The Future of Bitcoin When Neither Custodians Nor Self Custody Feel Safe

Binance got drained. So did hardware wallets. So now what?

Since late July, bitcoin holders have been hit from both sides. It seems like the bitcoin humility missiles are striking and nobody gets to feel smug.

On October 29, Binance's hot wallets (the coins an exchange keeps online to process withdrawals) were drained across about ten blockchains, most of it within roughly twenty minutes. Binance puts the damage at about $6.3 billion, the largest heist in human history (yet another proud record for the industry).

However, self-custody had its own season of rug pulls this summer when on July 30 attackers drained more than $100 million from Coldcard hardware wallets because a firmware flaw dating back to 2021 made some seeds (the backup words that control your coins) guessable. No phishing required, no physical access needed. 

Then in October, Ledger confirmed a hidden implant in a device sold through CryptoBilis, a Malaysia-based reseller. Researchers found implants tucked inside Nano X units, reading the seed off the screen and sending it out over a cell connection.

Not to mention the disaster of the shipping and supply chains seen across many vendors and the Liquid sidechain exposing 4,000 BTC. 

Custodial exchanges broke. Self-custody broke. Federations broke. But did Bitcoin break?

Bitcoin is the canary in the coal mine

Well, obviously Bitcoin didn't break. It’s actually working as designed. Bitcoin is once again the canary in the coal mine, exposing what is happening in the real world and taking the brunt of the blame.

The open source and auditable nature of Bitcoin enables anyone to audit, or attack, the network and its participants. Because of this, all transactions are publicly auditable in real time and the industry at large has adopted a culture of open source and auditable code. 

When the Coldcard bug, the Ledger implants and the Liquid bug surfaced, the community was able to pull them apart in public and publish what they found. When coins move, you can see where they came from, and where they went. A hack can't hide behind a closed door or a press release.

So every attack was played out in the open. Each hole was found, named and exposed, and every wallet maker, exchange and user learned from it at the same time, in real time.

Your bank doesn't work like that. Neither does your broker, your custodian or the payment app on your phone. In fact, very little software works like this. If we expand our vantage point outside of the finance industry, you realize your communications data, travel security, browsing history and basically everything you do with an electronic device is exposed to the same problem as bitcoin, but the software is closed.

Their books and data centers are closed and their board of directors is not willing to tell you the full story. They're run by the same kind of people on the same kind of laptops, and they're hunted by the same state-backed hackers. The holes are there too. You just never hear about them. They get patched quietly, or they don't get patched at all, and you find out when the freeze notice or the “sorry your data was leaked” email arrives.

If it's happening in Bitcoin, it's happening everywhere. Bitcoin just shows you.

Where is your stack on the counterparty ladder?

If bitcoin feels unsafe right now, and the rest of the finance industry feels worse, start with one question: who stands between you and your bitcoin? That is your counterparty risk. At level 1, a long line of people do. At the top, nobody does. Your job is to keep climbing, and to know what each step costs you.

Level 1: Fiat. You own paper bitcoin: an ETF, a fund, a claim on a thing. Behind that claim sit the fund issuer, the custodian, the authorized participants, the market makers, your brokerage, the clearing house, the transfer agent and the government. Any one of them can fail you.

Level 2: Custodial exchange account. You have real bitcoin in their wallets, with government risk stacked on top. If you aren’t paying for the service they provide, you naturally become the product.

Level 3: Bitcoin retirement account (Bitcoin IRA). Real bitcoin, held tax-free or tax-deferred. The paper claim from level 1 is gone, and so is its long list of counterparties. Similar risk to level 2, but with tax benefits. 

Level 4: Collaborative custody. Keys are shared across multiple institutions, so no single group can move your coins. You hold some keys and your partner(s) holds the rest. This fits big balances and nervous first-timers who don't want one mistake to cost them everything.

Level 5: Self custody. You hold the keys, so the only counterparty left is your own setup and backup. Done right means a device bought direct from the maker, firmware verified and current, and a seed with proper entropy that you have test-restored. This can be scary, but there are plenty of resources to help you.

Level 6: Bought privately, in self custody. Everything at level 5, with no identity tied to the purchase. Nobody holds your coins and nobody holds a record that you bought them. 

Most people sit lower on this ladder than they think. Find where your stack sits, learn what the next one asks of you, and take a step up. 

Bitcoin Well exists because I don’t trust the first level of the counterparty ladder with my family’s future, and I don’t believe you should either. If you’re buying bitcoin, skip Level 2 entirely - I personally believe this is the part of the ladder most ripe for disruption. Until then, you can use the Bitcoin Well Portal so you buy bitcoin straight to your personal bitcoin wallet. It never sits with us. And if you don’t like paying taxes you can probably limit your tax hit with the Bitcoin IRA by Bitcoin Well.

At the end of the day, it is likely that most people will have bitcoin scattered across the counterparty ladder. And our hope that you are intentional with the placement of your generational wealth.