Crypto custody: exchanges, wallets and what can go wrong
The practical difference between leaving crypto on an exchange and holding your own keys, with the risks on each side.
When you buy a crypto asset such as bitcoin, you need somewhere to keep it. The choice of where is one of the most important decisions you make, and it carries risks that stocks and bonds mostly do not.
Keys, not accounts
Crypto ownership rests on private keys, the secret numbers that authorize transfers. Whoever controls the keys controls the coins. There is no bank to call if they are lost or stolen.
Option one: leave it on an exchange
An exchange or broker holds the keys for you, much like a bank holds your money.
- Upside: convenience, easy trading, recovery options if you lose your password.
- Risks: the exchange can be hacked, can fail, can freeze withdrawals, or can mismanage customer assets. Crypto held at an exchange typically does not carry the deposit insurance or investor protections that apply to bank accounts and many brokerage accounts. Check what a platform says about how it holds customer assets and which regulator, if any, oversees it.
Option two: hold your own keys
A wallet that you control, often a hardware device, keeps the keys in your hands.
- Upside: no counterparty can freeze or lose your coins.
- Risks: if you lose the recovery phrase, the coins are gone for good. If someone else gets it, so are they. Phishing and fake apps are common.
Other things to watch
- Fees and spreads. Trading, withdrawal and network fees add up.
- Volatility. Large price swings in a day are normal, and drawdowns can be deep. See how recovery math works in the drawdown calculator.
- Scams. Be cautious of anyone promising guaranteed returns, giveaways, or urgent transfers.
- Rules and taxes. They vary by country and change often. Keep records of purchases and sales.
A note on sizing
Because of the volatility, many people treat crypto as a small slice of what they own, sized so that a severe loss would not change their life. That is a personal decision. The position size calculator can help you fix the dollar amount at risk.