What You Really Own When You Buy Bitcoin?
It might surprise you to learn that when you buy Bitcoin or any other cryptocurrency on an exchange, you don’t always get the cryptocurrency itself. Most of the time, the exchange or broker will give you a promise or an IOU instead. This makes you a creditor to that platform instead of a straight owner of the cryptocurrency.
The “IOU” Model Explained
You can think of buying crypto on an exchange as a lot like starting a savings account at a mainstream bank. When you put money into an exchange or broker, they claim to keep it safe for you. You don’t have a direct claim to the item like you do with a savings account. Instead, you believe that the exchange will keep your assets safe and manage them properly.
To be sure you own your crypto, you need to take it out of the exchange and put it in a secret wallet that you control. This step is necessary to protect your assets and prove that you have control over them. Recent high-profile bankruptcies and collapses of companies like FTX, BlockFi, Celsius, and Voyager have shown how dangerous it is to not have direct control over your bitcoin.
The Significance of “Not Your Keys, Not Your Coins”
“Not your keys, not your coins” refers to an important rule in the world of cryptocurrencies: you can’t be sure you have full control over your cryptocurrency if you don’t hold your private keys. To view and manage your crypto holdings, you need private keys. You have to count on the exchange or service provider without them.
Anyone who buys crypto from a central authority needs to understand this concept. When you use centralized exchanges and services, they can be convenient and easy to use, but you might not have direct power over your assets. It is very important to weigh the benefits of these services against the risks of not having your own secret keys.
Is It Important?
A lot of investors want to get exposure to Bitcoin and other digital assets more than they want to keep the assets themselves. This way of doing things makes sense for people who care more about how their investments do than how they handle their crypto.
But having your own crypto gives you more protection and control. It gets rid of the risk that comes with using a third-party tool that might not work or have a security breach. The technicalities of handling your own cryptocurrency, such as lending and staking, can be scary, but they are important things for serious investors to think about.
Risks of Not Managing Your Own Private Keys
The latest failures of exchanges such as FTX, BlockFi, and Celsius show how dangerous it can be to not keep your own private keys safe. When these things go wrong, investors are often left waiting for compensation, but there is no promise that they will get their money back in full. For instance, creditors of Mt. Gox, an early cryptocurrency company that lost 850,000 Bitcoins in 2014, are still waiting to be paid back.
Also, exchanges don’t offer FDIC or SIPC insurance, which is what covers bank and brokerage accounts. Some markets have set up “rainy day” funds or gotten private insurance for cold storage funds, but these usually don’t cover losses that happen because of mistakes made by users. Also, some services that say they can find stolen money have been attacked for not doing what they say they will do.
Making the Right Choice for Your Crypto Holdings
Managing your cryptocurrency stocks isn’t the same for everyone; it depends on how much risk you’re willing to take, how technical you are, and how big your portfolio is. Here are some things to think about:
1. Evaluate Your Risk Tolerance: If you’re comfortable with the risks associated with centralized exchanges and your holdings are relatively small, keeping your crypto on a reputable platform may be acceptable. However, as your portfolio grows, consider additional steps to secure your assets.
2. Assess Your Technical Skills: You need to know a certain amount about technology to be able to manage your own secret keys. If you don’t feel safe with your own wallet or crypto storage, you might like the ease of using a trusted exchange. Learning about simple security measures, on the other hand, can help lower risks.
3. Consider Your Portfolio Size: For smaller holdings, it might be practical to keep your crypto on an exchange. As your holdings increase, you should consider moving some or all of your assets to a private wallet. Popular wallet manufacturers include Casa, Trezor, Ledger, ColdCard, and KeepKey.
4. Understand the Ideology: People who support crypto often stress how important it is to be decentralized and keep your own keys. Taking charge of your own private keys can show what you think about the future of digital goods if you agree with this view.
Conclusion
When you buy Bitcoin or other cryptocurrencies, you should be aware that you might not get the real asset right away. You might get an IOU from the exchange or provider instead. If you really want to own and control your cryptocurrency, you might want to move your funds to a private wallet that you control. Because of recent high-profile exchange failures, this extra step can give you more protection and peace of mind. In the end, your investment goals, risk tolerance, and technical skills will determine whether you should handle your own crypto or use centralized services.
