By Michael Moskie
There are two main ways that you can own cryptocurrency. The first way is to purchase the coins using a decentralized exchange and then move them to a “cold wallet” (a wallet that is not connected to the internet.) When this is done correctly, you are assigned your own private keys that control access to your coins. This is considered the safest way to own crypto.
The second way is purchasing the coins via a centralized exchange and then leaving the coins there to be stored. This is the lazy way to purchase crypto and it is also the most dangerous. The “wallet” where your coins are stored on an exchange is a custodial wallet. This means the exchange keeps custody of the wallet, not you. These wallets do not come with private keys. This is where the term “not your keys, not your coins” comes from. If there are no private keys, you do not really own that crypto. Crypto Currency left on exchanges are exposed to unacceptable levels of risk.
Table of Contents:
- Introduction
- Exchanges
- Wallets
- FAQs about wallets
- Key Takeaways
- Conclusion
Introduction
Bitcoin started its journey as part of an underground movement in what is known as the “cypher-punk” phase of digital activism in the 1990’s. The cypher-punks emphasized the concepts of personal accountability and privacy. The original reason most users flocked to Bitcoin was the promise of being anonymous in their financial transactions.
It took an incident known as Mt. Gox to shine a light on the need for much higher levels of security and safety. In doing so they made the community realize that the use of private wallets was an essential part of the cryptocurrency infrastructure.
Mt. Gox was a cryptocurrency exchange that lost control of the private keys to their customer’s wallets and effectively lost all $460M of their customer’s Bitcoin. This catastrophic event drove change into the community by exposing security limitations of the system.
In this article we are going to discuss the basic structure of how cryptos are purchased so you can understand the need for using a crypto wallet to store your crypto.
Exchanges
The first thing you must understand to comprehend what “not your keys, not your coins” means is to understand the difference between the two types of crypto exchanges that you can use to purchase crypto. The two exchanges are 1. CEX or Centralized Exchange and 2. DEX or decentralized exchange.
What is a centralized exchange?
A centralized exchange or CEX as they are referred to, is a website or phone application that allows nearly anyone to open an account and purchase cryptocurrencies. The exchanges allow you to do this through normal transaction methods like credit and debit cards, bank account wires/transfers and even ATM’s. These exchanges are just like other financial exchanges in that they facilitate the purchase and sale of a particular type of asset.
CEX’s are regulated and scrutinized by ever growing wave of government oversight. These exchanges require customers to divulge financial information about themselves in the name of “creating a more secure system”. Don’t be surprised when they ask the standard KYC (Know Your Customer) and AML (anti-money laundering) questions when you open your account. Centralized exchanges provide a very low level of security and anonymity to its users.
What is a DEX?
A decentralized exchange or a DEX as it is commonly referred to is a peer-to-peer market where traders can go to trade directly with other traders thus eliminating the need for the involvement of any third party to process the transaction.
For those users that are looking for high levels of anonymity and secrecy, purchasing crypto via a DEX is the only way to go.
For example, when you are using a DEX, you will not need to make the standard Know Your Customer and Anti Money Laundering disclosures.
Wallets
Once you understand the two types of exchanges the next thing you must understand is what a wallet is and the different types of wallets available to you.
What is a wallet?
A crypto wallet is simply a place to securely store the private keys to your crypto on the block chain. There are several different types of wallets available to you and shown below:
| Wallet Name | Type | Safety Level | Private Keys? |
| Exchange Wallet | Custodial | No Security | No |
| Hot Wallet | Internet Connected | Limited security | Yes |
| Cold Wallet | Not connected | Safest Level of Security | Yes |
Sticking with the main theme of our post, we can see clearly that exchange wallets do not provide you with private keys and therefore you do not really own the crypto if you purchase it and leave it on an exchange. Not your keys not your coins, always remember that.
FREQUENTLY ASKED QUESTIONS ABOUT WALLETS
FAQ: Do I need a crypto wallet?
Yes, if you are purchasing crypto you need a crypto wallet. Most people purchase their crypto on a public exchange and are not aware that they can and or should move it off there to a more secure place. That place is a wallet.
As you have learned in this article, when you buy your crypto on a centralized exchange, they control your private keys. If that was your bank account, would you let them hide your account number and never let you see it? There is literally no reason you should buy a crypto on a CEX and then just leave it there.
FAQ: Are all crypto wallets safe?
No not all crypto wallets are safe. An exchange wallet or custodial wallet as they are called is not. A hot wallet which is connected to the internet is safer than a custodial wallet but really is not that safe. By being exposed to the internet, viruses and other hacking can occur even at a much later date.
The only truly safe way to store your crypto is using a cold wallet that is never exposed to the internet.
The level of safety you choose is your decision alone. Remember most lost funds are due to human error, always double check before downloading.
FAQ: If I purchase crypto on a CEX and I remove them to a cold wallet for safety?
Most CEX’s allow you to “remove” your crypto and store it in a place for safe keeping. Many new investors do not know that you are allowed to do this. In the opinion of the author, the “get rich quick” mentality makes a lot of investors lazy. They don’t read or educate themselves. This lack of attention to detail that leads to security breaches and lost crypto.
FAQ: What is the safest crypto wallet?
A cold wallet is the safest wallet option. A cold wallet is a wallet that has never been exposed to the internet and thus is not subject to electronic hacking. With the use of a cold wallet comes the added security needs that come with them. Where are you going to store the keys? Are you going to use a further encryption of your passwords in the physical world? While this is a relatively simple process, you need to treat it professionally. Go on Google and search how many people lost money because they lost their keys. Treat this like a business and you will thank yourself in the long run.
Key Takeaways:
- If you don’t control your private keys, you don’t own the crypto
- If you purchase crypto on a centralized exchange and don’t remove them, you don’t really own them (not your keys not your coins)
- There are two types of crypto exchanges Centralized (CEX) and decentralized (DEX)
- There are at least 3 types of wallets you can use
- A cold wallet is truly going to only way to protect your crypto
Cold wallets are the most secure because they are on paper and never touch the internet where they can be hacked
Conclusion
Today we have a large influx of new users into the crypto ecosystem who have been driven on the promise of meme coin riches and wen lambo wealth. With the newer waves we are seeing less and less discipline towards the purpose of crypto and the responsibility it bears. Not your keys not your coins is a phrase meant for everyone involved in crypto to control their wealth. Remove all funds from exchanges as soon as possible.