Digital gold has gone mainstream. JP Morgan, BlackRock and the biggest names in global finance are now echoing the cypherpunks and suggesting that Bitcoin could replace the yellow metal as a safe haven in investment portfolios.
But while Bitcoin does share characteristics with gold, a big reason why the digital gold narrative has found so much traction with sophisticated investors is because of limitations with institutional-grade digital asset custody infrastructure.
In the name of security, most institutions are forced to adopt centralized crypto asset management methods, shunting the private keys that grant ownership over blockchain assets offline, and reducing the functionality of a dynamic decentralized currency to an inert rock.
A decentralized safe haven
At a time when investors of all stripes are trying to hedge against economic policies designed to counter the impact of coronavirus, the idea of digital gold has quickly gained traction.
But while the contagious idea has helped bitcoin spread to institutional investor’s portfolios, treating bitcoin like a simple commodity limits its ability to act as both a safe haven and a digital decentralized asset, particularly for institutional players.
As a cryptographic asset controlled by a string of code, Bitcoin enables a new form of ownership, which is spelled out with legal certainty in pioneering regulations from Wyoming that recognize the ownership rights conferred by control of private keys.
This is liberating for individuals, who can take advantage of a unique safe haven that has no negative carry, and is cheap and easy for an individual to manage. Unlike gold, which is firmly rooted in the physical realm, bitcoin exists borderlessly on the blockchain, providing a safe haven that passes beyond geographic and jurisdictional limits, and can be stored as easily as memorizing a 12 word mnemonic of the private key.
Better yet, Bitcoin can be put to work in the growing crypto economy, and lent, borrowed, or sweated in other ways without necessarily giving up control of the asset to a third party.
Institutions, on the other hand, can’t take advantage of this self-sovereign vision so easily. Stringent regulations and lack of technical knowledge mean most sophisticated investors can’t simply take control of their own private keys, and are forced to use custodians that often limit the cryptocurrency’s full potential.
The problem with centralized custody
When bitcoin is squirreled away in cold storage or locked in cumbersome multisig services, the asset is stripped of some of its most salient qualities.
These centralized methods of private key storage treat private keys like the buried treasure of pirates, locking them away on computers disconnected from the internet, or on strips of paper in safety deposit boxes and vaults hidden far below Swiss mountains.
Yet as a bearer asset, managing Bitcoin means handling these private keys. So when they are locked away behind multisig accounts or in offline…