How and why to withdraw your coins from exchanges | by SatoshiLabs | May, 2022
Bitcoin news and comment
Exchanges are prepared to take ownership of your coins if they go bankrupt. Withdraw your bitcoin to cold storage today! — Josef Tětek
Every so often a new catastrophe comes along and causes panic in some part of the ecosystem. The recent, rapid crash of Luna was a result of failing to address the hidden risks of investing in the purportedly reputable project. A more obvious time bomb that none of us can afford to ignore, is that the custodians we buy from aren’t holding our bitcoin, they’re just promising us some of theirs.
Recently two interesting pieces of information about major custodians emerged, showing that Coinbase and Celsius may not repay user funds in certain cases.
First, Coinbase disclosed that its clients’ deposits would likely be withheld if the exchange ran into financial trouble:
In plain language, this means that if Coinbase go under, you won’t get your coins back. Even if you do, it will likely take a very long time. For reference, Mt. Gox clients have been waiting to get their bitcoin back for more than 8 years now and it’s still unclear what portion of their coins the users will get — or whether the settlement will be in fiat instead.
It’s reasonable to expect that most exchanges apply the same liberal understanding of client-custodian relationship. Bitcoin held on a centralized exchange simply isn’t yours; at best, it’s a promise that might be physically settled when you attempt to withdraw your coins. They are claiming the right to use your bitcoin to settle their debts.
Even the act of too many clients trying to withdraw their coins at once could leave the exchange insolvent — just like bank runs under a fractional reserve system, another practice which we had better assume exchanges are engaging in, unless proven otherwise.
It turns out that Celsius, a cryptocurrency lending platform, is in much the same boat.
Big custodians such as the two mentioned here may be quick to point out that there has never been a significant problem with user withdrawals or fulfilling other obligations, but the custodian space is the perfect environment for the so-called Thanksgiving turkey problem: everything is fine until one day, you’re totally wiped out.
Noncustodial exchanges are popular because they are often the most convenient way for people to buy cryptocurrencies. You don’t need to give up custody when you buy your coins! If this article has convinced you to withdraw your coins, maybe using one of these methods will help you cut out the middleman completely.
The best way to buy bitcoin is always peer-to-peer. If you know someone who needs to sell some, great! You can conduct your purchase in cash or arrange a bank transfer without the data risks of an exchange KYC process. If you don’t have a Bitcoiner buddy, turn to one of the popular peer-to-peer online exchanges. There are too many options to list here, but we cover some of them in our blog Buy Bitcoin without KYC.
If you just want to take custody of your coins and are otherwise happy with the convenience of noncustodial exchanges, you don’t need to stop using them outright. You can just have the coins from every purchase sent directly to cold storage, using your Trezor.
The Trade menu in Trezor Suite is a feature from Invity, which lets you compare rates, buy, sell and exchange across many providers, without ever needing the extra step of moving your coins.
Coinbase and Celsius are just two of the many custodians out there. Each have their own user account structures, so this will not be a comprehensive guide. What we’ll cover here is addresses, how the withdrawal process works, and why you’re probably paying too much in fees.
Depending on how much you’ve saved, you might not be too concerned about security for the time being. But any fraction of bitcoin could be significant in a few years’ time. Eventually, you will want to store your coins somewhere for the long-term. That place is an address.
Creating a secure address to withdraw to
No matter what wallet you use, your Bitcoin will always be held at an address on the blockchain. With your private keys, you can move it to a new address. In order to make sure the keys are really private, they need to be created offline and in a cryptographically secure way.
Hardware wallets create keys that have no realistic chance of ever being generated again. Those are the kinds of keys you want to secure your bitcoin with.
To generate a new address in Trezor Suite:
- go to your Bitcoin account and click on Receive,
- click on Show full address and your Trezor will display an address on its screen,
- compare the address shown in Trezor Suite with the one shown on your Trezor device
- if both addresses match, copy the address to your clipboard, or use the QR code if it’s supported by the exchange.
How to withdraw bitcoin to cold storage
Most exchanges document the withdrawal process in detail, so it is best to consult their manuals. Here are a few popular exchanges for reference:
For other exchanges, you can try the following:
- Open your exchange account and navigate through the menu until you reach a page called withdrawals. This may be nested in another category such as transactions or balances.
- Select the coin you wish to withdraw. Make sure it is on the correct network, Bitcoin should not be sent as an ERC20.
- Paste the withdrawal address or scan the QR code created by your Trezor.
- Confirm the transaction and perform any authentication as required.
Should withdrawals cost this much?
You will usually be charged a flat fee or a percentage by the exchange in order to be given custody your coins. This is often much higher than the actual Bitcoin network fee, and in most cases a decent source of the exchanges’ profits.
Waiting to accumulate more coins before you withdraw might mean a lower exchange withdrawal fee, but the longer your coins sit on the exchange, the greater the risk. In cases where exchanges charge just the network fee, you should be able to reduce costs by withdrawing to a Taproot account. Or avoid the withdrawal process altogether by buying direct to your wallet.
Coinbase and Celsius may very well hold up for the foreseeable future, but the writing on the wall (or rather, in the terms and conditions) is clear: your coins are never yours, unless you withdraw. Any semblance of security is purely trust-based when a third party holds your keys.
If you hold your coins on a custodial exchange like either of the two mentioned above, you choose to believe that nothing can ever go wrong. Because if something bad does happen to the company, they will take your coins and run, as they openly admit.
The trouble is, bad things do happen, both to crypto companies (Mt. Gox, Quadriga, Cryptopia), as well as highly regulated financial institutions (Long-Term Capital Management, Bear Stearns, Lehman Brothers). Bitcoin offers us a chance to truly own our money, yet most people feel the need to hand it over to a third party promising to keep them safe.
With Bitcoin, security has to be applied at a whole new level, and the only way to stay in control of it is to secure it yourself. Don’t trust anyone else to hold your money, take control safely and easily with a hardware wallet.