Self-Custody vs Centralized Exchanges: Which Approach Makes More Sense?

[sunsilk]

I think people would be wise to try a combination of the two or make adjustments between them as necessary. Putting all your eggs in one basket as they say sounds like setting yourself up for potential disaster. As one should be diversified in their investments, they should also diversify where those investments are held for security purposes.

I agree that diversifying also should be considered to at least increase the security of what we're holding even if others consider it a little bump.

So, IMHO It's okay to do both of it for as long as the less safer got the little amount than the ones that we know the safest.

But with the recent security issues, this is now depending on the holder on how they're taking things seriously.

If it sounds that the self custody is less safer for them, they're free to do it.

[EL MOHA]

I agree that diversifying also should be considered to at least increase the security of what we're holding even if others consider it a little bump.

So, IMHO It's okay to do both of it for as long as the less safer got the little amount than the ones that we know the safest.

But with the recent security issues, this is now depending on the holder on how they're taking things seriously.

If it sounds that the self custody is less safer for them, they're free to do it.

Yes diversification is actually key but even at that I will simply take the fact that self custody will most definitely be main one holding nearly all the coins. If one is then intending to actually diversify and the amount the investor is holding is really big then they could simply just diversify to different self custody wallet. For example;

40% to a separate hardware wallet with passwords passphrase added; the Keys could be generated by the hardware wallet itself.

40% to another cold wallet on an airgapped device. This seed phrase and passphrase is personally generated using either dice or any combination method.

20% to a hot wallet which can be on a device I do not frequently use. This could be the one I access easily and can easily share with my centralized exchanges because I don’t think there is such a hurdle between moving from this wallet to exchanges if need be.

I highly don’t recommended keeping my bitcoin on centralized exchanges talk more of sayin the biggest portion should be there because if that be the case then it is best to simply just use ETF instead of an exchange if the investors is indeed scared of self custody

[snowpega]

...
What approach do you use?
...

Just remember one thing: if you are in the crypto space for the long run, then only use self-custody wallets rather than relying on any CEX exchange. Because this includes a very big risk that you can't even imagine. What you're seeing on exchanges in your portfolio, those are just numbers and nothing else. Because you don't have your keys and you are holding your personal funds in someone else's custody. "Not your keys, not your funds" What will you do if the exchange on which you are holding funds goes bankrupt, is a scam or shuts down its service without letting anyone know about it?

Then you will have no place where you can be able to claim your funds. And as a matter of exchanging money into fiat, my advice is that only use an exchange to exchange the money you need. And overall, we need to stay away from them for our own safety in the long run. Well, this is my point of view. DYOR!

[d5000]

While I agree with the general idea that both approaches can have a role in the ecosystem, @BIT-BENDER and @un_rank are very correct in that the examples in the OP like phishing and approving malicious transactions are misleading, as you can do that with centralized wallets (be them on exchanges or not) too.

The real risk of self-custody are 1) malware on your computer (if holding on a generic device) and 2) vulnerabilities in the code of the non-custodial wallet software, as we saw in the Coldcard hack.

Of course "exchanges" are mainly to purchase and sell crypto, they're not called "hodlanges" for a reason

But it may make sense to at least consider a centralized custodian, which may be a (VERY trusted!!!) exchange, if you as an user think you are less able to keep the two risks listed above under control.

Example: You use Windows and have unsafe internet browsing habits -> better hodl only small amounts and better use a centralized custodian. (Perhaps it would even be best to use something like an ETF in this case, as the ETF companies maybe are the most trusted custodians that exist.)

There are however many strategies you can use for a cold wallet to improve security. An example is holding long term funds on a multisig address where you must approve a transaction with several keys, and you store the keys in different places. If a hacker gets one of your keys, then he can't do anything because he needs the others too. Even quantum attackers would have to use more resources to hack your keys

[bitbollo]

we know very well the risks and advantages in taking one or the other side related custody of crypto and bitcoin.

the only way would be to make a setup that can mix both options... even in that case the techinically solutions would requires skils, time, experience to setup....every passage would be a layer for an attack to your coins. this is why probably some users seems to be very grateful to have an ETF or some centralized entity that takes care of their coins.

it couldn't be easy to have just one system that could fit perfectly for all kinds of users or all kinds of possible uses.
this would not means to allow a low secuirity in generating keys or the site used to store it, but trying to use a "competitive" solution...

