If you hold all of your crypto on a centralized exchange, then you don’t own any crypto. Centralized exchanges (or CEXs, such as Coinbase, Kraken, and Nexo) work by holding all of the crypto themselves, and dividing it up among the users based on their trade history. They’ve also collected all of your banking information- your social, your address, your mother's maiden name, everything that they need in order to stay on the good side of Johnny Law.
Not that there’s anything wrong with that. I think we all would prefer to stay out of prison for tax charges. Prison can be a very terrible place for nerds like you and me. Let’s just keep everything legal and above board with Our Benefactors and pay our fair share like good little boys and girls who live in a polite society.
That being said, you should be aware that anywhere the government can touch your money is NOT SAFE. From FDR’s executive order 6102 which outlawed private ownership of gold to Prime Minister Trudeau freezing bank accounts of Freedom Convoy donors, there are plenty of examples of governments in the “free” world freezing assets of political enemies. They’ll do it in the name of “Combating enemy funding,” or “War on Terror,” or “Public health” or whatever lie will win them press favor that day.
You need to get your hard-earned dinero out of reach of the feds. This simple 3-step guide will help you go (nearly) completely decentralized.
1. Use Your Own Wallet
Most crypto projects come with their own wallet. I suggest looking into that before you even invest in a coin. Many wallets, like Metamask, can even connect different coins and tokens in one convenient place (assuming they use the same network protocols). It’s really easy. You don’t even need an account most of the time, just the twelve word secret password that allows you to use it. When you have that password, the wallet and money are yours.
A centralized exchange is pretty much the only place to trade fiat money for crypto, and that of course starts a paper trail. Trades between wallets are all public knowledge, so that trade from Kraken to yourself is on the books forever. Without your name attached to the wallet they’ll have to use clues to prove it’s yours, such as how much money was traded, the frequency of the trades, how many trades from one address, etcetera. I’m NOT suggesting that you launder your money, but be aware of the transparency.
2. Use a Decentralized Exchange
There are so many options in decentralized trading that I could write a whole article comparing them (which, I might). This part takes a lot of research, because you’ll want to find a decentralized exchange (or DEX) that suits your trading style. You may need one with all the right coins, something that provides good price information, something that allows for limit trades or even margin trading.
You’ll be hard-pressed to find an exchange that trades all of the coins that you own. If you can identify a coin that two exchanges have in common, you can bridge the gap that way. It’s a drawback of the technology- different blockchains don’t like to talk to each other. There are interoperability projects such as Polygon (MATIC), Cosmos (ATOM), and Polkadot (DOT) that are doing a good job of solving this issue.
You’ll have to get used to stablecoins in order to take profits. A stablecoin is a cryptocurrency with it’s price pegged to another asset; like gold, oil, or fiat. Tether (USDT) and USD Coin (USDC) are the most popular, both are on the Ethereum network and are backed by assets (thus creating a huge degree of centralization). They trade 1:1 with the dollar, or 1:1 with each other, so you can have some stability when switching between trading platforms to get that esoteric coin you want. Of course, you can’t buy coffee with Tether, which brings us to…
3. Cash Out
You’ve got to take your profits eventually, so unless you “know a guy” then it’s back to the CEX with you. All of your trading has happened off the grid, so to speak, now you’re just here to sell what you’ve earned. The exchange can’t see how big your bags REALLY are, and they don’t care. They see coins coming in, money going out, and it’s all on paper for when tax time comes.
If you do all of your trading with dollars on a centralized exchange, every trade is taxed, all the time. That’s a lot of money being thrown into the IRS incinerator that doesn’t need to be.If you switch to decentralized trading, you only pay taxes when you cash out, AND you own all your money in case something happens to the exchange (or you end up on a watchlist which I DON’T SUGGEST).
If you use your own wallets, use decentralized exchanges, you can enjoy the freedom that crypto offers to it's fullest. It's more work than letting Coinbase babysit your money, but you should always be wary of things that are too convenient.
Like this content? This was originally posted 3/9/22 on my website anarchocrypto.net where I write about cryptocurrency and more through a sarcastic anti-authority lense. Check it out for more! Also I'm not a financial advisor. This content is intended for educational and entertainment purposes only. Buy, sell, and trade at your own risk.