Is there a time when it might actually be beneficial to store crypto on an exchange?
Perhaps storing crypto on a centralized exchange is not the great snafu it once was.
If you have been around crypto for any length of time, you have likely heard the age-old adage:
"not your keys, not your crypo"
While there is a lot of truth to that, a ton of truth actually, it might not be quite the 100% fail safe saying it once was.
There may be times, for certain users, when it makes more sense to store their coins on an exchange than to try and keep track of their private keys.
But what @jrcornel, why would you say that?
Well let me tell you!
If you are a new user in crypto, keeping track of your private keys might be something you are not all that familiar with, and if you are, it might be something that proves quite difficult to do as life routinely gets in the way over time.
In the past it was expected that you would transfer your money into a crypto exchange, buy bitcoin (or whatever other crypto you wanted), and then store it on a hardware wallet or Ledger/Trezor.
And this strategy still mostly holds true today, mostly.
I say "mostly" because there are several very large crypto exchanges that are now fully insured.
Which means that even if they were to be hacked and coins were to be stolen, you the customer, wouldn't be on the hook for any of it as your holdings were fully insured.
Gemini is a perfect example of this, I believe Coinbase is as well (among others).
Better off on an exchange?
Going a step further, I would venture to say new users would actually be better off just leaving their coins on insured exchanges such as these as opposed to storing them in their own wallet and being responsible for their keys.
The reason being that from an odds standpoint, they are probably more likely to lose their key somehow or make a mistake doing a transfer and lose access to their funds than they would be to lose their holdings on a fully ensured exchange.
Over time I think we are going to see more and more exchanges fully insured so people can store their coins on them much more confidently, akin to what we see with large retail brokerages in traditional stock markets.
This is likely something that will help further bitcoin and crypto adoption.
There are other issues to take into account such as ease of access that are a bonus and also airdrops that likely need to be considered, but overall, if I was advising my grandmother to buy some bitcoin (I am), I would tell her to go ahead and leave it on Coinbase or Gemini after she purchased it.
Stay informed my friends.
Image Source:
https://www.crypto-news.in/news/cryptocurrency-exchange-gemini-secures-insurance-coverage/
Follow me: @jrcornel
The hacking risk is not really the primary reason for not holding your crypto on exchanges. For example, that's not the motivation behind the proof of keys event that happened recently.
The real reason is that whoever holds the crypto has the power. If an exchange holds an enormous amount of crypto (as most of them do), they have an incredible amount of power over those crypto networks.
For example, one of Bitcoin's most important points is that there is a limited supply which cannot be increased. But any crypto exchange today can increase the supply of Bitcoin significantly if they want, and we don't know if they are doing it or not (which probably means at least some are).
The reason they can do that is because they can put in sell orders on their platform as much as they want. They don't actually have to have the crypto that they are selling. In that case, people who buy the crypto they are selling aren't actually getting anything, but as long as they hold their crypto on the exchange, they don't know that.
The point is that the amount of bitcoin people have on an exchange is just how much the exchange says they have. As an example, say an exchange actually owns 10,000 BTC in their wallets, but the sum of all of the BTC balances in user's accounts is 20,000 BTC.
This could be the case right now and we have no way to know. As long as people keep holding their BTC on the exchange, this all works fine, and the exchange can keep adding more supply in this manner. The only way to stop this is if everyone withdraws their crypto from the exchange. If users have 20k BTC in their balances and the exchange only has 10k BTC, and all the users try to withdraw, only then will this extra supply go away.
This is exactly what banks do with USD, and with stocks (see the Dole food case for example, or look into why Patrick Byrne of overstock.com is into crypto). That is the reason behind movements like proof of keys and why Andreas and others say "not your keys, not your bitcoin". It's not because of hack risk, it's because if we think we have crypto because an exchange says we does, we have no way of knowing if the exchange actually holds that crypto to back up those balances and it gives the exchanges power to manipulate the supply at will.
Great comment. Yes, there is a lot of truth to this and it could be a good reason not to use exchanges, and perhaps something I should include in my post. :) However, do we know for sure of any crypto exchanges that are doing this? I mean has this been exposed ever or just assumed?
Very nicely explained 👍🏻
Has any exchange ever been exposed doing such practices or this is just a guess ?
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This makes the exchanges the banks of the future but i must agree there is need for it.
Sort of. Though you do always have the option to store yourself. Though in most cases I think people would rather let someone else worry about storing and then fully insuring their assets. If I lose access to my keys or get them stolen, not much I can do to get it back.
😁👍😁
Just gotta make sure you go with the ones that are fully insured!
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No. You are veurnable to hacks and you don't own your keys.
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Read the post.
Good point. I agree with you on this topic. I always struggling with my keys how and where to store them.
If the exchange is fully insured, this is the better route to go for most crypto investors.
Another interesting fact is that some of the larger exchanges which you mentioned also have the capabilities to send your crypto to vaults for cold storage. While this adds a layer of trust to provide to a third party, it may be a need for some. As the population continues to adopt to crypto, these are bridges that allow new holders to get a sense of the traditional custodial sense of banking with a new asset.
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Yep, very true. Just means the odds of a hack impacting the exchange and yourself are that much smaller. Though, as long as they are fully insured, I feel pretty good about holding some assets there. :)