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

[kexoni]

Totaly agree with previous post from KingsDen.

Self-custody and exchanges are different things, and must be used for different purpose. Self-custody is to store your bitcoin, and exchanges only to exchange fiat to bitcoin.

Must say also that self-custody require some planning and learning, but setup can always be improved.

[Findingnemo]

If they choose to keep their bitcoin in an exchange then it is not really their bitcoin, they can withdraw it as long the exchange allows them to. But one who wants to keep their assets with them they they need to spend a couple of hours to know how it works and if they can't afford then they should stick with the banking system that is more secure for such users than buying bitcoin but using exchange as their wallet.

[Japinat]

Which approach makes more sense, obviously its self-custody. However, self-custody could be easier said than done, but in real life, choosing self-custody over centralized exchanges brings a lot of responsibility.

Now if you don't want to carry those responsibilities, normally you will just stick from trusting centralized exchanges. That's why no matter how we claimed that self-custody is the real thing, a lot of people are still losing their bitcoin. Why? Because even if they're totally aware about having self-custody, but they aren't confident yet, or let' say they just want the easier way around, and don't want to compromise theirselves, though that kind of decision may compromise the future of their bitcoin.

[Cookdata]

~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.

Lmao, you predicted accurately. CZ has been on X doing that work since before the coldcard firmware exploit. I don't know why he never stopped being the CEO of Binance despite announcing that he has stepped down. I can't remember the last time I saw the current CEO of the exchange speaking in public, more like an underdog, while CZ still gives direction.

You know what is so shameful about these centralised exchanges? They have lost more of their customers data than some of these hardware companies, but recently they are just better at handling users data, they are worse than the data breaches we have had recently. KYC data is of a person that can identify a person is worse than data that includes location. I'm not trying to justify hardware wallet companies, they suck too, but nothing beats self custody, with or without them self custody can exist.

[Silverstonez]

This thing is very simple, so I don't know why you are complicating it.  Nobody ever said people should not use centralized exchanges, it was said that people should not store or keep their bitcoin investment in a centralized exchange, instead people should store their Bitcoin's in self custodial wallets where they would have full control over their funds and also take full responsibility for their Bitcoin.  Although keeping your bitcoin investment in a Self custodial wallets comes with risks, the same applies to keeping your bitcoin investment in a centralized exchange.

[PrivacyG]

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 the recovery is at a multiple level expense.

First of all.  If you did not have a Know Your Customer process on the platform yet, I imagine in many cases you will have to file it to claim your Bitcoin back.  Then you have to wait with your Bitcoin stuck in the wallet of an attacker, only hoping that maybe you will get that back one day again.  Which means lost opportunities, if you are an active Bitcoin user.  And then you will have to trust that the same platform you just were a victim of will not repeat the same behavior with no repayment the next time.

I would say the recovery chance is actually low.  If it is about the same chance as flipping a coin, I would not feel safe at ALL having my Bitcoin over there.

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.

With self custody, recovery is not even necessary if you did all steps properly.  People going for convenience is their fault, not the fault of Bitcoin.  We all have a choice!  It is convenient to never lock your front door or car, but people still do it.  Most of them any way.

The information to properly store your Bitcoin is all over the Internet.  It is easy as HELL to get to that information and because of that, in my opinion it is pretty much the fault of the owner every single time.  But I stand on my point, recovery is not necessary.  If some body really thinks they need a Third Party recovery option, Bitcoin is definitely not for them.

[Rengga Jati]

Totaly agree with previous post from KingsDen.

Self-custody and exchanges are different things, and must be used for different purpose. Self-custody is to store your bitcoin, and exchanges only to exchange fiat to bitcoin.

Yes, both options can be optimized for specific purposes. Depending on their respective functions and security features. When choosing a self-custody solution, prioritize genuine security. Each product has its own advantages. It is fine to cost more.  It offers robust security systems. Highly resistant to hacking attempts.

As for exchanges, choose top-tier platforms! Do not place 100% trust in them! Use them to convert Bitcoin to fiat currency! or for daily trading. Since trading typically involves keeping assets on the exchange, choosing a trusted platform is crucial. But, asset management strategies vary. Some users cash out profits immediately.  While others transfer them to self-custody for long-term holding.

