Why are investors more likely to hold Bitcoin in exchange wallets?

[5W-KILO]

Maybe the people feel more comfortable storing their assets on an exchange now, because there have been many cases of losing assets from non-custodial wallets. The exchange also offers if it is hacked they will try to restore, or your assets will not be affected. In this case, if we store asset on exchange, the exchange to be in charge. It is different when we store our assets ourselves where all the responsibility lies with us, this is a idea to store asset on exchange especially for people who are careless with security wallet.

They feel comfortably storing funds on centralized exchanges where they can trade Bitcoin to stablecoins or altcoins, can use leverage to gamble with trading. Most of time they don't feel any risk with this practice at all, and they only start to feel fearful when an exchange is hacked especially it's a big hack on a tier 1 exchange like what happened recently with Bitget and Binance.

They can withdraw funds in panic to non custodial wallets or to accounts on other exchanges, but after all most of them will move their funds back to exchanges and repeat risky practice again.

Most people store funds on exchanges are not investors but are traders and they want to find opportunities from trading.
Reminder: do not keep your money in online accounts.

Well, now that crypto exchanges are capable of paying back loses if hacks happen I think crypto wallet will be useless in no time, many people will eventually buy this idea and start leaving coins on exchanges instead of moving to their wallets.

It's only a matter of time, something will happen that will make this idea a very bad one, Binance is the one giving them the confidence to feel at ease with leaving money on exchanges.

If someone gets hacked and their coins are moved from their crypto wallet they will feel bad and probably always remind it, and if someone leaves their coins on an exchanges and they always cover losses of hacks it will encourage people even more.

[laspol65]

Maybe it's because of the reason you mentioned. But I think that people who are investing in Bitcoin for the long term prefer to store their Bitcoin in self-custody rather than depositing their Bitcoin in an exchange quality. That is, a decentralized wallet that the person himself controls. In that case, he only has to store his seed phase.
And those who store sales in exchange wallets are mainly traders or P2P investors. For example, I store some Bitcoin in an exchange wallet for my daily use, yes, it may be to trade in other tokens or to convert Bitcoin to fiat. But it seems unreasonable to me to prioritize the issue of losing seed phase.

Keeping your Bitcoin under your control is the best thing to do, where it is preferable for each person to keep their own Bitcoin in their own wallet. In the current situation, many people have been harmed by Bitcoin because they have kept it on exchanges, so this situation should definitely be ignored and not used at all. Users who use exchanges to keep their Bitcoin are making the wrong decision, they will eventually lose their capital.
 In this situation, you should definitely use a multisig wallet, because the chances of being hacked using this wallet are very low, but you can choose to use your wallet according to your own opinion.

[Ayers]

You are seeing something entirely different, it doesn't cost a lot to move small amount of Bitcoin from an exchange to a personal bitcoin wallet, why leave behind your coins when under $1 can be used to move it out?

When you have successfully bought some Bitcoin the next plan is to move it out, there is no such thing as buying some and leaving it because you plan to buy more later, because the more time you spent leaving the coins in the exchange the probability it will get lost.

Lazy people who can't take responsibility are the ones choosing centralised exchanges over self custody.

IIRC, binance's withdrawal fee ranges from 0.00002-0.00005 BTC, so $1.5-$3 at current prices. You're right about that.

That said, we're not all cut from the same cloth. Everyone's got a different risk appetite, different preferences and a different ability to manage their own coins. I don't encourage anyone to keep coins on CEXs, but I'm not gonna be so selfish as to call people lazy or irresponsible just because they don't see things  the way we do.
Besides, nothing guarantees that people who self custody won't lose their coins.  Have you forgotten what happened with coldcard and ledger? hardware wallets aren't completely risk free.

[Catenaccio]

IIRC, binance's withdrawal fee ranges from 0.00002-0.00005 BTC, so $1.5-$3 at current prices. You're right about that.

Binance as a page to check information about withdrawal fee and trading fee.
https://www.binance.com/en/fee/cryptoFee
https://www.binance.com/en/fee/trading

Bitcoin 0.00002
Bitcoin (Segwit) 0.001
Lightning Network 0.000001

There are BEP20 and ERC20 but I don't list them here because on such chains, there are Wrapped Bitcoin tokens, not actual bitcoins. Because they are tokens, not actual bitcoins, it's safest to avoid using those wrapped bitcoin tokens.

