Not your keys, not your Bitcoin… Let that sink in for a second.
If you are fairly new to cryptocurrencies you might still be struggling with exactly what a private key is and why it's so important. Perhaps you have just made your first crypto purchase on an exchange like Coinbase or Cash App, but didn't even realize that THEY hold the private keys to your cryptocurrency. Holding the private keys that give you access to your crypto is like holding the pin code to your debit card; it gives you unfettered access to your funds. Follow along with The ‘Stache as I break down what a private key is, why you should always be in possession of them, and why participating in the annual “Proof of Keys” days is a must (especially for all those newcomers)!
Cryptocurrency Private Keys Explained Simply
While I could get in to the technical side of exactly what comprises a private key, I actually wanted to focus on a very basic understanding of what they are and why they are important. Put very simply, a private key is like the pin code to your debit account. If someone has the pin code to your bank account, they can pretty much do anything they want with your money. Withdraw directly from an ATM or Bank, spend it online, or just rob you blind. This is pretty much the same case for a private key. It's the secret key that gives you access to spend your Bitcoin, move your Bitcoin, as well as prove you actually own it. For the same reasons you don't just give your pin code out to anyone, you also should never give your private key to anyone.
Do You Trust Your Bank?
Now that we have a basic understanding of what a private key actually is, lets think about why it's important you are in control of them. Everything comes down to trust… Do you trust your bank? I think a lot of people blindly do. We deposit money into traditional banking every day, and most never really know how it works or why. I won't get into the nitty gritty details here, but banks are not your friend and they are NOT on your side. They are a “trusted 3rd party”, that has failed us time and time again.
Sure, there is low level insurance to cover things like fraud and the FDIC for things a little bit larger, but is this tiny piece-of-mind comfort worth what we have to give up? How many data breeches, bailouts, and violations of our trust do we have to endure before we all realize this? Banks are in the business of being a trusted 3rd party because it makes them a lot of money. They take most of the profits and give little back, all charging you a “monthly account fee” for the pleasure of gambling with your dollars. This is not to mention fractional reserve practices where a bank only has to have a small amount of the funds they actually hold on hand. We tend to overlook these things because we feel like our money is “safe” in a bank and if there is a problem or a hint of fraud they will save us.
Be Your Own Bank
Things work a bit different in crypto and the ethos of Bitcoin is all about being your own bank. In cryptocurrency there are no reverse transactions, there are no refunds, and there is no recourse if you get hacked or scammed. This is scary to most people. They WANT that comfort and most are willing to give up liberty for the illusion of security. In crypto, YOU are the bank. You make the decisions, you mange the funds, you are the keeper of your security. This is a new and very scary thought to most people, especially those just trying to pay rent and keep food on the table. Let me fill you in on a little secret though…
I was that person too.
So were most of the people in crypto, because there really was not much of an alternative. I am not a fan of “the middleman”, but in finance it is almost impossible to avoid this guy unless you are stuffing your mattress with USD and living off the grid. Owning your own private keys and managing them without a trusted 3rd party is the whole point! This is the power that you wield when you truly own your own private keys and understand their power. Knowing what the ownership of those private keys means in the cryptocurrency ecosystem is paramount, otherwise we are doomed to repeat the financial mistakes we have already lived through.
Trusted 3rd Parties In Crypto
I have been talking about banks a lot so far, but many of the problems I talk about come with ANY trusted 3rd party. This includes quite a few popular services that are centralized 3rd parties like the aforementioned Coinbase or full on exchanges like Binance. These very popular 3rd parties hold your private keys for you. What happens when one of these centralized 3rd parties gets hacked? There go your funds! By holding your own private keys, instead of letting one of these 3rd parties do it, you can verify that you own the funds and have 100% access to them without censorship. While you may see me recommend these types of 3rd parties pretty often, it's always with the idea that these are great for beginners and you should do so with caution. I use Binance all the time and recommend it, but I don't leave any significant amount of money there because I don't trust 3rd parties farther than I can throw them.
Don't Trust, Verify
One of my favorite cypto sayings is “Don't Trust, Verify”. This basically means that instead of blindly trusting a 3rd party, verify that the information they gave you is valid through the use of a cryptography. Verifying information against an immutable, censorship resistant, and transparent digital system is much more trustworthy than just taking a companies word for truth. If you are personally holding onto your private keys you can easily do this for your money. You can verify against the public Bitcoin blockchain that you indeed are the owner of the funds. This also means the ONLY way someone can take your money is through the mismanagement of your own security. Once again, this is the power of owning your own keys.
Celebrate Annual “Proof of Keys” On January 3rd
Now that we know what a private key is, why they are so important in cryptocurrency, and why 3rd parties should not be blindly trusted, I wanted to put a spotlight on a little annual exercise that helps to demonstrate the points above. On January 3rd, join thousands of other Bitcoin hodlers in showing your “Proof of Keys” to celebrate the anniversary of the Bitcoin Genesis Block and verify that the 3rd parties you trust to hold your Bitcoin actually have your coins. It's a chance to test the system, brush up on your knowledge, verify your security, exercise your financial freedom! This is the day that companies and exchanges must prove their trustworthiness and consensus. Try getting the banks to agree to that! This is the crypto version of a classic “bank run”, if this were traditional financial markets the banks would be VERY worried as they simply don't have everyone's money to give all at once.
Trace has some REALLY great comments in this video, I recommend watching the majority of it. Encouraging everyone in the crypto space to participate, especially those that are new to cryptocurrency and I couldn't agree more. Make sure you check out the official Proof of Keys website for more info, but I am going to repost a few of his recommendations here for accomplishing your Proof of Keys on January 3rd.
“On January 3rd HODLers everywhere celebrate Bitcoin by withdrawing all their bitcoins to wallets they control that perform network consensus and use best practices like the Glacier Protocol.
- Bitcoin Core for network consensus; who controls Bitcoin Core
- Armory for private keys
- Glacier Protocol for operational procedures
- Purism [a Purism complaint] for hardware”
These are all solid recommendations, but there are multiple ways you can accomplish this task. For those that are less technically inclined and maybe can't setup their own node you can easily just move your Bitcoin to a wallet of your choice where you hold your private keys. Some of my favorite wallets where you own your private keys are Enjin, Exodus, or Monarch to name a few. You can go the hardware wallet route and pick up a Ledger, Trezor, or similar. You can even move it to a paper wallet you generate offline. The whole point of the exercise is to understand the importance of owning your private keys, verify you can get your funds from 3rd parties, and practice all the skills you need to maintain being your own bank. On January 4th, its back to business as usual and all you have incurred is a few nominal transaction fees, but hopefully gained some valuable lessons!
Personally I will 100% be participating on January 3rd and I fully support this celebration of financial independence. Will you join me?
Let me know in the comments if you have any questions about doing this the RIGHT way, but until Jan 3rd…
‘Stache That Crypto Friends!