[Joy- maker]

Self-custody and exchanges are different things, and must be used for different purpose. Self-custody is to store your bitcoin, and exchanges only to exchange fiat to bitcoin.

The earlier people understand that self custody and centralized exchanges have different uses it will be better for them.  Crypto exchanges were never created for storing Bitcoin or other cryptocurrencies,  they were created for specific purposes,  such as buying and selling, and trading Bitcoin and other cryptocurrencies.

However crypto exchanges still still provide wallets where users can deposit and hold their Bitcoin's.  While self custody,  is more suitable for storing your Bitcoin investment for the long term,  because self custodial wallets gives you full control over your Bitcoin and along with the responsibility of securing your Bitcoin investment yourself.

[Renampun]

I agree that both exchanges and self-custody serve their own purposes.. but from the start, it's clear that self-custody is more recommended for full control over your assets.. meanwhile, exchanges can be used for trading convenience, though with the trade-off that you are giving up control of your assets to a third party.

I lean towards both options.. exchanges are only for trading and should only hold a small portion of assets there, while for long-term holding, self-custody is preferable. Since you can't rely on an exchange to store your assets long-term, because even though self-custody comes with full responsibility, the exchange has the risk that at any time it could freeze your account, restrict withdrawals, or go bankrupt.

[tbct_mt2]

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.

Custodial and non custodial wallet (someone use the term self custodial wallet) is what I would like to use. Adding some tipping word like Private wallets can possibly confuse other people and I see it is not necessary to use. No offense to you, it's only my opinion.

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;
Open Source code wallet Vs Closed source code,
Hot wallet Vs cold wallet etc

Some topics for such comparisons and for newbies who are ready to learn, for their own safety in this market.
Custodial vs Non custodial wallets: what's the difference?
Custodial vs. Non Custodial Wallets - "Not your keys, not your coin" Explained.
Bitcoin & Cryptocurrency Wallets: The Definitive Guide.

[uchegod-21]

Self-custody and exchanges are different things, and must be used for different purpose. Self-custody is to store your bitcoin, and exchanges only to exchange fiat to bitcoin.

The earlier people understand that self custody and centralized exchanges have different uses it will be better for them.  Crypto exchanges were never created for storing Bitcoin or other cryptocurrencies,  they were created for specific purposes,  such as buying and selling, and trading Bitcoin and other cryptocurrencies.

However crypto exchanges still still provide wallets where users can deposit and hold their Bitcoin's.  While self custody,  is more suitable for storing your Bitcoin investment for the long term,  because self custodial wallets gives you full control over your Bitcoin and along with the responsibility of securing your Bitcoin investment yourself.

I guess op wanted to compare noncustodial wallets (self custody) to custodial wallets, but used an exchange in place of a custodial wallets. People often use these two terms interchangeably, not realising that an exchange is not primarily a wallet, it is used for trading. Even though the exchanges provide wallets for their users, the users are not supposed to be so comfortable using such wallets. The only thing that makes an exchange similar to a custodial wallet is that, in both, you do not control the keys.

Whether it is a custodial wallet or a centralized exchange, none is recommended for long term  and large storage of bitcoin.

Self custody comes with responsibilities, yea. But we should not be deceived to think that third party custody does not come with its own responsibilities too. If you are careless, you will still lose your bitcoins even when you are using an exchange or a custodial wallet.

[PrivacyG]

Custodial and non custodial wallet (someone use the term self custodial wallet) is what I would like to use. Adding some tipping word like Private wallets can possibly confuse other people and I see it is not necessary to use. No offense to you, it's only my opinion.

Self custody means you privately hold your Bitcoin so 'private wallet' is not really a term that confuses people.  It in fact helps them learn more, if they ever care to look the first term up.

[Natalim]

Totaly agree with previous post from KingsDen.

Self-custody and exchanges are different things, and must be used for different purpose. Self-custody is to store your bitcoin, and exchanges only to exchange fiat to bitcoin.

Must say also that self-custody require some planning and learning, but setup can always be improved.

Indeed, they serve different purpose that's why both shouldn't be compared. If you aim for long-term storage of bitcoin, get rid of an exchange, they can't be trusted especially for long term. But have your own decentralized, hardware wallet where you have the full custody and the only one accessing your coins.