[Obim34]

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

Straight to answering your question, self custody over exchanges.

Dictionary definition of EXCHANGE from Google:

An exchange is the act of giving one thing and getting another in return, or a marketplace where people trade goods, services, money, or information.

What happens after you trade (buy/sell) in a market, everybody leaves the market after doing business. I suppose this can be self explanatory on why exchanges are not a good place to hold your Bitcoin, staying longer exposes you to lots of risks.

[SquirrelJulietGarden]

While I agree with the general idea that both approaches can have a role in the ecosystem, @BIT-BENDER and @un_rank are very correct in that the examples in the OP like phishing and approving malicious transactions are misleading, as you can do that with centralized wallets (be them on exchanges or not) too.

The real risk of self-custody are 1) malware on your computer (if holding on a generic device) and 2) vulnerabilities in the code of the non-custodial wallet software, as we saw in the Coldcard hack.

If exchanges and self custodial Bitcoin users use a same wallet brand and model for Bitcoin storage, same method like multisig wallet, the second option is much safer for Bitcoin holders. Because they no longer have to rely on centralized exchanges or any third party to secure bitcoins for them when they are technically enough to become self-custodians properly and safely.

Using centralized exchanges and believe that they will do have safe and secure Bitcoin storage for you as well as have good business management and operation a long time is more risky than going to be self-custodian.

Bitcoin security resources.
Bitcoin privacy resources.

Of course "exchanges" are mainly to purchase and sell crypto, they're not called "hodlanges" for a reason

But it may make sense to at least consider a centralized custodian, which may be a (VERY trusted!!!) exchange, if you as an user think you are less able to keep the two risks listed above under control.

Exchanges can be big and trusted but they might change themselves with time, like Poloniex, Bittrex, BitMEX and recent years I have seen quality decline of Binance exchange. While in history, many cryptocurrency exchanges closed their services, died, hacked and bankrupted or scam exited.

https://www.cryptowisser.com/exchanges/
Cryptocurrency exchange graveyard.

[sunsilk]

~snip~

There will be more articles or threads that will come out that will glorify that people should get into exchanges entrusting them whole of their holdings.

While that's each their own but we, we knew it that it's still safer to have our funds on our hands depending on the strategy that we'll choose to do.

Like the diversification that you've given as an example, it's not that bad and I think that's balance at all. And no one stops people from keeping a bit part of their holdings into exchanges if they're actively trading.

[Merit.s]

It's good to use both combination for better safety so that, you don't lose all your life saving at once if there is a hack or your wallet was compromised.

You can even share your bitcoin investment into three storage. The biggest part like 60% of your overall bitcoin investment in a cold storage maybe, a hardware wallet or Electrum cold storage, 25% in a hot wallet (self custody) and 15% in exchange. You use the coins in the exchange daily/weekly and the one in your hot wallet monthly/once in a while and the coins in the hardware wallet is your future investment.

[QuickXChange]

Why make use of a coin that doesn't need an intermediary if you would be needing one.

If you lose your recovery phrase, approve a malicious transaction, or interact with a fake wallet or phishing website, recovering the funds can be extremely difficult or impossible.

There are also risk associated with CEX
Like someone having access to your mail or device for verification.
Account getting flagged or frozen due to compliance checks
and unwanted blockchain associations from things like dust attacks.
In summary even with its convenience and assistance
It means nothing if the user themselves isn't cautious.

I agree with you. Thank you for sharing! 🙏

[QuickXChange]

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

Straight to answering your question, self custody over exchanges.

Dictionary definition of EXCHANGE from Google:

An exchange is the act of giving one thing and getting another in return, or a marketplace where people trade goods, services, money, or information.

What happens after you trade (buy/sell) in a market, everybody leaves the market after doing business. I suppose this can be self explanatory on why exchanges are not a good place to hold your Bitcoin, staying longer exposes you to lots of risks.

 Thank you for sharing

[Taskford]

we know very well the risks and advantages in taking one or the other side related custody of crypto and bitcoin.

the only way would be to make a setup that can mix both options... even in that case the techinically solutions would requires skils, time, experience to setup....every passage would be a layer for an attack to your coins. this is why probably some users seems to be very grateful to have an ETF or some centralized entity that takes care of their coins.

it couldn't be easy to have just one system that could fit perfectly for all kinds of users or all kinds of possible uses.
this would not means to allow a low secuirity in generating keys or the site used to store it, but trying to use a "competitive" solution...

