Asking Crypto Enthusiasts "Where Do You Store Your Coins? "
90% will answer "Wallet" or "Exchange"
(The remaining 10% might be confused, "Where did I put them?")
In reality, storing coins in a wallet or an exchange doesn't mean putting them in the wallet or exchange's database. All coins in the world are still stored on the blockchain. The main difference between storing them in a wallet or an exchange is the way you control these coins.
There's a saying, "Not Your Keys, Not Your Bitcoin." This means that truly controlling your coins means controlling the mnemonic phrase (private key).
However, in daily life, very few people truly understand and independently manage their assets. Many users still store their coins on exchanges.
Today, I want to explain what it means to store coins on an exchange versus a wallet and discuss how to reasonably allocate and store your assets based on actual situations.
1. Where Are Your Coins When Stored on an Exchange?
The general steps for depositing to an exchange are as follows:
- The exchange generates a deposit address.
- You transfer coins to that address.
- The exchange checks the transaction on the blockchain and credits your account.
- Your corresponding balance increases.
For centralized management, exchanges do not provide users with the mnemonic phrase (private key) of the account. Therefore, the highest control of these coins lies with the exchange. The balance in your account is essentially a number reflected in the exchange's database, which can be understood as an IOU from the exchange.
So, when you store your coins on an exchange, it's equivalent to having your coins in the exchange's address. Whether you can get your coins when you withdraw depends on whether the exchange honors the IOU.
Additional Reading:
- Exchanges usually organize account balances periodically and may consolidate assets into a single address. When you see asset transfers on a blockchain explorer, it might be the exchange organizing balances. As long as your balance in the exchange matches, there's no need to worry excessively.
- When transferring internally or placing orders within the exchange, these actions are within the exchange's system and not recorded on the blockchain, known as off-chain transactions. When you withdraw coins, the transaction can be seen on the blockchain, known as on-chain transactions.
2. Where Are Your Coins When Stored in a Wallet?
Wallet users are repeatedly reminded: always keep your mnemonic phrase (private key) safe.
The importance of the private key and mnemonic phrase is because they are the highest authority to control blockchain assets. Storing coins in a wallet allows free and independent transactions without any approval for deposits or withdrawals.
Some may think storing coins in a wallet means transferring them to the wallet provider, which is a big misconception. As stated earlier, all coins are stored on the blockchain. The primary function of a wallet is to generate mnemonic phrases and receive addresses, helping you interact with the blockchain. The balance shown in your wallet is the balance of your address on the blockchain displayed by the wallet. Without a wallet, interacting with blockchain assets would require some coding skills.
When you store coins in a wallet, they are fully under your control. Even if you switch wallets, you can restore your assets in another wallet brand using your mnemonic phrase.
Should We Store All Coins in Wallets?
The above analysis mainly focuses on storage and transaction scenarios, which are the strengths of wallets. Hence, it might seem that wallets are better than exchanges. But is this truly the case? Of course, I, working for a wallet, would say so, right?
Okay, let's praise exchanges a bit… Deciding how users should store assets should be based on their daily use scenarios. For frequent and heavy traders not looking to store any digital assets, exchanges are the first choice.
For light trading needs or long-term investors, wallets are the best choice. (Bitpie also offers simple buying, selling, and coin-to-coin exchange functions, making it convenient for wallet users to trade!)
For most people, the best approach is to store long-term coins in a wallet and keep a small amount on exchanges for quick access.
I don't believe centralized exchanges are inherently evil. They significantly enhance the liquidity of blockchain assets and play an essential role in the blockchain's adoption process.
There's no right or wrong in choosing between exchanges or wallets. Understanding the logic behind them and customizing your asset storage strategy is most important.