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Comment by zubairq | Hacker News Reader

Actually a huge amount of Bitcoin that people bought from large institutions over the last 5 - 10 years was already not on the blockchain.

(1) a customer would go to an exchange’s website and purchase 1 Bitcoin

(2) the exchange would add 1 to an internal counter representing the Bitcoin balance for that customer on their internal SQL database

(3) the exchange would use / trade that money sent by the customer to try to make a profit before the customer sold their Bitcoin and withdrew their money

This is how big scandals like FTX and others disasters happened. Also known as “fractional banking”

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The popularity of these scammy exchanges despite the massive red flags shows that this is actually what customers want. They don't want the theoretical advantages of permissionless blockchains and private keys, they just want penny stocks that trade 24/7 and are called "crypto" because it sounds cool.

So institutions will take advantage of that desire for convenience and work with regulators to turn "crypto" into just another product on their menu, with the vast majority of customers having no other way to access it.

> They don't want the theoretical advantages

Surely only a fool would want advantages that were theoretical only?

The greater fool theory is the only mechanism for converting crypto to dollars, so this is a feature.

But they are not theoretical, users who have their own crypto wallets have been unaffected by all the failed exchanges (MtGox, FTX, etc.)

There are other actual advantages that some people today benefit from, like avoiding confiscation and uncensorable transactions ( which would have been appreciated by the Canadian truckers when they were debanked), or protection against high inflation (like many Venezuelans and Argentinians do).

This is not to say that the UX of cryptocurrencies is not good enough for the majority of people, but that is a separate criticism.

You're absolutely right, though I took the parent's main point to be that it's incredible how little people seem to care about these actually-very-practical advantages. (The advantages must seem purely theoretical to people so willing to throw them away.)

I agree with that point, most people don't seem to care about the advantages until they themselves get bitten by the status quo.

> They don't want the theoretical advantages of permissionless blockchains and private keys

Because none of these theoretical advantages make any sense for the absolute vast majority of people, and don't make sense for about 99.99999999999% of things for which the advantage is claimed.

This is right on the money.

It's incredible to think about really: the one technical feature that truly differentiates crypto from all other forms of currency -- namely, a cryptographically strong guarantee that no one else can touch your money -- gets thrown away routinely and no one minds at all.

Why would I mind if other people hold their money themselves or use a custodian as long as I have the option to custody my own money? Let people choose

Perhaps I wasn't clear: There's no reason at all for you to mind what other people choose to do with their money, and I'm fine with exchanges offering it (that is, holding customer balances on file privately instead of recording everything on the public blockchain) as an optional service. It's just shocking to me that so few people seem to regard the small cost and inconvenience of "doing it properly" as being worth it, when in some sense the entire blockchain machinery was designed and built to enable exactly that guarantee.

It's like watching someone buy a padlock to secure something, but then immediately cut through it with a boltcutter "to make it easier to get my stuff out".

Or maybe it's just that they aren't illiterate and know that US taxes must be paid in USD by law. If you want to call not going to federal prison "convenience" then make that argument explicitly instead of dancing around it.

That’s not at all fractional banking. That’s called a bucket shop.

Yes you’re right, “fractional banking” may have been a bad choice of words on my part. The point I was trying to get across was that assets given to a crypto exchange would be lent out and used, instead of custodied.

This is the same as a bank. When you give them money they lend it out and use it for other purposes which is why “bank runs” exist if everyone asks for their money back at the same time

In fact the US regulators have been very hostile in recent years to banks where you give them money and they just custody it for you safely, even for a fee

Any cryptocurrency investment is a bucket shop, not just exchanges. There's no underlying positive cash flow to return to investors.

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