Then I agree, because there's no single set up could work with everyone. Mixing it up with same like ETF custody style and with real self custody is really possible. But the problem is it will just add another layer of complexity also more required skill to manage properly their assets.

This is why many people feels like they are comfortable when there's regulated custodians take the responsibilities on operations side. There are people also like to take full control even if they know how big the responsibilities that they might going to handle.

But well at the end of the day. Each people have different needs especially on what they like to use and those competitive security somehow means that they are using the best set up that match on their skills and knowledge.

[BABY SHOES]

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

Self-custody we do for HODL long-term, so do not do both of his because I am not a trader at least at the moment, so we do not keep the exchange at any time.

There is someone who keeps on the exchange because he is a regular trader, then it is natural than back and forth transfer from a personal wallet to the exchange, keep in mind the risk at your own expense.

Saving on the exchange you have to understand recently I Bitmart got a lot of condemnation among the community for not being able to withdraw, here's what you know how to store assets on the exchange you have no control in times like this.

self-custody is much better, I think even a beginner understands how to use it, so don't get too hung up on continuous exchanges.

[Floxynice]

@op, you are now making it seem as if, if you use exchanges, you are automatically immuned against personal attacks from scammers, hackers and the use of malicious site. You will still lose your bitcoins if you are careless and fail to take part of the responsibility for the safety of your bitcoins. If you interact with scammers and they steal from you, the exchange will not help you recover your bitcoins simply because you are using the exchange.

You have the greater risk from using an exchange because, anything that affects the exchange also puts your bitcoins at risks. It is better for you to eliminate the exchanges and focus on taking full responsibility of your bitcoins. If you must use an exchange, it should be a decentralized exchange and with small amounts of bitcoins.

[cryptomaniac_xxx]

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

The Coldcard incident might really put a lot of questions on self-custody. But I think it is still the best for us Bitcoin holders instead of trusting CEX as there are also dangers of hacks and your funds being confiscated by the 3rd party without any proper explanation.

Probably this is just a black swan even as far as hardware wallet services is. And with this, for sure known hardware wallets like Trezor or Ledger although have history of data leaks as well, might be looking to enhance or double check their software, hardware or finware for possible loopholes.

So for me, the best is still self custody specially if you are not a trader but a long term investor.

[Btcdeybodi]

Self-custody has always been one of the core ideas behind cryptocurrency, but I think the discussion is becoming more relevant as more people enter the market.

When you keep crypto in a self-custody wallet, you control the private keys. This gives you direct control over your assets without depending completely on a centralized platform.

But that freedom comes with responsibility.

If you lose your recovery phrase, approve a malicious transaction, or interact with a fake wallet or phishing website, recovering the funds can be extremely difficult or impossible.

Whatever that has to do with money comes with many responsibility because it is not just about making money but protecting it. If you value your investment in bitcoin, you should know that your private keys is the access to your money so you should keep it safe. It is an obligation to keep your secret keys safe and secret. Do you prefer waking up one day and discover that all your coins are gone because the exchange you kept it encountered hack or wake up with the knowledge that your coins are secured because only you have the private keys to your wallet.

Centralized exchanges have a different advantage. They are generally easier for beginners and provide convenient access to trading and liquidity, but users must trust the platform with custody of their assets.

The advantages that centralized exchanges have is the ability to perform peer-to-peer transactions on their platforms by exchanging crypto assets with fiats and also in the case where you forget your log in password, you can do a password recovery but will you choose to keep your assets in the custody of exchanges where they can be prone to phishing attacks and exposed to theft if the exchange wallet is hacked.

For me, the interesting question isn't necessarily "Which one is better?"

Maybe both have a role.

An exchange can be useful when you need to trade or exchange assets, while self-custody can make sense when you want direct control over crypto you're holding.

As crypto adoption continues, I think security education will become increasingly important. Giving users control over their assets only works when they understand the responsibility that comes with it.

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

The logic is just to keep your bitcoins on self custody wallets, if you want to trade then you can transfer it to an exchange wallet.
Of course, security education is paramount when it comes to your assets because one mistake can cost you to lose all your coins.
For me, i practically keep my bitcoins in Electrum wallet, when there is need for me to sell i do move it to exchange wallet.

