This isn’t going to be a popular post, but it absolutely needs to be said and I don’t see anybody pointing out what I’m currently seeing as a strong possibility. There have been numerous hacks of centralized exchanges since the days of Mt Gox and the problem hasn’t gone away and many people are losing these funds because they treat these exchanges like banks. Exchanges introduce the possibility of fractional reserve bitcoin.

Unfortunately the vast majority of people have no idea how important it is to have a limited supply of a currency. They don’t understand how they have been fleeced because their bank accounts show the same numbers. But over time buying power has diminished even for the US dollar. A loaf of Wonder bread used to cost 45 cents when I was a kid. Now it is nearly 10x that. Gas was 25 cents a gallon. Now it’s 10x that. A good income in those days was 10K per year, but is the average income now 100K? Why did this happen? Because the Federal Reserve increased the money supply.

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The industrial revolution has made counterfeiting and Keynesian economics (encourages people to spend by causing their money to rot if they hold it too long) seem reasonable because they were able to make it work by increased production. They discovered that if the average person has enough to eat and is at least minimally provided for (like cattle) that they generally won’t notice the theft and what they’re really missing. We the people have no clue how vast the theft has become (hint: we’re into the 10’s of trillions of USD in terms of buying power that is lost and I have to say that this is a conservative estimate).

Production has increased many times over in the past 50 years and at the same time, the Bretton Woods agreement was rescinded by Nixon destroying the dollar’s precious metals peg. With a precious metals peg, they had to make sure there was a small enough supply of the currency in case everyone came in to claim their one ounce of fine silver. Too much and they run out of silver before they run out of dollars. Removing this peg allowed the Federal Reserve the ability to print up money while goading companies to produce more to make up for the QE (literally counterfeiting). Legal adjustments over the years began to weaken the protections (such as the Volcker rule) against consumers leaving them subject to bank fraud and manipulation. By 2008, the derivatives market nearly collapsed the entire world economy. The Fed bailed out the banks into the hundreds of billions each and ended up adding an extra 10 trillion in debt for the US taxpayer.

Enter Bitcoin, which fixed this problem by instituting a hard cap limit of 21 million bitcoin hard baked into the protocol itself. Changing it would require 95% consensus. There was also mention of fiscal irresponsibility in the Bitcoin genesis block… “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.

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We are in the early days of bitcoin, but most people are still making the mistake of holding their crypto on an exchange. Unfortunately I just don’t see anywhere near close to the majority of people coming to an understanding of why it is important to hold your own crypto using your own hardware wallet, or about such things as the potential segwit donations attack… Not your keys, not your coins.

People avoid these complexities and want simple swipes on smart phones. For this reason, I strongly suspect that the majority of crypto holders will remain on the exchanges. Beyond the danger @anonymint points out above, if for some reason the powers that be decide to take over the exchanges, all that has really happened is that you changed banks. JPMorgan buys Coinbase, Wells Fargo buys Kraken and so on until all the liquidity rests on centralized exchanges. This will be hailed as for the benefit of all because no longer will exchanges such as Binance be operating under “wild west” rules, and they will also have found a way to eliminate cash once and for all. But the price will be…

“fractional reserve bitcoin”.

You say this is impossible? There will never be more than 21 million bitcoin? Sorry, but there’s a good chance that there’s already more than 21 million bitcoin if one were able to audit all the exchanges in the world and total up what everyone says they have. Maybe the reason why bitcoin isn’t going up as fast anymore is because the exchange values have already seriously diluted the supply of bitcoin possibly as high as 50 million BTC. How would we know if we never take them off the exchanges? See Trace Mayers proof of keys.

If you understood the first few paragraphs in this article, the reason should be very clear to you how this could be done. If you never withdraw to your hardware wallet, you haven’t technically forced the exchange to give you bitcoin on your hardware wallet by forcing a "truth" interaction on the bitcoin blockchain. They need only put you down for “X” amount of bitcoin at the time you bought in their central database and don’t even bother to go to the blockchain. If Coinbase or Binance just keep it in fiat and put it into something like Tether or DAI, they have other opportunities to use that liquidity to arbitrage everyone’s gains away.

Given that so few have what it takes to become personally sovereign over one’s finances these days, it wouldn’t surprise me that one day regulators pass legislation making it impossible to withdraw to a hardware wallet, then book of Revelations consequences would soon follow.

Please prove me wrong.

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