When you check your Coinbase account and see "1.5 BTC" next to your name, you don't actually own 1.5 Bitcoin. You own a promise from Coinbase that they'll give you 1.5 Bitcoin if you ask for it. That might sound like a technicality, but it's the difference between owning your house and having a receipt from a storage company that says your house is in their warehouse. When the storage company goes bankrupt, you find out which one you actually had.

I'm not trying to scare you. I'm trying to explain what's legally happening when you leave Bitcoin on an exchange, because most people don't realize they're taking on a specific kind of risk until it's too late.

The Part Nobody Reads: Terms of Service

Here's what actually happens when you deposit Bitcoin to an exchange. You send real Bitcoin—controlled by cryptographic keys—from your wallet to an address the exchange controls. At that moment, you stop owning Bitcoin. The exchange now owns that Bitcoin. What you own is an entry in their database that says "this user deposited 1.5 BTC."

In bankruptcy law, this makes you an unsecured creditor. You're not a Bitcoin owner. You're someone the exchange owes a debt to. And when a company goes bankrupt, unsecured creditors are at the back of the line. Secured creditors—banks that lent money with collateral, bondholders with legal agreements—get paid first. Lawyers and bankruptcy administrators get paid second. Whatever's left gets split among unsecured creditors, which includes you and every other customer who thought they "had Bitcoin" on the exchange.

In most cases, whatever's left is nothing.

This isn't speculation. It's how bankruptcy works, and it's already played out multiple times in Bitcoin's short history.

The $30 Billion Education

In 2014, Mt. Gox was the biggest Bitcoin exchange in the world. It handled about 70% of all Bitcoin trading. People trusted it the way you trust your bank. Then one day it went offline, and the founder announced that 850,000 Bitcoin—worth about $450 million at the time—were gone. Hacked over a period of years without anyone noticing.

Customers became creditors in a Japanese bankruptcy case. Some of them are still waiting for their money. Eleven years later, partial payments finally started in 2024, but many of the original Mt. Gox users died before seeing a cent. The ones who survived got back a fraction of what they lost, calculated at 2014 prices, while Bitcoin's value went up 100x in the meantime.

That was the first big lesson. It wasn't the last.

Fast forward to 2022. FTX was the third-largest crypto exchange in the world. It had celebrity endorsements, Super Bowl ads, and a CEO who met with Congress to talk about regulation. It looked as legitimate as any financial company. Then in November, it came out that the CEO—Sam Bankman-Fried—had been using customer funds to make personal trades through his hedge fund. The exchange collapsed in a week. Eight billion dollars in customer funds vanished.

Same year: Celsius, a lending platform that paid interest on Bitcoin deposits, froze withdrawals and filed for bankruptcy. BlockFi did the same. Voyager Digital did the same. Genesis, the institutional crypto lender, collapsed in early 2023. All of them followed the same playbook—lend out customer Bitcoin to generate yield, hit a liquidity crisis, freeze accounts, file bankruptcy.

The total estimated losses from exchange and platform failures? Somewhere between $30 and $50 billion, depending on how you count. And in every single case, customers learned the same lesson: the "Bitcoin" they thought they owned was actually just a database entry that disappeared when the company went under.

Why "Regulated" Doesn't Mean Safe

I know what you're thinking. "Those were sketchy exchanges. I use Coinbase. They're a publicly traded company. They're regulated."

Mt. Gox was the most trusted exchange of its time. FTX was regulated in the Bahamas and had institutional investors who did due diligence. Celsius had a compliance team and legal counsel. Every single one of them looked legitimate until they weren't.

Here's the problem: being regulated doesn't prevent bankruptcy. It doesn't prevent hacks. It doesn't prevent fraud. What it does is create a legal process for how the company gets liquidated after it fails. And in that process, as I said, you're an unsecured creditor fighting for scraps.

Just this past February, Bybit—one of the larger exchanges still operating—got hacked for what reports suggest could be billions of dollars. The North Korean Lazarus Group, which has been hitting exchanges for years, apparently found a way in. Bybit is still operating, but the incident is a reminder that even the big players are constantly under attack. Exchanges are honeypots. They hold billions of dollars worth of Bitcoin in centralized wallets, which makes them the highest-value target in the entire crypto ecosystem.

The question isn't whether your exchange might fail. It's when.

The Simple Solution Nobody Wants to Hear

Self-custody sounds complicated, but it's not. A hardware wallet costs less than $200. You set it up in an afternoon. It generates a seed phrase—12 or 24 words—that you write down and store somewhere safe. That's it. Now you own Bitcoin. Not a database entry. Not a promise. Actual Bitcoin, controlled by cryptographic keys that only you have.

If the exchange goes bankrupt, it doesn't matter. Your Bitcoin isn't on the exchange. If the exchange gets hacked, it doesn't matter. If the government shuts down the exchange, freezes accounts, or seizes assets—none of it matters, because your Bitcoin is in a wallet you control.

I'm not saying self-custody has no risks. If you lose your seed phrase and your hardware wallet breaks, your Bitcoin is gone forever. There's no customer service to call. That's the trade-off. But here's the thing: losing your seed phrase is a mistake you make once and can prevent with basic precautions like metal backup plates. Trusting an exchange is a mistake that gets repeated across the entire industry every few years, and the outcome is always the same.

The people who lost money on Mt. Gox didn't make a mistake with their seed phrase. They trusted a company. The people who lost money on FTX didn't forget their password. They trusted a CEO with a good PR team. The pattern is clear: trusting someone else to hold your Bitcoin is more dangerous than holding it yourself.

What This Actually Means

Bitcoin was designed to be a system where you don't need to trust anyone. You can verify everything yourself. The whole point was to eliminate the middleman—the bank, the payment processor, the custodian. Exchanges put the middleman back in. They take a technology designed for self-sovereignty and turn it into something that works like a traditional brokerage account, with all the same vulnerabilities.

I'm not saying exchanges are useless. If you want to buy Bitcoin with dollars, you probably need to use an exchange. If you're trading frequently, keeping some amount on an exchange might make sense for convenience. But the moment you're done trading, the moment you're holding Bitcoin as a long-term position, there's no reason to leave it on an exchange. You're taking on counterparty risk—the risk that the company fails—for zero benefit.

People treat "not your keys, not your coins" like it's paranoid maximalist rhetoric. It's not. It's just an accurate description of how Bitcoin works. If you don't control the private keys, you don't control the Bitcoin. You control a claim against a company, and that claim is worth exactly as much as the company's ability and willingness to honor it.

Every major exchange failure looked impossible until it happened. Mt. Gox was too big to fail until it failed. FTX was too regulated to fail until it failed. The next one will look safe right up until it isn't, and the people who figure that out early will be the ones who moved their Bitcoin off the exchange before it mattered.

The real choice isn't between taking custody of your Bitcoin or trusting an exchange. It's between spending a weekend learning how to use a hardware wallet, or spending years in bankruptcy court hoping to recover a fraction of what you thought you owned. One of those is inconvenient. The other is catastrophic.

I know which one I'm choosing.