[YellowSwap]

I think we cannot assume that they hold their Bitcoin on exchanges, I believe that most of the Bitcoin on exchanges is from people who are also actively trading as well. Some may HODL there for the long term but only a small percentage I guess.

But if they hold there they have a reason too as even hardware wallets can be compromised, just like the tampered Ledger hardware wallets, so for people who do not know how to protect their wallets they choose exchanges especially if an exchange has SAFU and has never failed to compensate their clients every time a hack happens (talking about Binance). Both hardware wallets and exchanges have risks it just depends on how the person weighs things up.

The most important point for me is them getting their coins back if hacks happened, it's not about trading but that's a plus too because as a trader you can already open down some trades and a hack takes place.

I would rather lose $1 or few more as withdrawal fee every 24hrs if I am done trading on a exchange rather than leaving it on any crypto exchanges and sleep well at night.

Just because Binance is capable of reimbursement right now doesn't mean business will always be good,, that amount of money will affect them and trust me they will find a way to recover, either genuinely or illegally.

[briggswillis4real]

I think the Binance payouts are making this worse, not better. Every time an exchange covers a hack, holders learn that custody risk costs them nothing.
The lesson people take is “I got my money back”, not “I should have held my own keys”. Few of them notice that a refund depends on the exchange’s reserves and on its willingness to pay.
Even a full refund doesn’t cover the withdrawal freeze while the exchange investigates, which has been a real problem for Binance users since the attack.

I also don’t think "people hate seed phrases" is the whole story. For most people, the cost of self-custody is a one-time setup, while the cost of exchange custody is a small chance of a large loss.
People are bad at weighing that kind of trade, so they take the option with no upfront effort.

What I’d tell someone who isn’t going to cold-store everything

- Move out anything you won’t trade in the next few months. Even a cheap hardware wallet beats an exchange for long-term holdings.
- Test your backup before you rely on it, by restoring the wallet from the seed with a small amount. Most seed-phrase horror stories come from backups nobody ever tested.
- If you use an exchange for receiving payments, as some of us do with signature campaigns, sweep it to your own wallet on a regular schedule.

I agree with Charles-Tim that on-chain transactions from a non-custodial wallet aren’t harder than people think. The perceived difficulty is mostly the first time.

[SmartCharpa]

I don't know whether investors actually use exchange wallets but it's true that using exchange wallets can also be risky especially when you have a large amount of funds. Normally wallets are much safer than exchanges but there could be a problem with exchange keyless wallet. For example you deposit a large amount of funds into it then the exchange removes access to your wallet and asks you to import it again. When you try to import it you find that you're wallet is no longer there. What will happen then? All your funds will be gone.

I can say that most of the investors prefer to use exchange wallets than the wallets, but it look like the numbers of people that use exchange and wallets are equal. It’s true that the both is involved of risky but one has high risks, and with that people doesn’t care if not be now that this issue of hackers is has been come so popular. Like me I also prefer using exchanges than wallet, because since i started using the exchange I have never experience any losing from the exchanges and that that’s why i stick to the exchanges up to now. I know that this incident that happen recently has teach most us a lesson, not everyone will like to store their assets in the exchanges anymore.

Using exchanges or private wallets doesn’t stop you from getting scammed. We see different ways people lose their in this space, using exchanges is now more risky after what happened few days ago.

Exchanges are getting hacked, and people are becoming more vigilant about their money. During the incident a lot of people lost their money, and they would never want to experience such losses again. Many individuals may change their mind and go back to private wallets, where they have full control over their bitcoin. While using a private wallets if u lose your money or get scammed, you will hold yourself responsible because you are the one person who control your wallet.

[passwordnow]

I think the Binance payouts are making this worse, not better. Every time an exchange covers a hack, holders learn that custody risk costs them nothing.
The lesson people take is “I got my money back”, not “I should have held my own keys”. Few of them notice that a refund depends on the exchange’s reserves and on its willingness to pay.

