Not Your Keys, Not Your Coins: The Dangers of Keeping Crypto on Exchanges

Centralized Exchanges (CEXs) like Binance, Coinbase, or Kraken are user-friendly gateways to crypto. They work like traditional banks: you log in with an email and password, and you can recover your account if you lose access. However, convenience comes at a cost. When you leave your Bitcoin on an exchange, you do not technically own Bitcoin. You own an IOU—a promise that the exchange will pay you.

1. The Risk of Bankruptcy
History is full of giants that collapsed overnight. Mt. Gox, FTX, Celsius, BlockFi—millions of users lost billions of dollars because they treated these companies as safe banks.

• The Reality: When an exchange goes bankrupt, your funds become part of the liquidation estate. You become an "unsecured creditor," meaning you are last in line to be paid back. This process can take years, and you might only get pennies on the dollar.

2. Account Freezes and Seizures
Unlike a non-custodial wallet, an exchange has full control over your account.

• Reasons for Freezing: They can lock your funds due to "suspicious activity," a sudden change in local regulations, or a request from law enforcement. You have to beg customer support to give you your own money back. In DeFi, no one can freeze your wallet.

3. The Golden Rule of Diversification
Exchanges are for trading, not saving.

• Action Plan: Buy your crypto on an exchange, but once the transaction is done, withdraw the majority of it to your own hardware wallet (cold storage).

• If You Must Trade: If you are an active trader, split your capital across 2 or 3 different exchanges. Never keep all your eggs in one basket.

Summary:
An exchange is a currency exchange booth, not a personal vault. Use it to swap, then leave. Only when you hold the private keys (the seed phrase) is the money truly yours.