In today’s Exponential Investor:

  • A surprise debate
  • A painful NFT
  • NYKNYC

In February 2014, I get an email asking if I’d be happy to go on national TV in the United States to talk about bitcoin.

I say yes. Any chance I get to help people understand about this burgeoning digital money I’ll grab with both hands.

Thanks to the time difference with the UK, it’s night by the time I’m on Skype, waiting on standby as the presenter goes through his introduction to the segment.

I can’t see anything during the call. There’s no face on the other end, just a black screen. I can hear the audio, though. I know that I just need to do my thing, looking straight at the camera on my MacBook.

During the intro, however, I’m thrown an incredible curve ball before I go live.

The host explains that I’m not the only one he’s talking to. In fact, right there in the studio with him is a “very successful software pioneer,” who thinks bitcoin is all one big scam.

Oh boy. Didn’t see that one coming. Thanks for the heads-up, guys. Instead of talking about bitcoin, I’m now in an unexpected debate. To be fair, I don’t care one bit.

I know that whatever this tech “expert” has to say in scepticism, I’ve heard all before. I know he’s going to mention tulip mania and speculative bubbles. He’ll say bitcoin isn’t backed by anything. He’ll claim it’s just a bunch of computer nerds conning people into parting with their hard-earned…

Yawn.

Then I’m called in, “… welcome, Sam…”

The NFT to prove it

For the next seven minutes we discuss bitcoin. If you’ve never seen the clip, I suggest you do so here.

I explain that I believe it has become an entire parallel financial system infrastructure and that it will be around longer than all of us are alive.

But that’s not why I bring this up for you today.

I highlight this because of the reason I was asked to talk about bitcoin on TV in the first place.

The collapse and bankruptcy of the gigantic bitcoin exchange, Mt. Gox.

Now, as a quick explanation, in the earlier days of bitcoin Mt. Gox was the biggest exchange on earth, handling upward of 80% of all bitcoin trading at its peak.

But then, overnight, it collapsed, shut down, and closed all access to its platform.

It was said at the time that the exchange was “hacked” for $460 million worth of bitcoin. It’s believed the total number of bitcoin stolen, or lost, ended up at around 850,000.

Back in the day it was gigantic. In relative terms, nothing we’ve seen in terms of hacks or failures recently comes close to Mt. Gox back then.

It was big enough that there were genuine concerns that bitcoin would fail as a result. Or at least that was the mainstream line of attack.

But that’s not what I saw.

In that US TV interview, I explained that the failure of Mt. Gox was unfortunate, but that it was also the reflection of a free market functioning as it should. There were no bail-outs of Mt. Gox, there was no stimulus package for those affected.

Mt. Gox failed. The market absorbed its failure and, as I noted, the whole ecosystem would come out of it the other end bigger and stronger than before.

And that’s exactly what happened.

For those of us with bitcoin on Mt. Gox, to this day we’re still in the process of trying to recover the amount “lost”. Maybe we get some of it back. Maybe… we’ll see.

For tangible proof, we do now at least have a non-fungible token (NFT) to prove it.

Source: screenshot of editor’s NFT

Perhaps one day the NFT will be worth more than the amount I lost on Mt. Gox.

Nonetheless, the episode of Mt. Gox is particularly relevant today. You see, I was pretty lucky, or smart, in that while I held some bitcoin on Mt. Gox, I didn’t hold all of my bitcoin there.

The rest I held on wallets where I controlled the private keys and access to the bitcoin.

The lesson that Mt. Gox taught me early on was that holding crypto on an exchange, even one that (at the time) was as big as Mt. Gox, is fraught with danger.

I wonder what Mt. Gox would be today if the hack had never happened. Had it survived. I wonder what the bitcoin ecosystem would be like – better? Or worse?

Either way, it was proof that the safest way to avoid losing your assets from the failure and bankruptcy of an exchange was to never hold your crypto on an exchange.

History repeats

Mt. Gox wasn’t the first exchange to fail. I was directly impacted by two others, Cryptsy and MintPal. Luckily, the impact was not nearly as great, and the crypto that was on there was  minimal – a small portion of the bulk of it held off exchange.

I learned my lesson. But it seems that many others are unaware of the risks that holding crypto on exchanges poses.

Take, for instance, the recent uproar when Coinbase noted in its quarterly earnings report that:

… the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.

As noted by Fortune,

Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.

This hit the headlines across all major financial publications that cover crypto.

Frankly, I don’t understand why. Did people think the situation would be different for Coinbase? Did people think that, if Coinbase suffered a catastrophic hack, or was declared bankrupt, they’d just be able to log into their accounts and move their crypto off the exchange after the fact?

No. That’s not how it works.

If you want to protect your crypto from third-party risks, like an exchange going bust, then there’s only one thing to do.

Get it off the exchange and into a wallet to which you control the private keys (access).

Bitcoin isn’t going bankrupt, there is nothing to go bankrupt. So, whether Mt. Gox fails, Coinbase fails, or some other exchange in the future fails, you’ll always retain control and access to your crypto.

Now, I should say I don’t expect Coinbase is going bankrupt. In fact, nothing I see even comes close to indicating that as a near-term possibility. That doesn’t make it too big to fail. Mt. Gox was relatively bigger at the time it failed.

In the event that something like Coinbase fails, or, as we witnessed last week, when the Terra (LUNA) network collapsed, the wider crypto free market deals with it.

The ecosystem absorbs such failures, and comes out the other side stronger.

That’s how markets should work, and that’s how the crypto market does at least.

Importantly, if you’re going to be in this market, understand that the safest way to protect yourself and your crypto is to take control of it yourself. Don’t rely on an exchange to keep it safe for you, and don’t rely on a third party to do it all for you. Those are sure-fire ways to not survive in the market long term.

Take my advice and a popular saying in the crypto world: not your keys, not your crypto.

It was true in 2014 and is true today.

Until next time…

Sam Volkering
Editor, Exponential Investor