The recent episode where Coinbase temporarily froze the account associated with donations for Ross Ulbricht’s defense got me thinking: lots of cryptocurrency users don’t use it as it was meant to be. They still rely on bank-like services of the past, which come with all the drawbacks and vulnerabilities. If you’re a new (or even a longtime) user, please read this. I’m here to remind you that cryptocurrency is digital cash, and how to actually capitalize on all the advantages it offers.
Why we don’t need a bank anymore
Let’s take a moment to think about why people started using banks to hold their money to begin with. First and foremost they were a method of safe storage, since the thick walls of a bank vault are much harder to breach than your mattress. Second, banking services provided a better way to send and receive money than having to physically transport bags of cash to wherever you want money to go. To summarize, for the average user banks made it easier to securely store money and send it around, especially over great distances.
With digital currency, that first advantage of banking is erased, since you can send some to anyone anywhere in the world at anytime very quickly for very low fees (as long as you stay away from Bitcoin!). The second advantage goes away too, since you can back up your private keys in ways that make your funds very difficult to steal, while a bank can be subject to identity theft, or simply be pressured by government officials to close your account and take your money.
Treat your digital cash like actual cash
If cryptocurrency truly is digital cash, you should treat it as such, with equivalent practices. To begin with, your light wallet, in particular mobile wallets, should be treated like your physical wallet you carry on your person: carry around whatever spending cash you need, but not more, nothing that would ruin you to lose it. Back it up so if your device gets lost or stolen you can rush home to restore and move your funds, much like how you would quickly cancel all your credit cards if your physical wallet got stolen.
As far as storage, since the cost of a “digital vault” is much lower than a physical vault, everyone can afford to have one. Get a cold storage solution like a hardware wallet and back that up too, so in case it gets found and stolen you can still get your funds back. If you do those two things, you should have a more efficient and more secure way of using and storing your funds, and unlike using a bank you aren’t vulnerable to institutional failure or government seizure.
How NOT to treat your digital cash
If you’re treating your digital currency like digital cash, here’s a few things you should avoid. Do not leave them on an exchange: they control your private keys and are big targets for hacks. Do not leave them on a “coin bank” like Coinbase or other service that can automatically convert your crypto into fiat currency and vice versa: they control your private keys and can close your account without warning. Do not use a wallet like Freewallet: they control your private keys. Notice the theme here? Don’t store your keys anywhere near a service that keeps your private keys. Control your own funds. There are circumstances for using the above-mentioned services, but try to make sure you never keep any money there. In and out, then put it somewhere secure.