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

[MadSl1m]

d5000's list of the real self-custody risks (malware, wallet code) is missing a third member: the label being wrong about the product. Custody isn't a property you check once. It's whatever the operator's current terms say it is, and terms get revised.

I read these documents for a living. The honest self-custody products define custody as things the operator cannot do. Hyperbeat's terms, for one, say they cannot move, lock, freeze or change your wallet, and the key exports to MetaMask or Rabby. Most others just print the word non-custodial somewhere in the marketing and stop there. And Kolo's terms revision dated 1 July moved the whole program to a non-custodial model. Same app, same card, different custody overnight.

So whichever side of this debate you take, the test is the same: find the sentence that says what they can't do. If there's no such sentence, assume they can.

[wapwapwendy]

I use both. Exchanges are handy when I need to trade, but for coins I'm holding long term, I'd rather keep them in my own wallet. Self custody has its risks too, but at least you know you're in control of your keys.

[suzanne5223]

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.

I believe people easily understand the responsibility that comes with the use of self custody. What they really dont understand is how to securely use or perform the responsibility that comes with self custody without human error that exposes their holding.

What approach do you use?

I use both.

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.

I use a combination of the 2 depending on the size of the crypto, and the plan i have for it

[AgriTrack]

The reason why knowledge is important is because most newbies or beginners don't understand the difference between an exchange and a wallet. An exchange is a platform that you use for making trades, making it as simple as possible. Whereas, a wallet is a service you use to keep your assets, and there is a big difference between these two. People aren't supposed to use exchanges as wallets, because that's not what they are meant to be used for, you can buy or sell Bitcoin using an exchange, but you are not supposed to keep your bitcoins within that exchange if you plan to hold it.

The actual discussion should be about custodial and non-custodial wallets, where one is those that don't give you complete custody of your assets because you don't get to access your private keys, and the other one gives you complete access to your assets and private keys, which means you are the only one in control of the assets and the wallet. These are very basic things that people nowadays don't even know because of a lack of knowledge, and they don't focus on knowing the basics but directly jump into trading or making investments.

[Lontor]

Learn to be responsible, that's my answer.

People who think the other way ended up losing money to BitMart exchange.
If a centralised exchange is going to close down they should be able to refund all their customers, right?

Well the opposite was what happened to people who left their coins on BitMart exchange.
There is no better way to safeguard your coins than getting the job done yourself.

No one can help get things done better the way you would, it's like letting someone handle your business for you, they will never manage it the same way like you because they are not the owner.

[Hamza2424]

I have been doing self custody for MANY years now and I really do not miss having the fear that the newest exchange hack may have affected me.  If you still like playing russian roulette after looking at all this list and still think centralized exchanges are the better way to store your decentralized Bitcoin then I do not know what else to tell you.

Did you just prepare this list for the sake of giving OP an idea that Centralized Exchanges are not secure? This really great and can be helpful. The list is too big and accurate. I have bookmarked it for sharing purposes.

It is true that after reading all these articles, which I doubt OP would ever read, but still, even if he reads the titles, which exchanges have lost how much, he will not even seek such exchanges again for trading. But what if we give it another look, like how many exchanges from the list have said the funds of their customers are secure and they will receive them back on time?

Some might have given not the exact amount as FTX, etc. But people think that with Centralized Exchanges, we can claim our funds, and eventually, they have to repay them back. But of course, not all exchanges are alike when it comes to paying in full, unlike WazirX and FTX.

[d5000]

d5000's list of the real self-custody risks (malware, wallet code) is missing a third member: the label being wrong about the product. Custody isn't a property you check once. It's whatever the operator's current terms say it is, and terms get revised.

I read these documents for a living. The honest self-custody products define custody as things the operator cannot do.

In "real" self-custody, there is no "operator". And I was referring to risks related to software wallets like Bitcoin Core which are operated entirely by the user, with the ToS denying all responsibility. Of course there are developers, and thus it is possible that they put something like "secure" or "safe" on their website and that's not the case because of e.g. lack of entropy for seed generation. Something like the Coldcard bug/hack could of course also occur to Core, in theory, albeit it is extremely unlikely.

But you're correct about a lot of solutions which are promoted as self-custodial, and in theory also about hardware wallets. I think to these solutions, a lot more risks apply.

So the user has to investigate a bit, preferrably on popular websites like bitcoin.org. That may be an obstacle, but it is necessary imo if you want to invest more than a few bucks.

