Should You Store All Your Crypto On Coinbase, Or Get Separate Wallets? (2024)

A month ago, in early May, Coinbase COIN told investors – and, indirectly, its account holders – that if they ever went bankrupt, the cryptocurrencies held on their exchange might become theirs instead of yours.

In their first-quarter earnings report, Coinbase said that if the company were to go broke, a bankruptcy court might treat customer assets as Coinbase’s assets. Bitcoin BTC “hodlers” holding their BTC on Coinbase would “be at the back of the line for repayment”, Bloomberg reported on May 11.

That’s news to a lot of people. In December 2021, some 80 million individual cryptocurrency wallets were in use worldwide. It hit 82.2 million in April, according to Statista.

Coinbase was custodian to some $256 billion of client funds as of the end of the first quarter. Imagine some of that vanishing to pay back venture capitalists and global bond lords? Coinbase has a roughly $1.2 billion bond due 2031.

Big-time investors often have professional money managers managing their cryptocurrency accounts. Those have their own custodians to keep it safe. Not so for retail investors. There is a pro version of Coinbase and some exchanges allow for you to sign up for custodial accounts for extra security. But if Coinbase holds your funds in custody and goes belly up, as they are required to warn by the Securities and Exchange Commission, then investors' crypto could be used to pay back creditors in a worst case scenario. Assuming this is a plausible risk, should retail investors get individual wallets to hold their crypto? There is no Federal Deposit Insurance Corporation for cryptocurrency accounts.

“Exchanges do their best to make the overall crypto-user experience more comfortable. But comfort is a double-edged sword. Storing everything on an exchange means that you need to trust the exchange team, their platform mechanisms, the market situation, and the way they go about regulatory compliance,” says Michael Gord, an Everscale Foundation board member in Canada. “If the only person you really trust when it comes to your personal finances is yourself, you should definitely get your own wallet.” Everscale has its own wallet, the EVER Wallet.

Coin holders usually want an individual coin’s wallet because they use the coin to interact on a particular blockchain ecosystem. Owning a wallet makes it easier.

Those who have no intention to use the tokens for anything other than as a speculative investment, then it is important to note that cryptocurrencies that pay yield are better held in their own individual wallet. Otherwise, Coinbase will skim about 25% off those gains. More advanced investors who participate in staking and yield farming programs will have their own wallets related to those yield-bearing tokens.

During the height of the initial coin offering phase, hard wallets became the new way to store Bitcoin and Ether ETH eum. They proliferated as a solution. These are basically like flash drives. Ledger brand wallets became ubiquitous. But, like any other portable drive, they get cluttered in an office desk drawer or stored in a backpack somewhere. Hard wallets need to be in as identifiable and secure a location as a traditional combination safe holding the family’s jewels.

“They are a good idea, but there's always the risk of losing or breaking them,” says Mike Ermolaev, spokesman for ChangeNOW, a crypto exchange in the country of Georgia.

Hard wallets are not very convenient for regular traders who have to remind themselves to store on the drive, and they are slower to use than a mobile application.

Worse yet, Ermolaev said there are a lot of re-flashed and fake hardware wallets out there designed to steal cryptocurrency.

Most people think of centralized cryptocurrency exchanges like their E-trade account. It’s impossible to hold individual corporate shares, cash and bonds in a home safe, so investors have long turned to banks or brokers for service and custody.

Cryptocurrency is different. Investors who keep their cryptocurrency holdings on an exchange are giving their private keys to the exchange, and “therefore your money,” says Ermolaev.

According to a blog post by blockchain data group Chainalysis in February, about $2.66 billion has been stolen from exchanges since 2012, with the most common attack method being the theft of private keys. In theory, it would be much harder (and safer) to steal an individual’s digital assets hiding across a multitude of different wallets.

Individual digital wallet use is growing, according to a report by market research firm Mercator titled “Digital Wallets: Moving Beyond Payments With Expanding Options”, published June 15.

Universal wallets — which support multiple and unrelated items that are part of a particular blockchain — and merchant-supported wallets, which are wallets that narrowly focus on a specific brand, are seeing their user-base increase.

Mercator said that is mostly due to branded wallets, from branded tech companies like PayPal PYPL , and was more of a consumer story than an investor one.

“The marketplace (for digital wallets) continues to define itself as use cases evolve and consumers develop more sustainable preferences. The table stakes of payments through digital wallets provide an opportunity to expand how those payments are processed and serve as a gateway to digitize other items commonly found in physical wallets,” commented Jordan Hirschfield, Research Director at Mercator Advisory Group.

Security matters most, but so does convenience. Is it really worth having 10 different wallets and log-in accounts? In sticking to the earlier comparison to banks as custodians of cash and securities, no one has 10 different bank accounts.

The ChangeNOW exchange has its own wallet. “You will fully own your assets as your private keys are in your hands,” Ermolaev said about their NOW Wallet. "The phrase ‘not your keys, not your coins’ is commonly used among crypto enthusiasts. Unless you’re a day trader, it is best to keep your cryptos in a separate wallet rather than on an exchange,” he says, touting their own wallet as one example. The ChangeNOW exchange’s integration with their wallet allows investors to manage their portfolio directly within an app without having to go to an exchange.

“The crypto space is rife with opportunities, but one of the cornerstones of using cryptocurrency is having control over your own assets,” says Gord. “This isn’t possible with custodial services. Unfortunately, there have been numerous examples of people losing their money because of custodians, so a lot of people try to avoid that by having complete control.”

Coinbase CEO Brian Armstrong said in a series of posts on Twitter on May 10 that customers would be protected in a bankruptcy. “Your funds are safe at Coinbase, just as they’ve always been,” he tweeted.

**The author of this article owns Bitcoin and holds them with Bitpay and other digital assets are held by Coinbase. He has an individual wallet for Algorand to collect yield ALGO .**