Crypto and Financial Freedom
Last week, we took a look at how cash and gold can be used to achieve some degree of financial freedom—but not exactly in the most convenient way.
Carrying around heaps of cash to pay for things isn’t exactly ideal, while gold suffers from limited utility—since you need to convert it to cash first to actually spend it. All in all, they’re just not good enough.
Cryptocurrencies, on the other hand, represent a more complete offering. Being digital, there’s nothing to carry around, while their underlying blockchain technology makes them incredibly fast and cheap to send, while benefiting from beyond bank-grade security.
They also have value in and of themselves, meaning you don’t need to convert them to cash to actually extract value from them—making them super convenient.
But to really take advantage of their benefits, it’s important to understand how to ensure you truly own your cryptocurrency—because it’s not always a given, unfortunately.
Here’s what you need to know.
Why Cryptocurrencies Are the Answer
As we previously mentioned, banks, stocks, hedge funds, as well as most other financial institutions and services are considered centralized. That is, they are a central point that people must interact with in order to access crucial financial services.
Cryptocurrencies, on the other hand, are completely decentralized. There’s no faceless figure behind the scenes that makes all the decisions, no company at the helm, and nobody that controls who can access them or when.
Instead, the rules a cryptocurrency is based on is enforced by a decentralized network of specialized computers. These work together to keep everything secure and make sure nobody can get up to any funny business.
These were built with one main goal in mind: to empower you, the user.
By holding cryptocurrencies, you can participate in the vast, ever-growing crypto economy, and access decentralized versions of practically every major financial service you’re used to using—all without needing to ask permission, create any accounts, or fork over your private data for the privilege.
They’re truly global financial assets that promise to bank the unbanked, eliminate financial borders, and ensure users have true ownership of their assets. But getting this out of them is not entirely straightforward.
There’s a Catch
Now, we know what you’re thinking… “Where do I sign up?” After all, who doesn’t want absolute financial freedom and all the perks that come with it?
But while we understand your eagerness, it’s important to take a step back first to get to grips with a thing or two first before diving in. The first thing to understand is the role of cryptocurrency exchanges in the crypto ecosystem.
As their name suggests, these are platforms that allow you to exchange or trade one cryptocurrency for another, such as converting Bitcoin (BTC) to Ethereum (ETH). These are similar to your local currency exchange, but with one key difference—they’re custodial.
What does this mean for you? Well as we previously touched on, this means they need to hold onto your money (or cryptocurrencies) to offer you these exchange services. Similar to the way that a bank would if you had an account with one.
If you’ve been following along with our financial freedom series, then this will probably be ringing alarm bells already. After all, one of the core principles of financial freedom is having full control over your own money—which you simply don’t get when using a cryptocurrency exchange.
While many cryptocurrency exchanges are perfectly safe, some have proven to be insecure, resulting in potentially significant financial losses for users. Between 2011 and 2019 alone, well over $1 billion worth of cryptocurrencies has been stolen from exchanges.
The only way around this is to manage your own private keys.
Get to Know Your Private Keys
“But what are private keys exactly?” we hear you ask…
Well, to put it simply these are essentially the keys (but more of a code) that you use to access and unlock your funds—similar to the way your PIN can be used to unlock your bank card at the ATM to withdraw money. Albeit a bit more complicated.
Managing your own private keys is one of the core tenets of true financial freedom. However, there are a huge number of exchanges and other crypto wallet services that don’t actually give you access to these private keys.
And many of these often don’t make it clear that this is the case. They simply manage your keys in the background, without ever letting you access them.
These are known as “custodial” platforms—most of which are cryptocurrency exchange platforms. These offer you a wallet for your cryptocurrencies, but this comes at the compromise of loss of control (among other things).
Not your keys, not your crypto. Here’s why.
Using these platforms requires trust, since if they get hacked or suffer a data breach of any kind, you will probably struggle to get your funds back without your private keys. Like a bank, there are also more than a few fees associated with using them.
With cryptocurrencies, the goal is always to eliminate the need to trust or rely on third-parties—the only way to do this is by simply holding your own private keys.
In the final part of the financial freedom series, we will take a look at how you can take control of your own private keys, and cover how you can ensure your funds remain safe at all times. Stay tuned until tomorrow!