Edit: Have added this idea to another thread about possible recommendations about Bitcoin for friends and relatives. If you want to add something, do it

[PrivacyG]

If you want less hassle and more convenience as a beginner, go for a centralized exchange,

I can not call 'less hassle' having my heart stop every time I see 'Large Bitcoin exchange hacked for millions' as a headline, hoping I am not one of the victims.  Less hassle is when you open up Bitcoin Talk, see news about another hack and know your Bitcoin is still safe because you are the only one who has access to it.

-----

It is true that after reading all these articles, which I doubt OP would ever read, but still, even if he reads the titles,

OP does not even have to read the titles.  Simply looking at that list, I would really like to know how OP can argue why Centralized Exchanges versus Self Custody can still even be a debate.

[Byebyebtc]

Self-costudy feels like the best option for long term holders, it gives you complete ownership for your coins and you don't have to bother about freezing funds and other crazy stuffs that exchanges do,
But self-costudy isnt for every one, I will advise beginners to go for exchanges first then after some time if they are comfortable with it they can keep it but if they are not, they can do self-costudy

[Agathamay]

Everything have their advantages and also their disadvantages which if compared, you'll notice that decentralized systems always has an upper hand over centralized exchanges.
I always use the both, I use centralized exchanges for my regular exchange activities and trading while for holding, I alway get to use the decentralized wallet which gives me more confidence of control and safety.

I will advise beginners to go for exchanges first then after some time if they are comfortable with it they can keep it but if they are not, they can do self-costudy

Exactly
Beginners needs to start from a less complex system like the very centralized exchanges which would give them more familiarity with the system before deciding to be responsible for all their holdings as this will prevent some avoidable losses or complaint of using decentralized platforms like the exchanges and wallets.

[Maslate]

Simply put, if you prefer self-custody without knowing your full responsibility as a bitcoin holder, its like you are still gambling. That's when CEX enters because that will open you how bitcoin's privacy and security works, although we can't really tell if these centralized exchanges are able to maximize our own privacy and security because we still don't know what's happening behind or inside the real centralized exchange market.

However, if you think you are not capable and reliable enough yet, trust CEX first until you will learn to master how to safeguard your coins 24/7. Yes, it comes with high responsibility, but everything becomes worth it when you know you are in full control of your bitcoin.

[Sanitough]

If we can make both work, I think that can also be favorable on our part. However, I don't think trusting centralized exchanges for long will be profitable on our part since we are only putting our coins at a high risk of losing any time. We don't fully control our coins the moment we entrust them to centralized platforms, not our keys, simply not our coins. And this is the biggest threat for our bitcoin, putting them in a position where their future aren't safe and secured.

[snowpega]

If we can make both work, I think that can also be favorable on our part. However, I don't think trusting centralized exchanges for long will be profitable on our part since we are only putting our coins at a high risk of losing any time. We don't fully control our coins the moment we entrust them to centralized platforms, not our keys, simply not our coins. And this is the biggest threat for our bitcoin, putting them in a position where their future aren't safe and secured.

Yeah, that's true, but the wondering fact is that, knowing all that, many still hold their funds on centralized exchanges; isn't it called rigidity? And when such people become victims of any scam, what is left behind? Obviously nothing, but yes, one thing surely stays there with the name of "stress" for such kind of rigid people. I truly hate centralized exchanges because I also had a very bad experience with one of them a long time ago.

And I truly don't want to even name that shit exchange here; I lost my coins, and it never helped me with that. I provided all the things that the exchange asked me to get assistance with that matter, but they did nothing for me. So, I was a victim. The major concern is that we need to reduce the use of centralized exchanges and stick to using more self-custody platforms for our own safety.

[X-ray]

Centralized exchange isn't always sunshine and rainbows, if they experienced data breach your personal information might get exposed and it has happened quite a few times already. On top of that, sometime they freeze your account because they thought you didn't comply enough.

We have so many scary stories about people being locked up out of their account that have 100k+ in crypto for more than few years, some even got their account locked up when they still have their trading order open!.

Centralized exchange, only worth it if you don't know your way around self custody, or you're still gathering knowledge and learn about self custody, after you understand how to do self custody properly, it's advised that you take care of your own money.

If you don't want all that risk nor self custody, only wants capital gain exposure, simply buy BTC ETF. It exists solely for that reason.

[MusaMohamed]

Centralized exchange isn't always sunshine and rainbows, if they experienced data breach your personal information might get exposed and it has happened quite a few times already.

