In this lesson
- understand the difference between custody on an exchange and self-custody
- see what happened when exchanges went bankrupt
- get a simple rule for what to leave on an exchange and what to take with you
When you have crypto on an exchange, it looks like it is yours. You see the balance, you can sell it. In reality you only have the exchange's promise to hand it over. It is like a hotel safe the reception has a spare key to – convenient, as long as the reception is honest and the hotel stays open.
Who holds the keys#
You know from the lesson on wallets that crypto sits on the blockchain and a wallet only holds the keys that give access to it. The deciding question is: who has those keys?
- An exchange – it has the keys. You have an account, a password and a claim against a company.
- Self-custody – so-called self-custody means you hold the keys. Nobody else can move your coins – but nobody can give them back if you lose the keys either.
People in crypto like to say "not your keys, not your coins".
When an exchange falls#
- Mt. Gox (2014) – the biggest Bitcoin exchange of its time went bankrupt, and hundreds of thousands of bitcoins belonging to its customers vanished with it. Creditors began getting part of their money back only ten years later.
- FTX (November 2022) – the exchange stopped withdrawals within a few days. It turned out it had used customers' money for its own trading. Customers waited years for a settlement.
- Celsius (2022) – a lending platform that promised high interest froze withdrawals and went bankrupt.
An exchange can block you even without going bankrupt: because of a check, an error or an official order.
Self-custody has its own risks#
Self-custody moves the responsibility to you. Typical ways people lose their own crypto:
- they lose or destroy the backup of their seed phrase,
- they forget a password or passphrase,
- they sign a fraudulent transaction,
- nobody in the family knows how to access the money if something happens to them.
Estimates speak of millions of bitcoins lost for good – mostly because of lost keys.
How to decide#
| What the money is for | Where to keep it |
|---|---|
| a small amount for trying things out and trading | a licensed exchange, with a secured account |
| savings for years | your own wallet, ideally a hardware one |
| an amount whose loss would really hurt | your own wallet with a well-thought-out backup |
A simple rule: whatever you would not want to lose if the exchange closed tomorrow, take with you. And before you do, learn to make backups – that is what this whole course is about.
A licence is not a guarantee
A licence under the EU's MiCA regulation raises protection, but it does not mean state insurance as with bank deposits. Crypto on an exchange is not protected the way money in a current account is.
Common myths#
- "A big exchange cannot go bankrupt." FTX was one of the biggest in the world.
- "Your own wallet is always safer." Only if you know how to back it up and use it.
- "I have crypto on the exchange, I just cannot see it on the blockchain." You have a claim against the exchange – and with it the exchange's risk.
Summary
- On an exchange the exchange holds the keys and you only have a claim against a company; in self-custody you hold the keys.
- Exchanges have gone bankrupt before (Mt. Gox, FTX) and customers waited years.
- Self-custody brings a different risk: losing keys, scams and forgetting.
- Small amounts for trading can stay on a licensed exchange; savings belong in your own wallet.