Bitcoin – Becoming your own bank

We’ve taken a look at Bitcoin is in terms of a distributed ledger vs a centralised system and how bitcoin compares to ‘traditional’ money. Now let’s talk about becoming your own bank and what that means.

Don’t we have digital currency already?

You might feel as though you already have access to a digital currency, you receive your salary automatically into your bank account, you pay your bills online, you can transfer funds to friends and just tap your card when making payments in shops. Why do we need another type of digital currency?

In this situation you don’t actually own that money you have in your bank account. The bank does, and you have an IOU. Each time you make a transaction online, you’re not moving that money, you’re asking permission from your bank for them to make that transfer, and the transactions can only happen if you’re sending from one bank account to another.

Being your own bank

With bitcoin, you own the currency that you have. When you wish to make a payment or transaction, you are authorising it, there is no third party bank that you have to seek permission from. Which is why you’ll see Bitcoin being referred to as being permissionless. You can send bitcoin to someone who doesn’t have a bank account.

This independence of owning and moving money around without permission from a third party bank appeals to many people. But with it comes greater self responsibility. There is no Bitcoin helpdesk number. Of the 16-17 million bitcoins (out of the total supply of 21 million) that have already been mined, it’s estimated that over 4 million of these have been ‘lost’. Because you own your bitcoin, you are responsible for keeping it safe. This requires you to consider where you’re going to store/hold your bitcoin.


You can do so on an exchange, in a hot wallet, or in a cold wallet. Most people hold their crypto currency on an exchange because it’s easiest. The problem with this is the exchange holds the private keys to your money. The person who has the private keys, controls the money. The second issue with this is that exchanges are largely centralised, and as such targets for hacking. There have already been plenty of examples of exchanges that have lost millions of funds with Mt Gox being the most famous.

When you hold your bitcoin in a hot wallet, you’re holding it in a digital wallet on your device. You have the private keys, so you have control of your money. For some this isn’t secure enough, because your device could be hacked, and your money stolen.

The most secure, is to hold your bitcoin in a cold wallet, which is why we issue our clients with cold wallets. The simple difference between a hot wallet and a cold wallet, is the hot wallet is connected to the internet, the cold wallet is not. Cold wallet storage can either be on a piece of paper, which you’ll then need to store safely, or on hardware, like a Ledger Nano S, Trezor or KeepKey. Of course, now you need to make sure you don’t lose the paper or hardware device.

If you have a lot of wealth in bitcoin or other crypto currency, then it’s best to store these as safely as possible. You can define a lot of wealth by asking the question “If I lost my money how badly would it impact my life?” If you would be uncomfortable with the loss, then you know which storage option to use. You can of course hold a small amount on an exchange or in a hot wallet for ease of access.

Remember this is not currently a regulated area, so if anything goes wrong, you’re on your own. If you lose your private keys, then you’ve lost your money. If you send a transaction to the wrong wallet address, then you’ve lost that money. If an exchange is hacked, or the money stolen, then you’ve lost your money.

Compare this to having your money in a centralised bank, and on many levels having your money looked after by the bank affords you levels of security that are appealing, including the first £85,000 of your money on deposit being protected if a bank collapses in the UK. For a lot of people this level of protection is enough. But for wealthier individuals, or businesses that have to keep an amount of cash on deposit for payroll as an example, this level of protection is woefully inadequate. Being in control of your own money, actually owning it and not having it sat in the bank as an IOU is an inviting option.

Bank bail outs and bail ins

The idea of a bank collapsing seemed highly unlikely before 2008, but the bank bail outs is something everyone remembers, where the UK government stepped in and supported the banks by giving them a rescue package totalling £500 million and European and US govts followed suit.

Less commonly known is a bank bail in, this is when a bank is in financial difficulty, rather than government bailing them out as before, the bank is left to fail, and only the protected amount (in the UK as mentioned the first £85,000 for each individual) is honoured.


Protecting yourself from fraud in terms of being hacked is vital, but also if you’re looking at other crypto currencies, not just bitcoin, then there are other fraudulent behaviours you need to be aware of.

Using crypto currencies for criminal activity. While it’s true that criminal activity has chosen bitcoin as a currency to trade in, recent reports show the vast amount of activity on bitcoin is legal. Bitcoin was once thought of as anonymous, but that’s not the case, and as a result criminals who can keep up with the technology are moving to other crypto currencies that offer such privacy.

While some crypto currencies come about because they’re looking to solve the problem that bitcoin hasn’t yet achieved (faster transactions, greater scale, lower transaction costs) many others are to solve entirely different problems. The unregulated funding mechanism for launching, and developing these alternative currencies (alt-coins) is known as an Initial Coin Offering (ICO). Investors into such projects need to do their due diligence as the potential for fraud can be rife in amongst the genuine projects.

You can listen to more about bitcoin protection, fraud, energy consumption and much more in a recent BBC radio programme where the question was asked Bitcoin: Bubble or Brave new world. Their expert panel included Frances Copolla, Oliver von Landsberg-Sadie, Jordan Pearson, and Catherine Mulligan.

Look out for the upcoming articles that focus on ICOs and discover more about the alt-coins Litecoin and BitcoinCash.



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