Why people will keep their Bitcoins on the exchanges.
When talking with experienced Bitcoiners, the sentence you you hear the most is probably Don't leave your Bitcoins on the exchange. It is understandable as the trauma of the Mnt Gox debacle is still fresh in those people minds, however as Bitcoin reaches mass adoption I expect that the vast majority of Bitcoins will be held on exchange accounts for one simple reason: The common man does not want the responsibility of managing his bitcoin account. Simple as that!
With a wallet you have control over your money. That also means that you are responsible for safely storing your money. There is no one to give you back your bitcoins if you lose your wallet keys or your HD seed. If you die and you didn't plan for your heirs to have access to your wallet, your money is lost. I expect that this will be unacceptable to the average European or American who is used to complain to his bank if he has to pay for a replacement Visa card. Imagine if you lost the contents of your checking account in case your debit card was stolen or misplaced, do you think it is a situation most people would be comfortable with?
Of course there are disadvantages to storing your money in your exchange wallet. Even recently Coinbase locked an account to be used for someone's legal defense. As the Bitcoin industry matures however I expect these issues to recede and the risk of losing your keys to become higher than the risk of having your funds locked or seeing your exchange go bankrupt. We are not there yet but I think it will happen relatively soon.
What is your opinion? Feel free to discuss it in the comments.
Picture Public domain by Tim Evans
After hearing so many ppl having their funds frozen and stolen......I immediately starting invest time on finding a offline line wallet. Exodus is great. They will add more coins onto their wallet soon. When also invest on getting the ledger nano as well.
Great article!
Your right for small amounts but i think serious investors will still look for more security.
Maybe this means licensed exchanges with governance best practice and transparent audits or wallets such as exodus where you have control. I think both will be important.
I expect that at some point the exchange will get licenses and will need to be audited like banks. Maybe there will even be deposit insurance at some point.
Xapo have some form of deposit insurance already. I don't know how extensive it is.
Managing your own money (and safety) is a concept very different to what we are used to in terms of money. Where cash increasingly went out the door for plastic money and your money in the bank, safety was an issue far far away, with money on your PC, private keys and new technological mumbo jumbo told by your neighbour kid without you understanding anything of it, I fully understand that people keep their coins on their exchange. After all, isn't it some kind of online banking institution?
Second, I do not think that people are long term HODL'ers right away and perhaps are scared that the Bitcoin price may tank and want to dump at the first sign of trouble.
Perhaps the solution when cryptocurrency grows is people having a USB hardware key with which they are able to control funds in an exchange? This should be implementable with ease (technology is there).
Hardware technology could be a solution, but I still think that most people will want someone to manage these things for them. Unfortunately people will choose the most convenient solution even if it is not the best. For example Mp3 vs CD.
One of the reasons people keep bitcoins in exchanges could be that Bitcoin doesn't have as easy to use paper wallet like ethereum has - myetherwallet.
Easy to create and easy to transact