Why you shouldn't hold your coins on exchanges

By yanis | little crypto guides | 14 Jun 2023

If you're new to crypto, chances are high you're currently storing your freshly purchased coins on a centralized exchange such as binance or kucoin. Even if you only claimed crypto for free on faucets, your hard-earned coins might be sitting in a centralized microwallet such as faucetpay.

However, it isn't the best solution at all, and this article will tell you why !

How do crypto ownership work ?

In crypto, coins/tokens aren't held by accounts with a name, but crypto addresses, which usually consist of a long encrypted string. Every address is linked to a public/private key pair (to be exact, derived from public key), in a way that you need to know an address' private key in order to spend its funds (more informations about public/private keys here). Thus, the only way to really own crypto is to have it in a wallet you fully control private key of.

As anyone with access to a private key is able to take its funds, you should NEVER share your private key with anyone !

Wait... exchanges didn't give me a private key !

Exactly ! When you have crypto on an exchange, they (claim to) hold your crypto in their wallet, keeping your balance records on a centralized database, which is essentially what banks are doing (but with crypto).

To be honest, even if exchanges gave users of copy of their private keys, it wouldn't change much as key was generated by exchange.

So it's all IOUs ?!

Yep ! Let's say you hold 1 BTC on Binance. That DON'T make you the proud owner of 1 BTC. Instead, it means Binance owes you 1 BTC !

What could go wrong ?

As withdrawing is only a matter of repaying an IOU, it exposes user to a significant risk if exchange goes insolvent (Sam moment lmao), leaving your pretend-coins worthless.

Furthermore, since you've probably never read their terms and conditions, they might reserve the right to take your hard-earned money without you even knowing !

How to solve this ?

The best solution to this issue is probably holding your precious coins/tokens in a self custody (aka non custodial) wallet, which gives you full control over your private keys.

I recommend (and use) Trust Wallet (mobile) and MetaMask (mobile, chrome) as beginner-friendly wallets.

However, if you're holding big amounts, I suggest you to use a cold wallet (such as a Trezor). As cold wallets work offline (only connected by USB to your PC), it considerably reduces probability of hack (unless ledger staff pushes some recovery features lmao) !

But I wanna trade

Even though holding your whole portfolio as IOUs is a terrible financial decision, you can transfer some coins to your favorite exchange at anytime :D

However, please note that blockchain charges some transfer fees (usually a few cents, way more on bitcoin and ethereum) :/

Bonus : forks and airdrops

Projects such as Uniswap (UNI) have performed airdrops based on on-chain activity, while forks are allocated proportionally to your holdings on forked chain.

As exchanges perform on-chain actions for you, they can reserve the right not to give rewards (frustrating :/). By giving you full control over your funds, self-custody wallet enable you to keep all your rewards and forked tokens !