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While centralized platforms offer convenience, they pose significant risks. Using self-custodial wallets for the majority of funds ensures greater security and control over your Bitcoin.
The phrase "Not your keys, not your coin" is often used to encourage Bitcoin users to withdraw their BTC from custodial exchanges platforms.
Literally, this expression highlights that not owning the keys to your Bitcoin wallets means not truly owning the BTC. This is because these keys, and only these keys, provide access to the funds, or "coins."
An exchange platform, as the name suggests, is a platform used to exchange fiat money for Bitcoin. However, their original function is not to keep funds for their clients.
Later, these platforms saw that it could be profitable to offer a user-friendly interface and allow their clients to delegate the custody of their funds to the platform, so they can use a friendly app and do not have to manage the private keys themselves.
Indeed, managing private keys and a Bitcoin address's seed phrase can seem complicated for beginners and create a fear of losing funds. Indeed, if the keys to a wallet are lost, the funds are too.
But then why keep the keys yourself if we can lose your funds with poor protection of them?
The main reason is that exchange platforms are businesses that can go bankrupt. An exchange bankruptcy can lead to funds being locked for several years, or even a total loss if the company is unable to repay.
Also, cryptocurrency exchange platforms might not always be honest about how much Bitcoin they actually have. Imagine if people put a total of 1 million dollars into an exchange to buy Bitcoin. If the exchange only buys 500,000 dollars worth of Bitcoin to have enough for people who might want to take their money out, but uses the rest for its own business, it can still tell its customers that they own the Bitcoin they paid for, even though it’s not true.
In this case, clients have no guarantee that they actually own Bitcoin, and the platform could virtually show BTC that does not exist on the blockchain.
This is exactly what led to the downfall of FTX, the third largest cryptocurrency exchange at the time of its bankruptcy. Today, its founder Sam Bankman-Fried has received a 25 year prison sentence.
Finally, being the holder of your keys allows you to fully benefit from the qualities and advantages that the Bitcoin blockchain offers: resistance to censorship, sending over the internet in just a few minutes, etc.
A Bitcoin wallet is like a chest on the blockchain, it secures your BTC, allowing you to send or even receive new ones.
When the phrase says “not your keys,” the plural is used because it actually refers to a pair of keys: the private key and the public key.
A Bitcoin private key is a sequence of 256 bits chosen at random. A bit is the basic unit of information in computing and telecommunications, represented by a 1 or a 0.
Here is an example (this example is for educational purposes only and should not be used for a real wallet):
0000010111001111110100000111000110100000101100000100001100011111100010011101100001011000110001101110101010100100000110100001010011110000011111101011000011111100000011010110011110110010101100100111000010101110011101111101111110101101101100100111000001000111
To make it easier to read, this 256-bit sequence is converted into hexadecimal (this example is for educational purposes only and should not be used for a real wallet):
05CFD071A0B0431F89D858C6EAA41A14F07EB0FC0D67B2B270AE77DFADB27047
To simplify its storage, the private key is usually kept as a seed phrase, a series of words representing the private key. In our example, the seed phrase would be (this example is for educational purposes only and should not be used for a real wallet):
keen solution wage pupil chest child law piano foil fold eternal author code peace misery whip unit short luggage danger region whisper doctor carry
A 256-bit private key allows enough possibilities that it's nearly impossible for a human or a computer to guess an already used private key. Indeed, creating a Bitcoin private key is like choosing a number between 1 and 2^256, which is between 1 and 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936. This number is about 1.1578 * 10^77, for comparison, the estimated number of atoms in the universe is 10^80.
The public key, on the other hand, is derived from the private key calculated using an elliptical curve, a one-way cryptographic function that allows obtaining the public key from the private key but makes it impossible to guess the private key from the public key.
Finally, the address is also derived from the public key, calculated through two hashing functions.
Thus, the address is a string of characters that can be shared to receive funds or to track transactions on the blockchain. However, the private key should not be shared as it gives direct and free access to anyone who knows it.
We could nuance the views of some Bitcoiners who insist on holding 100% of private keys for using Bitcoin.
Indeed, depending on user profiles, keeping keys and funds on-chain may not be suitable.
For short-term investors, using centralized exchange platforms will be most appropriate, allowing for an easy, accessible, and low-cost on and off ramp.
Conversely, for long-term investors, adopting a "Hodl" strategy is advisable, meaning buying Bitcoin and keeping it for several years in the hope of selling it or even spending it once its price has increased.
For Bitcoin users, that is, those who want to hold Bitcoin while benefiting from its increase in value and its qualities as currency, it would be more suitable to adopt a more cautious strategy and rely on custodial wallets for only a small portion of their funds for more dynamic management of their Bitcoins.
For example, it would be more prudent to keep the majority of your funds in a wallet where you directly hold the keys, and then take advantage of custodial wallets like Blink to deposit funds spontaneously to easily pay in Bitcoin or to perform transfers between friends.
Although using centralized platforms offers many advantages, depositing 100% of your funds on one of them is a risky strategy. Using self-custodial wallets reduces the risks of losing your funds. History has repeatedly shown that centralized platforms are less reliable. Withdrawing the majority of funds to a self-custodial wallet greatly decreases the chances of losses due to hacking or theft organized by the platform itself.
Check out our article on using Lightning Network wallets versus Bitcoin wallets.