It's about KYC and privacy but actually there are more risks that will be talked below.
Why KYC is extremely dangerous – and useless.

On top of that, sometime they freeze your account because they thought you didn't comply enough.

We have so many scary stories about people being locked up out of their account that have 100k+ in crypto for more than few years, some even got their account locked up when they still have their trading order open!.

Loss of your fund when centralized exchanges terminate your account, freeze your fund and don't allow you to withdraw your money is very big concern. Other reasons that can cause your fund loss is exchange hacks, service closure, scam and more. Like Mt.Gox, many years after the exchange hack, and their users have still yet received funds back, even part of their funds.

Be careful using Binance & Centralized Exchange.
Eventually Binance closed my account.
Sanctioned Services and the service traceability to this forum, Any danger?
KX frozen my account and required me to KYC with a less than $1,000 deposit.

[M47AK16]

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.

I would do the same if I had a lot; for me right now, there is no need to keep it in any hardware wallet, because cold wallets are for bigger numbers and I do not have that much. So all of my money is at binance, because there is no need to keep it anywhere else, and even the long-term ones are there. Some of them are even getting returns because binance does offer interest if you keep it there and lock it, which I did.

After all, if I did not lock it I do not trust myself that I would not sell them, so I made the decision to lock my USDT and BTC, which they are paying very low returns of course but at least they are offering "some" returns instead of zero, which I would have if I did not put there, and the fact that I can't sell when it is locked is even better deal.

[Antotena]

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.

Bitcoin itself is like a beta tech, it has never been created before, that's why we do see upgrade and all of that. Coldcard is the same, I'm sure other open source project will have learnt one or two from their mistakes and in fact it will strengthen many securities in Bitcoin. I don't know the kind of narrative that people will push but nothing comes close to self custody, centralized exchanges are not the better option, they are convenient but have their own challenges.

What I noticed about this whole Coldcard hack is that I think we were focused too much on the effects of centralized custody, we didn't look at our glass that it will break and that is why it look too easy how the keys were tried and the hackers were able to move away with the coins. Lesson learned and it's a hard one but we all be fine, I pray and hope that people that lose their coins to hackers get stinger and buy again, as long as their life theirs hopr for them to have Bitcoin again.

[Hamza2424]

OP does not even have to read the titles.  Simply looking at that list, I would really like to know how OP can argue why Centralized Exchanges versus Self Custody can still even be a debate.

There is no debate, but then there is always some haha. As I think we should use a linear behavior. I am not saying yours is not, but saying universally, we just give our opinion and think the other one's answer is wrong. Like, I know what he will debate if he even replies back.

My debate would be, you mentioned 65 incidents, and almost 30 out of these fully recovered the funds for the users, so users of 30 incidents did not face huge losses. The 19 went bankrupt and never repaid their users, and 12 repaid partially. The numbers can vary, but still, the exchanges usually have a higher recovery chance, especially if we are using a good one that has good authority and high liquidity. Like tier 1 or tier 2, maybe.

But with self custodial wallets, recovery is not an option. Although, there are practices we can use to enhance the safety of our funds, but still, people always go for convenience, even if their data will be breached, like the broker in Israel lost 25k people's data or maybe more. There are several other incidents like this. People lose their data to hackers and then become victims of wrench attacks.

[Shadiq]

It depends on how much you value privacy and security. Self-custody wallets not only give you the responsibility of your wallet but also keep you free from unwanted KYC, thus maintaining your security and privacy. Some people also transact with self-custody wallets for privacy reasons.
Even if you want to trade coins privately, you can use DEX, which does not require KYC. Although it has some disadvantages.

If you do not have much of a privacy concern, you can use CEX for small transactions or trading. Exchanges are still probably more convenient for buying crypto with fiat or converting crypto to fiat. I only use exchanges for P2P services.

[KingsDen]

I do not think that there should be direct comparison between private wallets(self custody) and exchanges, as both serves different purposes. This comparison can come when the choice is to choose one over the other.

Self custody is a must and that doesn't stop anyone from using exchanges. The exchange is for buying crypto with fiat and for trading which is different from the function of non custodial wallets.

The comparison is fit for;
DEX Vs CEX,
Open Source code wallet Vs Closed source code,
Hot wallet Vs cold wallet etc

Even if you want to trade coins privately, you can use DEX, which does not require KYC. Although it has some disadvantages.

Apart from technical requirements of the user and the possibility of being scammed, any serious disadvantage?