Should you keep £8,000 of bitcoin on an exchange or in a wallet?

Most retail crypto investors who buy bitcoin through a trading app keep their holdings on the platform, a practice that trades ease of access for exposure to additional risks, experts say. Financial commentator Harvey Dorset cited 2021 data from the Financial Conduct Authority showing about 59% of UK crypto investors store assets on the exchange or platform where they bought them. That choice matters because, unlike stocks, crypto held on a platform is not backed by the UK’s Financial Services Compensation Scheme.

Holding bitcoin on an investing or trading app can make buying, selling and switching tokens simple, but it leaves users reliant on the platform’s security and solvency. Platforms have been breached, froze withdrawals or gone into administration, exposing customers to loss. The collapse of FTX in 2022 remains the most prominent recent example of a platform failure that resulted in substantial customer losses.

Industry specialists describe two broad custody models. Custodial wallets are managed by a platform that holds the private keys on a user’s behalf, similar in concept to how a bank holds deposits. Non-custodial wallets put the private keys — and therefore the responsibility for security — in the user’s hands. Pantelis Kotopoulos, UK country lead at Bitpanda, said security is fundamental and that wallets are the gateway to onchain activity. He argued custodial wallets offer simplicity and professional custody that can suit beginners, while non-custodial wallets provide greater independence for users prepared to manage their own security.

Glen Goodman, author of The Crypto Trader, said the safest option is to move crypto into a private wallet after purchase. He noted that crypto held on any company’s books remains dependent on that company not losing funds or acting dishonestly. While some firms, including major exchanges and fintechs, say they segregate customer crypto from corporate funds to provide an added layer of protection, that practice does not create the same legal compensation rights investors get for bank deposits or securities held with a regulated broker.

Wallet technology itself varies by connection to the internet and by device. "Hot" wallets are software applications on phones or computers that make transacting easy but remain connected to the internet and therefore more vulnerable to hacking. "Cold" wallets are hardware devices such as those sold by Ledger or Trezor; they store keys offline and reduce the attack surface but require physical safekeeping and secure backups of recovery phrases. Goodman and Kotopoulos both warned that private custody carries its own risks: losing your seed phrase or private keys can render holdings permanently inaccessible.

Regulation of the crypto sector in the United Kingdom has increased in recent years, and new requirements under the Cryptoassets (Regulation of Promotions) Order and related measures aim to raise standards for how wallets and custody are managed. Kotopoulos said stronger oversight should boost trust and reduce some operational risk, but he and Goodman agreed regulation does not equate to government-backed compensation for crypto losses in the same way as regulated banking or investment products.

For an investor with about £8,000 in bitcoin, the trade-offs are concrete. Keeping funds on a well-known, FCA-registered platform can be convenient and may reduce day-to-day operational risk, but it exposes the holder to counterparty and operational risk if the platform is hacked or becomes insolvent. Moving holdings to a non-custodial wallet, and particularly to a hardware cold wallet, gives the investor sole control but requires disciplined backup of recovery phrases and careful protection against scams and device loss.

Practically, advisers suggest a mixed approach for many users: buy crypto through a regulated platform for convenience and to use its on-ramps, then transfer larger sums or longer-term holdings to private custody if comfortable managing keys. Whichever route is chosen, users should verify platform security measures and registration status, create secure backups of any seed phrases, consider using hardware wallets for sizeable holdings, and remain aware that crypto assets currently lack FSCS-style compensation protections.

Investors should also monitor regulatory developments in the UK, which could change operational requirements for custody providers and affect the relative safety of keeping crypto on platforms versus in private wallets.