The analogy fails because it's different in a substantial number of ways. That's the problem with arguments by analogy in general -- they're weak.

I'm not proposing an alternative to cash and banks here, I'm just pointing out that, if you have Bitcoin and want to sell it for fiat currency, using an exchange is definitely the easiest way to do so, and a best practice for doing so is to hold your cryptocurrencies yourself and only move them to the exchange when you're selling them, rather than holding them in the exchange.

Many laughable things become fine with technology. Look at various encryption or network protocols. If someone had seriously proposed to Caesar that to keep their messages truly safe they needed to work out the math of a one time pad for every communication (or maybe more practically by modern standards, AES), they'd be executed. Rather than dismiss things on analogy, look at things as they actually are. The total amount of friction for the bitcoin equivalent is very little which makes it not a problem at all.

If I have to transfer my money into an exchange, wait for it to clear, and then immediately transfer it out into a wallet with a long random address with a random key that I then have to protect, that's not "very little friction" compared to traditional banking. There are many benefits to cryptocurrency, but ease of use is not one of them, and when you claim it is, you come across as out-of-touch with the average user.