Much of the cryptocurrency world spent January 3 – the tenth anniversary of the mining of the genesis block of bitcoin by Satoshi Nakamoto – pondering the wonders of bitcoin. At the same time, a number of hodlers [sic] were responding to the call of the industry’s first ever “Proof of Keys” celebration by harrying bitcoin exchanges into turning over to them the bitcoins that they were holding. (The key is what you need to transact bitcoin that you own.) Why would hodlers do that? As Andreas Antonopoulos, a well-known bitcoin security expert, warns, “Your keys, your bitcoin. Not your keys, not your bitcoin.”
In a December YouTube video, Trace Mayer, a prominent “hodler of last resort,” called on the bitcoin community to embrace a “new cultural tradition” that he calls “Proof of Keys” by withdrawing all of their bitcoins from exchanges and other third parties and storing the keys in wallets that they own and control. Mayer said the community should “declare and re-declare our monetary sovereignty” on January 3 every year. Mayer, however, does not let this sententiousness cloud his otherwise straightforward discussion of how important it is to control your own bitcoin holdings. “It is either on the blockchain or it didn’t happen,” as Mayer notes.
A Cultural Tradition
What Mayer is getting at with his new cultural tradition is reminding bitcoin holders (I save hodler for those who are purposefully saving bitcoin) and traders that the point of bitcoin is to endow the holders of wealth with full control of it. To Mayer and many others, when you leave your bitcoin on an exchange, the exchange controls – and maybe owns – your bitcoin. When your bitcoin is on an exchange, it is held in wallets that the exchanges – not you – have the keys to.
So what if an exchange controls your bitcoin? What can it do with it? Well, the greatest risk is that they lose it – either through negligence or as a victim of hacking. Or they might use it for their own purposes, such as speculating on the price of bitcoin. They could lend your bitcoin out to others. Or use it as collateral on loans. At any rate, they can deny you timely access to your own bitcoin funds.
Mayer, though, didn’t bother with scare tactics to motivate hodlers and holders alike. Instead, he reminded the bitcoin community that trusting any third party with your bitcoin is against the point of cryptocurrencies in the first place. And then he made some practical points. For one, in the event of a cryptocurrency or exchange panic, “you are going to get rekt” if you don’t have control of your bitcoin. And in the case of forks and airdrops, Mayer notes, your ability to claim new coins is much more certain when you have your own wallet to hold them.
Finally, Mayer, as a bitcoin OG – he has been talking and writing about it since bitcoin cost a nickel – encourages everyone to take their bitcoin off exchanges now so they can learn about what it is like to make a withdrawal, how long it can take, how much it could cost and which exchanges work better with their customers. He also says that setting up wallets will teach the community about how the bitcoin network operates. A true believer, Mayer also wants hodlers to operate their own consensus networks to validate transactions, but he seems to think that just getting a wallet set up is a valuable first step.
Celebration Day Arrives
Mayer promoted Proof of Keys as more of a movement than an event. He termed January 3 the “Proof of Keys Celebration Day.” In fact, in the December video he pointed out that you should withdraw your bitcoin right away, no reason to wait. Not only was he not trying to foment an operational crisis but, as he pointed out, if there is a panic or crisis in processing withdrawals, it is better to be in the front of the line.
Mayer set up a website dedicated to the celebration. The website sets forth a new criterion to be a hodler, namely, holding bitcoin in your own wallet:
“By demanding and taking possession of their assets, individuals will learn real fast with blockchain proof whether they are part of the elite HODLers or not. Proof of Keys is the annual HODLer initiation.”
In addition to a countdown clock to the next Proof of Keys Celebration, the website provides some information and encouragement to bitcoin holders to become hodlers.
The first annual Celebration came and went quietly. Mayer’s Twitter feed included reports of some problems at a few exchanges. Mayer tweeted on January 3 there was a slight perceptible effect on network performance, “But fees have not gone crazy. No CTO heart attacks. No CFO suicides.” The next day, Christine Masters of Cryptovest, an online crypto news service, reported some customers had had issues that may have been associated with requests for withdrawals from HitBTC, Bitfinex, OKEx, Poloniex and even Coinbase.
On January 7, Peter Smith, the co-founder of Blockchain Inc., one of the largest providers of bitcoin wallets in the world, tweeted that Blockchain experienced an extraordinary level – more than 100,000 – of new customer sign ups on Celebration Day.
Mayer wants to transform January 3 into hodler initiation day. But Proof of Keys is more a lifestyle change than a one-day event. And to the extent that it succeeds, Proof of Keys has implications for the cryptoverse beyond returning bitcoin to its libertarian roots.
To the extent that when you have bitcoin burning a hole in your wallet you are more likely to spend it, decentralized holdings of bitcoin could help spark its broader and more frequent use. Proof of Keys (re-)acquaints bitcoin holders with it as a currency that stores value but also transfers value through transactions. The exercise familiarizes people with how to transact using bitcoins.
Holding your own bitcoin undercuts some of the business cases for any number of today’s cryptocurrency exchanges like Coinbase, Kraken and LedgerX, which tout the safety and soundness of holding your bitcoin in their wallets more than the quality of trade execution on their platforms. The convenience for customers of holding their cryptocurrency at the exchange has translated into a higher probability that they will park their currencies there and trade cryptocurrencies mostly if not only from that account. Since you can’t sell on Exchange B bitcoin that takes hours (days?) to withdraw from Exchange A, competition between traders on exchanges has been dampened. Only traders with holdings and accounts across several exchanges can arbitrage markets.
When more bitcoin is held on-chain in individual wallets, there will be increased competition among exchanges to provide transaction services. If trading is more accessible, variations in contemporaneous bitcoin prices will diminish in size and frequency. Price discovery will be rationalized and simplified as essentially a single liquidity pool is generated.
This efficiency could – of course – be accompanied by centralization of trading. Unless regulatory barriers arise, there is little if any reason for more than one marketplace to exist for a digital asset, especially if the world uses a single fiat currency like U.S. dollars to price it. Organic network effects (you add your liquidity to the already most liquid exchange because you want to benefit from the liquidity that already exists there) drive concentration. The history of competition in the futures industry shows what rare and extraordinary efforts are required for a market to compete with a more liquid alternative.
Or the eventual market for bitcoin could be so decentralized that it exists everywhere, governed by software code and business protocols. The marketplace for bitcoin could simply be the Internet. You have a bank account that will pay or receive fiat and you have a wallet that holds your bitcoin. Internet search engines find the best price. It will not fulfill the dreams of anonymity (the bank accounts tip identity), and there will be issues with things like anti-money laundering that may give rise to exclusive networks. If regulatory concerns become numerous, this decentralized exchange model can also deteriorate into a single, organized market with rules, “best practices,” gates and gatekeepers. But you still should be able to hold your bitcoin in your own wallets.