Same way, if you use an exchange for trading and same stuffs, go with highly reliable and reputable exchange. But do not store with bigger amount of coins, the chance to lose is high especially that you no longer own your coins totally. Once you deposit it into an exchange, not your keys, not your coins anymore.

[Russlenat]

You don't have to complicate things, centralized exchanges do not work for us, but they work for their own survival and profitability. So we can tell that there is no guarantee that our coins will be safe there for long term.

On the other hand, self-custody is what works favorable on our part. Where there is full self-custody, there is security and safety of our coins. And that's what we need to gain assurance.

However, centralized exchanges can also be useful in times of trading our coins. But for safekeeping alone, stick with self-custody.

[SeriouslyGiveaway]

Source of all this list comes from https://www.chainsec.io/exchange-hacks.  And I am pretty sure they missed a few.

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.

Some other sources with collective information about hacked exchanges.

List of Major Bitcoin Heists, Thefts, Hacks, Scams, and Losses.
Hacked Exchanges since 2011.
List of cryptocurrency exchange hacks.
Crpyto exchange hacks 2009-2023: Chronological list.
Security incidents.

[Peanutswar]

It depends on how you will treat or approach your investment. If you are not quite sensitive with your information you can freely use with the centralized exchange but the cons here you are already vulnerable, your details are already submitted to them such as face, ids, and even address now the thing you need is a CEX which is secured _{(but some of them get hacked  )}, now the role of the CEX basically is just to exchange and not act as a wallet but because of being convenient for the traders to swap and convert into fiat currency most of them preferred this but basically if you are into a long term hodler ideal to use a non-custodial wallet this will make you feel safe because you have the rights with your coins, you can trade anytime you wanted with no limitation of the security but the thing you consider is the safety of your funds.

[drangos]

It depends on how you will treat or approach your investment. If you are not quite sensitive with your information you can freely use with the centralized exchange but the cons here you are already vulnerable, your details are already submitted to them such as face, ids, and even address now the thing you need is a CEX which is secured _{(but some of them get hacked  )}, now the role of the CEX basically is just to exchange and not act as a wallet but because of being convenient for the traders to swap and convert into fiat currency most of them preferred this but basically if you are into a long term hodler ideal to use a non-custodial wallet this will make you feel safe because you have the rights with your coins, you can trade anytime you wanted with no limitation of the security but the thing you consider is the safety of your funds.

It's worth noting that the decision is largely based on your crypto usage. I agree. Centralized exchanges are great for trading. Swapping assets and converting to fiat currency. But you're entrusting a third party with your money and personal information. Self custody can give one more control. As they own their private keys and are not relying on an exchange to get access to their money. Self custody is also more of a responsibility. However In the event that you shed the seed phrase or expose the private keys. You may not be able to recover the cash. So I believe a balanced approach is good. While you need to trade funds on a reputable cex storing a long term. Investment in a well secured. non custodial wallet is recommended.

[The Cryptovator]

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.

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.

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 can’t stop myself from quoting this part: you have ignored the biggest problem when storing funds on the centralised exchange. I am not just talking about hacking centralised wallets, because the exchange seems to give compensation upon hacking exchanges' funds. But the biggest fact is the exchange could freeze your funds anytime.

I often discourage storing our funds in any centralised exchange. We might trade and send funds to the hardware wallet upon completion of the trading. For me, I just move funds into exchanges when I need to buy something, then back to the hardware wallet again. I believe most of the forum members who know the potential risk of keeping funds in exchanges will not store funds there.

[bhadz]

You don't have to complicate things, centralized exchanges do not work for us, but they work for their own survival and profitability. So we can tell that there is no guarantee that our coins will be safe there for long term.

On the other hand, self-custody is what works favorable on our part. Where there is full self-custody, there is security and safety of our coins. And that's what we need to gain assurance.

However, centralized exchanges can also be useful in times of trading our coins. But for safekeeping alone, stick with self-custody.

To be honest, I've started to see the crypto content creators in our country who are amplifying the situation. And they want to convey the message that it's now time to trust the funds we have to the centralized exchanges; they're questioning self-custody. Well, I hope that nothing bad happens to them when they have that sole trust and put all their funds into the centralized exchanges. They are good to keep funds which are ready to be traded and not to be held as if they are our sole storage because they are not.