Experts weigh holding £8,000 of bitcoin on trading platforms versus private wallets

Most retail crypto investors keep the tokens they buy on the platform or exchange they used to purchase them, but that convenience comes with trade-offs in security and legal protection, industry figures say.

According to 2021 data cited by the Financial Conduct Authority, about 59% of crypto investors store assets on the platform where they bought them. That approach makes trading straightforward and preserves immediate access to markets, but it also exposes holdings to the operational and solvency risks of the platform, and to hacking threats. Unlike stocks and shares held through an FCA-regulated broker, crypto assets kept on an exchange do not benefit from the Financial Services Compensation Scheme.

Two industry voices canvassed by This is Money set out the practical balance investors face. Pantelis Kotopoulos, UK country lead at Bitpanda, said security and custody are central to the promise of crypto. He described two broad custody models: custodial wallets, in which a platform holds private keys on behalf of customers much like a bank holds deposits; and non-custodial wallets, where the user controls the private keys and thus sole access to the assets.

Kotopoulos said custodial solutions are simpler and often safer for beginners because they remove the burden of password and key management, while non-custodial wallets appeal to users seeking maximum independence but place full responsibility for safekeeping on the owner. He added that wallets are the gateway to onchain services such as staking and decentralised finance and noted that UK regulatory standards are increasing as the government progresses measures such as the Cryptoassets Order.

Glen Goodman, author of The Crypto Trader, argued the safest custody is holding bitcoin in a private wallet under the owner’s control. Goodman noted that if a platform goes bust, customers are not entitled to FSCS-style compensation for crypto and can lose their holdings. He pointed to the collapse of FTX and the conviction of its founder as evidence that platform assurances of security are not infallible. Goodman recommended that investors move assets off exchanges after purchase into private wallets and described hot wallets (software apps) and cold wallets (hardware devices like Ledger or Trezor) as common non-custodial options. He warned, however, that private custody carries its own risks, such as loss of private keys and scams that trick users into revealing access credentials.

The debate between platform custody and private wallets hinges on three linked issues: security, convenience and legal protection. Platforms and exchanges provide a direct trading interface, fiat on- and off-ramps, and services such as insurance or institutional-grade custody that can reduce some operational risks. Some firms, including widely used providers, say customer crypto is kept in segregated storage and employ measures intended to limit theft. Yet regulation has historically lagged and does not deliver the same statutory protections as those that apply to conventional financial products.

Private wallets return control to the user. Non-custodial wallets mean ‘‘not your keys, not your coins’’ — if a private key is lost, there is generally no way to recover the assets. Cold storage, where private keys are held on an offline device, reduces exposure to online hacking but requires disciplined backup and secure physical storage. High-profile examples such as the case of James Howells, a UK IT worker who lost access to a laptop with a large bitcoin holding, illustrate the consequences of poor key management.

Practical considerations for investors vary with experience, the size of holdings and how often they intend to trade. For small holdings or for those wanting frequent trading, keeping assets on a reputable platform can be the most convenient option. For long-term holders or for amounts an individual would not want to risk in the event of a platform failure, transferring funds to private custody — ideally using a hardware wallet and secure backups of seed phrases — reduces counterparty risk. Many platforms permit transfers to external wallets, and some offer custody products that sit between full self-custody and exchange custody.

Regulatory change is reshaping the landscape. UK authorities have signalled tougher rules for firms that provide crypto custody, and the Cryptoassets Order is expected to raise standards around custody and operational resilience. While that may improve baseline protections and transparency, it will not create an FSCS-style guarantee for crypto holdings.

Security experts also emphasise hygiene measures regardless of custody choice: use strong, unique passwords; enable two-factor authentication; keep software and devices updated; beware of phishing and scam sites; and consider diversifying custody across more than one method. Firms and wallets differ in their approach to key management, insurance and recovery options, and investors should review terms, security practices and fees.

As the crypto market and its regulatory framework evolve, the choice between holding assets on a trading platform or in a private wallet remains a trade-off between convenience and control. Investors should weigh how much immediacy of access they need against how much counterparty risk they are willing to carry, and take steps to secure whatever custody model they choose.