Is It Safe To Keep Your Crypto On An Exchange?

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Table of Contents

• Cold wallet or exchange – which is safer?
• What is a cryptocurrency exchange?
• Is my cryptocurrency safe on an exchange?
• Centralised storage v self-custody solutions
• The pros and cons of keeping your coins on a centralised exchange
• What’s the difference between a hardware and a software wallet?
• The pros and cons of crypto self-custody using a hardware wallet
• The pros and cons of crypto self-custody using a software wallet
• Custodial versus non-custodial crypto storage – which to choose?
• What are the risks of non-custodial crypto storage?
• Our verdict on where to store your crypto

Cold wallet or exchange – which is safer?

One of the most frequent questions I get asked by people who are at the start of their cryptocurrency journey is “How do I keep my coins safe?” and which is safer, a cold wallet or a crypto exchange.

Many of the individuals I speak to during consultations have heard about the risks associated with keeping coins on exchanges but are unsure whether they should move their coins to a wallet or keep them centralised.

They’re keen to know if it’s safe to leave their Bitcoin and other digital assets on the exchange where they bought them, even if it’s a large, well-known platform.

They also want to know what the alternatives are, such as self-custodial hardware and software wallets, and what the pros and cons of each solution are together with how to keep their seed phrase safe if they do decide on decentralised storage.

A few clients are completely in the dark about the risks and it’s not until I highlight the ‘not your keys, not your coins’ mantra which comes hand in hand with exchanges that they begin to consider the security of their crypto.

In this guide I’ll explore the question of whether it’s safe to keep your cryptocurrency on an exchange and give you some tips on how to secure your digital assets.

What is a cryptocurrency exchange?

A crypto exchange is an online platform that allows users to deposit cash then buy, sell and trade cryptocurrencies.

They’re the first port of call for most people who want to invest in crypto, offering convenience, liquidity and access to a wide range of crypto assets.

However, this convenience comes at a cost, as leaving your coins on an exchange can potentially expose your assets to hackers, regulatory uncertainties and operational failures.

Is my cryptocurrency safe on an exchange?

It’s fair to say that exchange security has come a long way since the days of Mt. Gox.

If you’re not familiar with the name, Mt. Gox was a Japanese crypto exchange that launched in 2010, just a year after Bitcoin was created by the mysterious Satoshi Nakamoto.

It quickly rose to become the largest Bitcoin exchange in the world, handling more than 70% of all transactions by 2014.

Then, disaster struck. The exchange abruptly suspended all trading and shuttered its operation amidst a hack/theft which saw up to 850,000 Bitcoins stolen.

For context, when Bitcoin reached its all-time high (so far) of $68,789 in November 2021 the haul would have been worth nearly $58.4 billion. Only around 200,000 of the stolen coins have ever been recovered.

But that’s all in the past, right? Not quite. In 2022 a cryptocurrency exchange called FTX collapsed after concerns were raised about its solvency in connection with a partnered trading company called Alameda Research.

During the turmoil that followed, customers were frozen out of their accounts and faced losing some, or all, of the crypto stored on the FTX platform.

At the time of writing, various actions were in play to refund customers, including possibly restarting the exchange.

Both these cases serve as a stark warning to anyone holding their coins on a centralised crypto exchange that the unexpected can happen which could lead to the loss of your crypto assets.

While advanced security measures and cold storage solutions employed by exchanges today have made it increasingly unlikely that you’ll lose your coins to hackers, the FTX debacle shows how unpredictable the crypto space still is.

This in turn means that any crypto assets you have stored on an exchange are exposed to external risk factors beyond your control, because you don’t hold your own private keys.

Centralised storage v self-custodial solutions

The problem lies in the fact that if you hold your coins on a centralised exchange you are effectively handing over ultimate control of your crypto.

Apart from being quoted by me in this article, the ‘not your keys, not your coins’ expression is widely used in crypto circles to highlight the inherent risk of trusting your crypto assets to a centralised exchange.  

When you own a crypto such as Bitcoin you have both a private key and a public key. A public key – usually a wallet address – is used to receive crypto, while a private key proves that you own the coins held in the wallet.

A public key takes the form of a long string of letters and numbers which you can share with anyone who you wish to transact with.

Your private key, which in most cases is a mnemonic phrase of between 12-24 words, is generated when you create a crypto wallet (public key). It can be used to restore a crypto wallet if you lose access to it on a device.

