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Comment by gedy | Hacker News Reader

Not really involved with crypto, but if I had large sums of money in it, I would never store this on an exchange. Seems so risky. Can anyone ELI5 why people do this?

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Two main reasons:

1. Self custody is hard. You need to understand how to setup a wallet. If you lose the keys to that wallet, your money is gone. Opening an account on an exchange is so much easier, and there is usually a way to reset your password if you forget it.

Exchanges provide an online-banking style experience that most people are already familiar and comfortable with.

2. Access to markets. If you hold funds somewhere else, it takes quite a bit of time and effort to move it back onto the exchange so you can sell it later. It only really works for people who want to buy some coins and stuff them under their mattress until later. For anyone who wants to play the markets, you kind of need to keep your coins on the exchange.

Additionally, holding coins on the exchange is free. You don't have to pay the transaction fees to withdraw and deposit, which can add up, especially on congested blockchains like bitcoin and ethereum.

I found that many exchanges/custodial wallets (I've tested Kraken and CashApp) charge fees or imbalanced exchange rates for converting fiat into crypto and sending crypto to another address (often using a bulk transaction exchanging money between the exchange's wallet), so I wouldn't say you avoid transaction fees that way (they may or may not be reduced). I ended up using them anyway because it's easier to purchase crypto as a number on an exchange than to have it sent to your personal address.

The whole selling point of cryptocurrency is to avoid the online-banking experience

I thought the whole selling point was "line go up".

For trading with lower latency / no confirm time.

Non-KYC exchanges outside the US and sharp deranged claws of the FTC and DoJ typically depend on exchange held crypto if you want near instant clearing for futures and securities trading etc.

In the case of something like bitcoin, lower latency / no confirm time means you are avoiding the very blockchain that is meant to be the bedrock of the currency's value. What's the point?

I think low latency traders don't much care about the value proposition, only that they can gamble on the trades. Much like forex day traders don't give a shit about the value proposition of the dollar

It all just reminds me of Steve Martin's old comedy routine about banks.

I mean, like, take, say you get out college or whatever you're doing. You're gonna go into business; say you're going to open a bank. Now you, just for example, you've got to give it the right name. It's got to be something big and strong like Security First Trust and Federal Reserve. And you have to name a bank that because nobody is going to put their money in Fred's Bank. "Hi, I'm Fred. I have a bank. You got $1,500? I'll put it, I'll put it here, in my white suit. White suit, right-hand pocket. Ok, you gotta remember that."

(you probably have to listen to get all of it)

Managing your own keys is stressful. You go around worrying that the hardware has failed or that the seed words won't work. Never again.

Legitimate question (I expected this will read poorly).

If you don't trust that seed phrases, which are a fundamental piece of how bitcoin key pairs are designed, will work why would you ever consider investing in bitcoin?

I totally get the stress of self custody. I just don't get why anyone that stressed about it would bother buying bitcoin.

To make money, but it's not that I don't trust the technology. It's more that I don't trust myself. Maybe I wrote them down incorrectly or did some other mistake? I also once lost the paper after moving (but found it again), even though I was sure i had put it in the new safe.

I think this is the key thing I wasn't considering - I think of Bitcoin as primarily way to save currency, whereas a lot of people are treating like an investment for trading.

To add on to the trading latency benefit:

During the Terra collapse, there was a 2-day period where Terra's price was supported by a massive BTC reserve. Those with Luna on exchanges could quickly exit their positions, but those with Luna in wallets or locked in Anchor Protocol faced hours-long delays for their currency to be confirmed and traded.

By the way, because a lot of people are keeping their crypto on exchange, would it be possible for an exchange to have fractional reserves like for banks? It is probably doable for big exchanges as trades happen on a platform they control anyway and crypto only goes out when a customer sends money to an external address. They may be able to keep only a third of customers account balance and still operate as usual.

Most exchanges are suspected to secretly run fractional reserves.

Binance in particular has its own blockchain and gets to run fractional reserve on most of the assets bridged to that block chain - the bridge keeps the real copies of the assets while only "shadow copies" are "projected" onto the Binance chain and traded.

Yes, the solid ones keep the rest in the cold storage, the remaining ones steal the rest and lie to clients about the money existing:).

I often leave up to $1k on my account to pay for occasional stuff that I need to pay for. May be people who leave huge amounts of money there do the same, but they're rich and their stuff is much more expensive?

Lazy? Perhaps a bit of: whatever other option I use could be even less safe.

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