Not Your Keys Not Your Coins

Say someone hands you a piece of paper with a $10,000 cheque made out to you. You don’t own that money yet. You have a document that gives you a claim on it — but until you cash it, it’s just paper.

Bitcoin on an exchange is similar. You have a number on a screen. But the actual private key — the thing that proves true ownership on the blockchain — belongs to the exchange. They can freeze it, lose it, or have it stolen. History shows that all three have happened.

When you hold your own private key in a self-custodial wallet, the situation changes completely. The blockchain recognises you as the owner. No company is involved. No intermediary holds anything on your behalf. Your Bitcoin is as directly yours as the cash in your hand.

The phrase “not your keys, not your coins” was popularised after the collapse of Mt. Gox in 2014, when hundreds of thousands of Bitcoin users discovered that the exchange holding their coins had been insolvent for months. The coins were gone. The users had no recourse.

FTX repeated the lesson in 2022. Billions of dollars of customer funds, supposedly held in safekeeping, had been used without permission. When the exchange collapsed, customers couldn’t withdraw. Most lost everything.

In both cases, users who had moved their Bitcoin into self-custodial wallets beforehand were unaffected. Their coins were theirs. The exchange collapse was someone else’s problem.

Tomorrow: the seed phrase — what it is, and why you need to protect it more carefully than almost anything else you own.

— The Daily Bit