When you use a crypto exchange your public and private keys are held by the platform meaning you can be locked out of your crypto at any time, either by an FTX-style event or some other unexpected disaster.

Moving your coins off an exchange means you take control of your keys and that you alone have control of your wallet and the cryptocurrency stored on it.

Effectively you become your own bank, and there’s a general consensus among crypto experts that this is the safest way to store your coins, especially given the nascent nature of the cryptosphere.

But, moving to a self-custody solution, such as a hardware or software wallet, is not without its own risks and drawbacks, and it adds an extra level of technical complexity that not everyone will be comfortable with.

The pros and cons of keeping your coins on a centralised exchange

Despite the risks, there are still some advantages to keeping your coins on an exchange.

They advantages of keeping your coins on an exchange include:

• Ease of use – exchanges offer a quick and easy way to buy crypto with cash, sell it and send it to others.
• Convenience – you don’t need to worry about managing your own wallet, public and private keys or passwords.
• Range of cryptos – the cryptos available will differ from exchange to exchange, but most of the big players offer a wide range of digital tokens, including some of the more obscure altcoins.
• Liquidity – the large pool of buyers and sellers using an exchange means that you’ll always be able to execute your transactions.
• Additional products – many exchanges offer a wide range of products in addition to basic crypto trading. These include: lending, staking, margin trading, future and more. You can also earn interest on your crypto on some exchanges and take advantage of leverage to potentially increase your trading profits.

They disadvantages of keeping your coins on an exchange include:

• Security – Hacking, phishing and malware could all potentially compromise your account.
• Regulation – most exchanges require users to verify their identity and comply with Anti-Money Laundering (AML) laws and Know Your Customer (KYC) rules. Regulation also has the potential to impact the operation of an exchange if it’s subject to any kind of enforcement action.
• ‘Not your keys, not your crypto’.

You can do everything you can to ensure the exchange you’re using is reputable, such as checking the audits and permissions, but this might not prevent a hacker from coming along and finding a backdoor to your crypto stash.

However, ensuring you’ve enabled two-factor authentication (2FA) and used a strong password will help keep your funds safe.

Also, you should never share your login details with anyone and avoid accessing your exchange account on a public Wi-Fi network.

What’s the difference between a hardware and a software wallet?

The two main ways of securing your crypto away from a centralised exchange are by using a hardware or software wallet.

A hardware wallet, such as those made by Ledger and Trezor, is a physical device that works in tandem with an app to secure your private key and digitally sign transactions.

Your coins aren’t actually stored on the device – they remain on the blockchain – but you’ll need it when you want to send or receive cryptocurrency to the wallets associated with it.

You’ll need to connect the device to the network using USB or Bluetooth to make a transaction, but other than that it’s ‘cold’ and completely separated from the online world.

A software wallet on the other hand can be browser based or an app that you run on your phone, table or PC that effectively works as a platform for you to manage your crypto in a self-custodial environment.

There are dozens of different crypto software wallets available and it’s important to do your research to work out which is best for you. Exodus and Trust Wallet are some of the best-known.

MetaMask and Coinbase Wallet are some of the better-known web wallets, also known as browser wallets.

Most hardware and software wallets aren’t just limited to storing coins – they can act as a home for your Non-Fungible Tokens (NFTs) as well, and also open up the world of Decentralised Finance (DeFi).

Some also allow staking, which means you can effectively earn interest on certain cryptos you hold, and allow you to buy and sell crypto through Decentralised Exchanges (DEX), also known as peer-to-peer marketplaces.

There are pros and cons to both these solutions, which I’ll explore in more depth.

The pros and cons of crypto self-custody using a hardware wallet

These days there are several different hardware wallets on the market, all of which would do a perfectly acceptable job of keeping your digital assets safe.

The advantages of using a crypto hardware wallet:

• Completely isolated from the web/WiFi/Bluetooth until you transact, keeping the private key unexposed which makes it extremely secure.
• Additional on-device security, such as a PIN code or biometrics adds an extra layer of protection from cyber-attacks.
• Viewed as the most secure, self-custodial cold storage solution for the average cryptocurrency investor.
• Ideal as a long-term storage solution for those who are hodling onto the coins and not expected to need access to them often.
• Most modern devices are tamper proof, meaning they effectively self-destruct if opened.

