiat. Fiat currencies, which are typically issued and controlled by governments and their cronies, have enabled various misdeeds against society at large:
* Fiat enables theft via inflationary money printing, destroying wealth and people’s ability to save.
* Fiat inflation incentivizes ever-increasing amounts of debt for governments, businesses, and individuals.
* Fiat financial systems are highly susceptible to confiscation, surveillance, censorship, and burdensome taxation.
Many projects in the “Crypto” space have billed themselves as a cure for the evils perpetrated through fiat currencies. But as we’ll see today, fiat and “Crypto” are not quite as different from one another as we’ve been led to believe.
“Crypto” And Fiat Are Alike In More Ways Than One
One advantage that historical monies had over today’s fiat currencies is that they were typically free of control by any one party: Anyone could dive for shells, anyone could raise livestock, and gold was often acceptable as payment whether or not it had a monarch’s face imprinted on it.
Fiat currencies are of course completely controlled by the governments that issue them. Those governments decide when to increase supply or when to remove certain denominations from circulation. They decide who can access the money and how it can be spent.
If “Crypto” truly is different from fiat, then we should expect it to be relatively resistant to centralized control like monies in the past were, right?
It seems like that may not be the case. Every token within the “Crypto” space has a central team or group that decides what the token’s supply will be, how the token can be used, and who can use it. For example:
* There are cryptocurrencies with foundations and corporations deciding how “treasuries” will be spent or when portions of the supply will be burned.
* There are cryptocurrencies issued by Central Banks that can be programmed to only be spent for certain goods and services and only within specific timeframes.
* There are cryptocurrencies where the majority of nodes will refuse to process transactions unless certain conditions are met, such as adherence to government regulators like the Office of Foreign Assets Control (OFAC) within the U.S.
Fiat money is defined as a type of currency that derives its value from government decrees. But if “Crypto” is full of tokens with value that is manipulated by centralized teams that are all susceptible to government oversight and coercion, does that mean that “Crypto” is fiat too?
Bitcoin Is Not Fiat
We can’t really end a discussion like this without diving a bit into the unique characteristics that set Bitcoin apart from both fiat and “Crypto”:
* Bitcoin has no central team and cannot be controlled by any group or entity that wants to control it.
* Bitcoin’s essentially immutable supply cap ensures that savers can enjoy their wealth for as long as they choose to keep it.
* Bitcoin’s deflationary nature disincentivizes people from taking on all but the most prudent of debts.
* Bitcoin’s decentralized network reduces almost to the point of elimination the risk of censorship, confiscation, and burdensome taxation by any entity, government or otherwise.
Bitcoin succeeds where both fiat and “Crypto” do not: protecting the rights and interests of users with respect to their own money. With that perspective in mind, it’s clear that neither fiat or “Crypto” could ever hope to compete with Bitcoin as money.
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