And this makes the users convenient, but we don't see the future that this is a huge risk still that they need to understand. While it's job well done for binance but, they can't always be like this because they don't have an unlimited funds, the safu to pay for every loss that they'll get from these hacks.

People are bad at weighing that kind of trade, so they take the option with no upfront effort.

They don't see the cost of it as of now but when they do, it's definitely going to be costly that they'll learn the valuable lesson that we're trying to tell them even before they realize it.

[Pandu Geddon]

While using a private wallets if u lose your money or get scammed, you will hold yourself responsible because you are the one person who control your wallet.

Even though we have to bear the losses ourselves, I think it is still better. Although not free from the risk of loss, at least when you have quite a lot of assets stored in your wallet, your mindset to be more careful in protecting your wallet is certainly there. 
I am not saying that investors who keep their assets on an exchange do not have this mindset. But perhaps their awareness regarding protecting their assets is not as serious as investors who keep their assets themselves in a wallet. Maybe because they think the exchange will bear it if something goes wrong.

[Oshio-man]

Investors that understand exchange wallets very well will not leave their bitcoin in the wallet for long years before they can sell because the bitcoin is not save for future use despite that some investors are sharing their testimonies on some social media about exchange wallets,  exchange wallets that is not control by you and the team have the power to enter your exchange wallets without your permission, I think a lot of investors have learned from other investors to use electrum wallet to hold their bitcoin because they know is more save for long term than exchange wallets that is not good for long term holding.

[Anayochukwu]

Exchange wallets may be vulnerable and risky but users still use it because it seems easier and simpler to use and also less scary especially for newbies but because of the recent exchange that was hacked we all even newbies should consider using private wallets because it's less risk from being hacked and you are responsible for your assets by yourself without any third parties and it helps you prioritize your assets but if you lose it just know that you have no one to blame but yourself.

[Chinesebaby]

Exchange wallets may be vulnerable and risky but users still use it because it seems easier and simpler to use and also less scary especially for newbies but because of the recent exchange that was hacked we all even newbies should consider using private wallets because it's less risk from being hacked and you are responsible for your assets by yourself without any third parties and it helps you prioritize your assets but if you lose it just know that you have no one to blame but yourself.

In a nutshell, the easy ability of an individual to buy, sell and swap his Bitcoin to either fiat or other cryptocurrencies are the major reason why most people always hold their Bitcoin on an exchange wallet, instead of transferring it immediately to an exchange. And another reason that might prompt an individual to keep his Bitcoin on an exchange wallet is when he has a short term plan for the Bitcoin. Because when you intend to sell the Bitcoin after a few days or week for your basic needs, such investor will rather prefer to just leave the Bitcoin on his exchange wallet, rather than paying a fee to transfer it to his non custodial wallet and then transfer it back. But one thing they need to know is that leaving such money on an exchange wallet is never the best long term financial decision.

[Hamza2424]

Hmm, I haven't confirmed it yet how much Binance is still holding that are users funds. But thanks for mentioning it to me. I will check it later when I get some time to do some research and check it all in depth, hehe. And if this is correct, what you are saying there is still managing big numbers of users funds.

Well, bro, the withdrawals then exceeded $4.7 billion, and that's still below 3%. And speaking of Binance's AUM, it's around $157 billion to $171 billion, give or take, but just to be sure, I said $150B. Haha, they are not small. https://www.cbsnews.com/news/binance-customers-withdraw-billions-crypto-hack/

Here, let me give you a link so you don't have to do further deep research. A simple glance would be enough. It doesn't even require deep research.

But mate, no matter how trustworthy an exchange can be and how many users they are gaining over time. Our main perspective should be to make sure to keep ourselves on the safe side or place by not holding long-term funds on any centralized exchange, even if it is Binance. And I think you will also agree with this point, understanding the fact: "Not your key, not your coins". What do you think?

Bro, how can you doubt me on this? Haha, obviously I understand the fact, and I did not say anything about our perspective! I said about others, that they will always trust Binance and maybe even more so. Mark my words, but I can be wrong, though. Maybe the new generation of investors will come around, haha. But I am sure they won't.