Why should I withdraw my bitcoin from an exchange?

If you have to ask permission to use what's yours, it's not truly yours. Have you ever heard the phrase "Not your keys, not your coins" ? It's true. If you do not withdraw, and hold your bitcoin private keys, you are not in control of your own money. Leaving your bitcoin on your exchange account means that you are placing a significant amount of trust in a third party exchange.

What are bitcoin private keys?

Bitcoin private keys are like the passwords needed to move your bitcoin around on the network. To send or spend bitcoin, you need your private keys. If you don't hold these keys, that likely means someone else is holding them for you, typically an exchange like Coinbase or some other third party custodian.

When you utilize a third party to custody your bitcoin, you are exposed to many additional risks. Leaving your bitcoin with a custodian means that you have to ask permission to use what is "yours" . It is like trusting someone else to remember the family vault password for you.

What are the trade-offs with leaving your bitcoin on an exchange?

Without access to your bitcoin, you lose all the properties that make bitcoin special. It is no longer censorship-resistant. You can no longer send or spend freely. Your bitcoin can be force sold in a liquidation event. Your transactions can be frozen or blocked. Your access to your bitcoin can be shut off at a moment's notice. Trusting and leaving your bitcoin on an exchange exposes you to many significant risks:

  • You must trust that an exchange does not rehypothecate bitcoin.
  • You must trust that an exchange keeps your bitcoin stored securely.
  • You must trust that an exchange actually has the bitcoin they sell you.
  • You must trust that an exchange does not have fractional reserves.
  • You must trust that an exchange does not lend your bitcoin to day traders.
  • You must trust they an exchange will allow you to withdraw when you want.
  • You must trust that an exchange does not track or sell information on your transactions.
  • You must trust that an exchange will not go bankrupt, losing your bitcoin in forced liquidation.

You Must Use Bitcoin To Fully Appreciate It

Being hands-on with this new technology highlights it's utility in ways that are difficult to understand by just reading about it. Just reading about bitcoin is not enough for a comprehensive understanding.

There are many ways to use the bitcoin network. Spend a little bitcoin. Send some to others. Consolidate your UTXOs. Open a lightning network channel. Learn how to create, and broadcast a transaction to the network.

Heres an analogy to help illustrate this point: A person can study cars, and learn everything there is to know about how an engine works, but if they are a brand new driver, sitting behind the wheel for the first time, and being asked to drive, chances are they will still struggle to get from A to B.

How to withdraw your bitcoin from an exchange:

Withdrawing your bitcoin from an exchange will different depending on the platform you are using. Here is a list of some of the top bitcoin exchanges, and links to withdrawal instructions for each: