Some bitcoin users rely entirely on exchange wallets and get by without owning a personal bitcoin wallet. We explain why this is not really a good practice.
If you plan to buy and own bitcoin, then YES, you will need a bitcoin wallet. Your own personal bitcoin wallet. You will ultimately need a place to “store” them.
If you have paper money, you will also need a wallet to store it. However, paper money being physical in nature, can be placed just about anywhere. On the table. In your pocket. In your bank safe deposit box.
In the case of bitcoin, it is a little different. Bitcoin is digital in form. It is non-physical, and cannot be held or simply placed anywhere. And there isn’t a bitcoin bank. In cryptocurrency realm, your bitcoin wallet is more like a bank than a wallet. There isn’t a third party or financial institution which will look after your bitcoin. You are wholly responsible for your own bitcoin.
Again, this is one of the advantages of cryptocurrencies. You are in total control of your own funds. Nobody can tell you how and where to spend it, or the time of day and daily limit you are allowed to send to another person. In other words, you have FULL CONTROL.
So yes, you need a bitcoin wallet, if you buy and own bitcoin.
But…the exchanges that sell bitcoin have bitcoin wallets too!
True! But between your wallet and the exchange, the latter is more susceptible to hack attempts by hackers. This is because of the significantly higher value of cryptocurrencies at an exchange compared to a user’s personal wallet, and the effort to hack an exchange that holds more funds seems more worthwhile.
In the past, hacks at exchanges that resulted in account holders losing their bitcoin were not uncommon, and it was largely due to lack of awareness on security (both on the part of the exchange and the account holder) that resulted in those incidents. Today, new people entering the cryptocurrency scene are still running the risk of leaving their bitcoin at the exchange wallet, out of the same lack of awareness about the risks involved with not keeping their own bitcoin.
These days, exchanges are better equipped and have upped their security level. Bitcoin and cryptocurrencies are stored in cold wallets or vaults that make it virtually impossible for an outsider to penetrate in and steal bitcoin. However, inside jobs are still a possibility.
There is a famous saying that goes “Not your keys, not your bitcoin“. That implies that bitcoin kept at an exchange are held by the private keys that belong to that exchange and not you, even though the exchange wallet may bear your name. Should the exchange stop operating or vanish from existence, the same fate would apply to your bitcoin.
Remember, “Not your keys, not your coin“. You should always retain custody of your own coins, and that means having your bitcoin “stored” in your own wallet, held by your own private keys, wherever possible.
Consider this scenario.
Someone visits a bureau de change or currency exchange and decides to convert US Dollar (USD) to British Pounds (GBP). He looks at the rates and buys some GBP with his dollars. He then realises that he doesn’t need that much, and decides to keep half of the GBP at the exchange (let’s pretend for a moment exchanges do that) and leaves with the other half. Later that day, the exchange is robbed and all the currencies, including his GBP, are stolen. Maybe the exchange is insured against theft and robbery, but that is a separate matter.
A currency exchange doesn’t have a facility where you are allowed to store your money there, but assuming there is, would you leave your money at the currency exchange if you didn’t need the money there and then? If the answer is no, then the same applies with bitcoin that you leave at a cryptocurrency exchange.