Leaving your Bitcoin in an exchange is not now and has never been an "effective necessity to use" Bitcoin. However, for fiat-currency transactions, it is an effective necessity to leave your fiat currency in an "exchange" called a bank, if you want instant electronic transactions. Unlike with the banking system, you can engage in instant electronic transactions with Bitcoin you hold in your own wallet — although some counterparties may prefer to wait for a number of confirmations.
> There are no such institutional protections for Bitcoin and there never really can be, by design.
This is nonsense. Bitcoin's design permits all the same institutional protections available for dollar bills or precious-metal coins, and additionally permits others that are enormously more secure than the mere incentive structures we must rely on in the case of dollar-based institutions. For example, a bank holding gold or dollars cannot produce a mathematical proof of its reserves as a Bitcoin bank can, and there is no dollar equivalent of multisig wallets.
So, in both cases, you are incorrectly imputing advantages to fiat currencies that in reality belong to Bitcoin in this comparison.
> However, for fiat-currency transactions, it is an effective necessity to leave your fiat currency in an "exchange" called a bank, if you want instant electronic transactions
Yes. However there is also cash which allows for instant anonymous transactions in the physical world which is sufficiently widely accepted to be used to the exclusion of banks, if you so choose.
> you can engage in instant electronic transactions with Bitcoin you hold in your own wallet
Isn't the fact that transactions are not instant widely perceived in the Bitcoin community as one of, if not the, greatest barrier to adoption? If not, why all the investment in the Lightning network?
> Bitcoin's design permits all the same institutional protections available for dollar bills or precious-metal coins, and additionally permits others that are enormously more secure than the mere incentive structures we must rely on in the case of dollar-based institutions. For example, a bank holding gold or dollars cannot produce a mathematical proof of its reserves as a Bitcoin bank can, and there is no dollar equivalent of multisig wallets.
You're saying these words but not addressing the substance of what I said. There is no FDIC equivalent for Bitcoin - unless there's an exchange that guarantees replacement of lost/stolen Bitcoins? Replacing Bitcoin seems a difficult proposition when fiat currency can just be created out of thin air but Bitcoin cannot - once it's lost, it's lost, and can only be replaced in a zero-sum way.
> There is no FDIC equivalent for Bitcoin - unless there's an exchange that guarantees replacement of lost/stolen Bitcoins? Replacing Bitcoin seems a difficult proposition when fiat currency can just be created out of thin air but Bitcoin cannot - once it's lost, it's lost, and can only be replaced in a zero-sum way.
I didn't realize you were laboring under the misconception that the FDIC has the authority to mint money, like a central bank. That's why I didn't address it. Now I can. It doesn't. The FDIC is funded by premiums paid by its member institutions, not by creating currency out of thin air; an insurance scheme for Bitcoin depositors in a bank that provided fractional-reserve Bitcoin accounts could be funded in the same way. It could even be provided by the FDIC, which already provides deposit insurance for deposits denominated in foreign currencies.
> Isn't the fact that transactions are not instant widely perceived in the Bitcoin community as one of, if not the, greatest barrier to adoption?
Bitcoin transactions are instant; they reach everywhere in the mempool in a matter of seconds. It's just that until they're a few blocks deep in the blockchain, they might be reversed, like bank transactions can be for several months. This usually takes half an hour or so, and that's a hassle for some kinds of transactions. However, I think bigger barriers to adoption include the network effect of existing currencies, a sketchy reputation, and the fact that Bitcoin exchanges are now illegal in China.
> there is also cash which allows for instant anonymous transactions in the physical world which is sufficiently widely accepted to be used to the exclusion of banks, if you so choose
Cash limits you to transacting with people you can meet in person, which condemns you to poverty unless you are very lucky indeed.
> There are no such institutional protections for Bitcoin and there never really can be, by design.
This is nonsense. Bitcoin's design permits all the same institutional protections available for dollar bills or precious-metal coins, and additionally permits others that are enormously more secure than the mere incentive structures we must rely on in the case of dollar-based institutions. For example, a bank holding gold or dollars cannot produce a mathematical proof of its reserves as a Bitcoin bank can, and there is no dollar equivalent of multisig wallets.
So, in both cases, you are incorrectly imputing advantages to fiat currencies that in reality belong to Bitcoin in this comparison.