Once again for the people at the back: withdraw your digital assets from centralized exchanges

By Frank Corva

Just when you thought the coast was free to take a position in crypto, the bottom fell – again.

This time it happened because crypto exchange FTX may have gone insolvent, and its bailout of Binance is no longer on the table.

Sam Bankman-Fried (SBF), the CEO of FTX, who some compared to JP Morgan due to its bailout of smaller crypto platforms earlier this year, might sound more like Madoff than Morgan.

We’ll know more once the dust around FTX’s accounting settles.

In the meantime, FTX halted client withdrawals, which reminded many that if you leave the private keys to your crypto assets in the custody of a centralized exchange, you technically do not own said assets.

So the lesson here is, by all means, to choose the crypto exchange that suits you and use it to buy the digital assets you want – but then transfer the private keys of those assets to a non-custodial crypto wallet soon after.

There is more than one benefit to choosing to self-curate your digital assets.

Note: You will know you are using a noncustodial wallet if you have written a 12-24 word recovery phrase for the wallet. Non-custodial wallets include software wallets like Exodus Wallet or Atomic Wallet and hardware wallets like Ledger or Trezor devices.

Advantage #1: Reduce your counterparty risk

Bitcoin was designed to facilitate peer-to-peer transactions.

You can use the Bitcoin network to transact without permission, as no counterparty – or middleman – is needed in the process.

But most people don’t use bitcoin (BTC) for transactions. Most use it as a way to save.

Even if you are using BTC as a store of value, you still need to be aware of counterparty risk.

When you leave the private keys to your BTC in the hands of an exchange, you only hold an IOU for the asset.

The stock market is the counterpart in this case. In other words, if you don’t take the private keys from the hands of the exchange and store them in your own noncustodial wallet, then your IOU for that asset is only as good as the creditworthiness of the asset. exchange who holds the keys. .

Now that FTX may be insolvent, customers of the exchange are not guaranteed to receive back the assets they left in the custody of the exchange.

Benefit #2: Increase the value of your digital asset

When you leave the private keys to your digital assets in the custody of an exchange, you may be suppressing the price of the asset.

Until you move the private keys to your digital asset into a non-custodial wallet, you have not officially completed an on-chain transaction.

And without such a transaction occurring, you haven’t technically reduced the supply of the asset in the open market.

The greater the supply of the asset in the open market, the less the price increases, according to the law of supply and demand.

So, if you bought a digital asset in anticipation of its price going up, you can help create that effect by moving your digital asset’s private keys off an exchange and into a non-custodial wallet.

Advantage #3: BTC in a non-custodial wallet cannot be mined

Leverage and BTC don’t mix.

Wall Street vet and crypto industry stalwart Caitlin Long has been ringing that bell for a while now.

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BTC is a volatile asset. For this reason, it does not work well as collateral in leveraged trades.

When you store your BTC private keys in a non-custodial wallet, you cannot perform leveraged transactions with the asset.

The reverse is true when you leave your BTC private keys in the hands of a platform like FTX that offers leveraged products for crypto assets.

You are more inclined to perform a leveraged trade with the asset when you leave the private keys for it in the custody of a crypto derivatives exchange like FTX.

And when you leave the private keys to your BTC in the hands of an offshore entity like FTX – which operates outside the scope of US regulations – you are vulnerable to the exchange using the BTC it holds for leverage you as a full-fledged transaction or exchange, however unethical that may be.

Choosing to self-keep your BTC’s private keys can help prevent you from using it as leverage and/or using it as leverage.

Back to basics

We are at the point in the crypto bear market where we can see who has been swimming naked, and few of us could have imagined how naked some were swimming.

Regardless, here we are. And in the wake of this FTX-induced destruction, there are lessons to be learned and kept in mind for the rebuilding process.

A lesson here is that choosing to self-curate your digital assets has many benefits.

If Bitcoin is to fulfill its promise of taking money out of institutions and into the hands of ordinary people, we must learn to take the personal responsibility that underlies this perspective of financial self-sovereignty.

Part of this process is learning how to use a non-custodial wallet.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.