[MusaMohamed]

The Coldcard incident might really put a lot of questions on self-custody. But I think it is still the best for us Bitcoin holders instead of trusting CEX as there are also dangers of hacks and your funds being confiscated by the 3rd party without any proper explanation.

With non custodial wallets, there are less risks than with centralized exchanges and custodial wallets. Because you will have to rely on centralized exchanges while they can choose bad wallets like Cold card, while there are other risks like hacks, bankruptcy or scams.

If you store coins by yourself, you only need to choose a good non custodial wallet, then create, backup, test wallet, test backup, use the wallet while store backups safely, and you can control everything. There is no fear from many risks that you can not control, can not avoid if you store coins on CEX.

Probably this is just a black swan even as far as hardware wallet services is. And with this, for sure known hardware wallets like Trezor or Ledger although have history of data leaks as well, might be looking to enhance or double check their software, hardware or finware for possible loopholes.

To avoid black swan events of a single wallet manufacturer or brand or model or version, you must store your coins in some wallets that belong to different wallet softwares, manufacturers. Your coins in Coldcard hardware wallet could be hacked but if you store coins in other wallets from other manufacturers, they are safe now.

[Cookdata]

Centralized exchanges have a different advantage. They are generally easier for beginners and provide convenient access to trading and liquidity, but users must trust the platform with custody of their assets.

With this paragraph, I want to assume that you are a newbie. If you are not new to crypto, then what you have learn all this while is absolutely waste of time and effort. What are the advantages of exchange custody? They were never meant to be custody, they are exchanges where you trade. The only people I can make exception are traders with positions. If you don't have position open in an exchange, you have no business with centralized custody.

For me, the interesting question isn't necessarily "Which one is better?"

Maybe both have a role.

An exchange can be useful when you need to trade or exchange assets, while self-custody can make sense when you want direct control over crypto you're holding.

You can exchange asset in a self custody too, you don't have to use centralized exchanges before you can make a swap. We have many Dex today where you can trade without deposit to a centralized exchange, this is 2026.

As crypto adoption continues, I think security education will become increasingly important. Giving users control over their assets only works when they understand the responsibility that comes with it.

What approach do you use?

Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

If you use centralized exchange or decentralized, it's your choice, your privacy is your responsibility but better if you learn how to use Dex. As for Self custody, don't compromised that for anyone. The same security risk you are going to do is what centralized exchanges also do. They don't do anything special than what is discussed in this board. There is no issuance anywhere if they loss your funds.

[tbct_mt2]

Centralized exchanges have a different advantage. They are generally easier for beginners and provide convenient access to trading and liquidity, but users must trust the platform with custody of their assets.

With this paragraph, I want to assume that you are a newbie. If you are not new to crypto, then what you have learn all this while is absolutely waste of time and effort. What are the advantages of exchange custody? They were never meant to be custody, they are exchanges where you trade. The only people I can make exception are traders with positions. If you don't have position open in an exchange, you have no business with centralized custody.

I think differently.

I see the information is true for newbies even I would prefer to use non custodial wallets, but honestly I began with custodial wallets and exchanges to buy and store my fund. During my very first days in this market, even making a transaction, getting a wallet address were all new with me, and I felt like I could make mistake and lose my coins too.

It's safer to have first experience with centralized exchanges but let's choose and use top centralized exchanges. It takes time to get familiar with exchanges, custodial wallets, public addresses, transactions, check transactions with block explorers, then learn about non custodial wallets. It's only time when you learn enough about risk of CEX, risk of custodial wallets, advantages of non custodial wallets, you will change your practice entirely.

Reminder: do not keep your money in online accounts.

[Powerjumboo]

What approach do you use?
Do you keep most of your crypto in self-custody, on exchanges, or use a combination of both?

Interested to hear how other Bitcointalk members approach this.

If I were asked where I keep my crypto assets, I would say that I keep some of my Bitcoin investments in my own wallet and hold them for a long time. Then, to meet the needs of the family, I have to sell some of my income, which I take to the exchange and sell. Also, I sometimes prepare for trading, which is why I keep some crypto assets on the exchange platform, which I also trade with occasionally. So I would say that I use both my own wallet and the exchange to keep my crypto assets, and both seem safe to me.