The disadvantages of using a crypto hardware wallet:

• Cost – hardware wallets can range from £60/$75 to £300/$380 depending on the model you choose. Most beginners will find a basic model perfectly adequate.
• Restricted use – you’ll need to keep the device on you at all times if you want to sell your crypto or perform other transactions on the move which may not be convenient on a day-to-day basis.
• Using a hardware wallet is more technically challenging than a software solution which may deter beginners. However, most devices are fairly simple to use these days.
• More expensive and complicated to trade crypto via a DEX.

The pros and cons of crypto self-custody using a software wallet

There are dozens of software non-custodial wallets on the market today making it difficult to know which one to choose.

It’s important to do your own research and study the pros and cons of each wallet carefully before deciding which suits your needs.

However, if you make a decision then find you’re unhappy with your choice it’s quite easy to switch to another wallet, although you will incur fees when transferring your coins.

The advantages of using a crypto software wallet:

• Free.
• Ease of use and best for beginners. You can download and install a software wallet within minutes.
• Always accessible – most software wallet apps are available across a wide range of devices so you can always access your coins and trade at a moment’s notice.
• Ideal for frequent traders who don’t want to carry a hardware wallet around with them but want the security of self-custody.
• Transactions are more streamlined and faster compared to using a hardware wallet.
• A wider range of solutions to choose from plus greater cross platform/browser support for the apps.

The disadvantages of using a crypto software wallet:

• Constant online exposure means a software wallet is more susceptible to cyberattacks.
• Potential theft – a criminal could potentially force you to unlock your wallet in the street through your phone.
• Some software wallets, such as MetaMask, are limited in their cross-chain compatibility, meaning they don’t work with all blockchains.
• More expensive and complicated to trade crypto via a DEX.

It’s worth mentioning that some software wallets will link to a hardware wallet as well giving you additional functionality with a higher level of security.

Custodial versus non-custodial crypto storage – which to choose?

For beginners, getting used to buying, selling and storing crypto is best done through an exchange to start with, especially if you’re dealing with small amounts.

Exchanges such as Coinbase are extremely safe, very user friendly, and effectively act in the same way as an online banking app (aside from the trading part).

Coinbase even offers an account protection scheme which compensates customers in the event of a hack, providing a number of requirements are met, i.e., you haven’t been careless with your passwords or sent your coins to an incorrect address.

Keeping your coins on an exchange will give you the most flexibility when it comes to trading quickly and cheaply, converting crypto to cash and sending the money to your bank account with minimum hassle.

When you do decide to go the non-custodial route, I would recommend starting with a software wallet as this is the most straight-forward solution.

While not quite as secure as a hardware wallet, most software wallets these days offer a high level of protection for your coins.

Wallet solutions live or die on their security, so the developers have a lot riding on keeping your coins safe.

What are the risks of non-custodial crypto storage?

One important advantage/disadvantage of self-custodial crypto storage, depending on how you see it, is that you are solely responsible for the safekeeping of your coins.

When you set up either a self-custody hardware or software wallet you choose a password and are given a mnemonic passphrase of up to 24 words.

This passphrase is the ultimate key to your crypto – if you lose this and you lose access to the device with your wallet on, your crypto is gone forever. If your seed phrase falls into the wrong hands, your crypto can be easily stolen.

There’s no-one to complain to or seek compensation from – the buck stops with you, so it’s important to realise the significance of keeping your seed phrase secure, especially if you intend to invest a large sum in crypto.

Sounds scary, right? Well, it is, to an extent!

However, there are a number of products on the market to help you secure your passphrase, including metal storage solutions like the Billfodl.

Read our guide to the best ways to safely secure your crypto mnemonic seed phrase for more details on the options available.

You also need to consider appointing someone that you trust and who is technically proficient enough to retrieve your crypto from cold storage in the event that you die.

Our verdict on where to store your crypto

Ultimately, no storage solution is 100% foolproof and there are risks associated with both storing your crypto online and choosing a self-custodial wallet.

Either way, you need to stay vigilant in order to keep your digital assets safe – protect your passwords, PIN numbers and passphrases and always use 2FA where available.

Also, ensure that someone you trust knows about your offline crypto holdings and how to access them otherwise they may be lost forever.

Related link: Why it’s essential to have a digital executor for your crypto

Crypto coaching and advice

If all this seems a bit baffling don’t worry, help is on hand!

We offer a coaching/advice service which will help you learn the basics of buying and selling cryptocurrency such as Bitcoin and Ethereum, using an exchange and transferring your coins to a hardware or software wallet.

See our crypto Advice Services page for more information.