Article published here in Bitcoin Magazine.
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Audio by @DelioPera
#1 – If your coins are on an exchange, you need permission from the exchange to spend them. In your own custody, you can do whatever you want and pay whoever you want, whenever you want, at the fee you want.
You will understand this if you’ve ever wanted to move your bitcoin from an exchange, and you were blocked, because you needed to provide more identification documents, or prove your source of income. You may have been blocked because you reached a 24-hour limit of value you are permitted to withdraw. Your funds may have been unavailable due to unscheduled “system maintenance”. It is YOUR bitcoin, and you are in a powerless position.
Bitcoin doesn’t actually care who you are or how much you are transacting. You can move 100,000 bitcoin and you’ll be free to do that without any resistance any time of the day, even on Christmas Eve – if the bitcoin was in YOUR possession.
#2 – Your coins might not really be there. What you see is an account, a promise that if you ask for your bitcoin, they will give it to you. But if the exchange gets hacked, or if the CEO fakes his death and takes the private keys, or if the government steps in, all coins could go bye-bye.
Newcomers log into their exchange and see “Balance = 1.0 bitcoin” and they think THAT is their bitcoin. It is not. That is a number on a screen. The bitcoin is on the Bitcoin Blockchain, the ledger. The entity that can move that bitcoin from one address to another, is the entity that has the private key to the address where the bitcoin is. The user does not have the private key, the exchange does! It is THEIR bitcoin. The bitcoin belongs to whoever has the private key. This is crucial to understand, and explained more here.
The exchange just has a legal agreement that it belongs to the user, and they show the user his/her balance on their web page, under the user account. The user just has a login name and password. Not a private key.
A little sinister trick that blockchain.com employs is a 24-word password to log in to the website. This LOOKS like a Bitcoin private key, but it is not. It is just a website password. Blockchain.com has the private key. This is quite misleading and confuses beginners as to the true nature of how Bitcoin works.
Many exchanges have been hacked, and coins have been stolen from those exchanges, and therefore, users:
- Mt Gox is the first and most famous.
- Quadriga CX, a Canadian exchange, went bust after the CEO, the only person in the company with access to the private keys (allegedly), died while on a trip to India (body not found, I recall). The users lost all their bitcoin.
- Cryptopia, an exchange in New Zealand. They got hacked, and users lost their funds.
- Binance. $30 million worth of Bitcoin was stolen, but Binance was wealthy enough to make their users whole. Embarrassingly, the CEO called for a rollback of the Bitcoin Blockchain to recover lost funds, but was laughed out of town.
- Most recently, to my knowledge, the CEO of a Turkish exchange fled the country with $2 billion worth of Bitcoin.
- There have been many others that I have not even heard about.