Ask someone in the cryptocurrency community, "Where do you keep your coins?" and 90% of people will answer "Wallet" or "Exchange."

(The remaining 10% might be confused, wondering "Where did I put them?")

The so-called storage in a wallet or exchange does not mean that the coins are placed in the database of the wallet or exchange. All coins in the world are still stored on the blockchain. The main difference between storing in a wallet or an exchange is the form of control that people have over the coins.

There is a saying, "Not Your Keys, Not Your Bitcoin," which means that truly controlling the mnemonic phrase (private key) is what truly controls one's own coins.

However, in everyday life, there are actually very few people who understand and independently control the assets, and there are still many users who store their coins in exchanges.

So today, I will explain to you what it means to store coins in an exchange and a wallet, and in light of actual situations, discuss how one should reasonably allocate and store their assets.

I. Where are your coins when you store them in an exchange?

The general process for depositing in an exchange is as follows:

1. The exchange generates a deposit address.
2. You transfer coins to that address.
3. The exchange confirms the transaction on the blockchain and credits your account.
4. Your corresponding balance increases.

Firstly, for the convenience of centralized management, exchanges will not provide the mnemonic phrase (private key) of the account to users. Therefore, the highest control over these coins lies with the exchange. Thus, the essence of your balance in the exchange is a number reflected to you by the exchange's database, which can also be understood as an IOU from the exchange.

So when you store your coins in an exchange, your coins are essentially in the exchange's address; when you perform operations such as withdrawals, whether you can get your own coins depends on whether the exchange will honor that IOU for you.

Extended Reading:

1. Exchanges usually periodically consolidate address balances, transferring most of the assets on user addresses to a single address. So sometimes when you search for your exchange address on a blockchain explorer and find that assets have been transferred, it may be that the exchange is consolidating balances. As long as the balance in the exchange can be accounted for, there is no need for excessive concern.

2. When you transfer internally or place orders within an exchange, these are digital transfers within the exchange system and cannot be queried on the blockchain. This type of transaction is considered off-chain. When you withdraw coins, and the exchange sends the coins to the address you submitted, this transaction can be queried on the blockchain, which is considered an on-chain transaction.

II. Where are your coins when you store them in a wallet?

Friends who have used wallets have been repeatedly advised: Be sure to remember the mnemonic phrase (private key) (you can search for the article "A Little Popular Science: What Are Private Keys and Mnemonic Phrases?" on Bitpie's Weibo).

The private key and mnemonic phrase are so important because they are the highest authority to control blockchain assets. When storing coins in a wallet, receiving and sending are completely free, and no one reviews your deposits or withdrawals.

Some people mistakenly believe that storing coins in a wallet means transferring the coins to the wallet provider. This is actually a big misunderstanding. As mentioned earlier, all coins in the world are stored on the blockchain. The main function of a wallet is to generate a mnemonic phrase, receive coins at an address, and help users interact with the blockchain. For example, the balance in your wallet is the balance that the wallet reads from your address on the blockchain and displays for you. Without a wallet, operating blockchain assets would require a certain level of coding ability.

When you store your coins in a wallet, your coins are entirely under your control. Even if you want to switch to another wallet, you can simply use the mnemonic phrase you have recorded to restore your assets in another brand's wallet, and all your assets will return as expected.

So do we need to store all our coins in a wallet?

Because the above analysis mainly comes from the storage and receiving scenarios, which are the advantages of wallets, it sounds like wallets seem to be superior to exchanges. But is the reality really like this? Of course, it is. As someone who makes wallets, wouldn't I praise wallets over exchanges?

Well, let's praise the exchanges... When discussing how users should store their assets, it should start from the user's daily usage scenarios. If you are a frequent, heavy trader who does not store any digital assets, the first choice is definitely an exchange.

If you have a light trading demand, or even a dollar-cost averaging investor who only buys and never sells, a wallet is the best choice. (Bitpie has features like pure buy and sell, coin-to-coin exchange, etc. Wallet users who want to trade can also do so very conveniently!)

Of course, what suits most people is to keep most of the coins that are not used for a long time in a wallet, and a small portion in an exchange to solve the problem of itchy hands.

I don't think centralized exchanges are inherently evil. The emergence of exchanges has greatly improved the liquidity of blockchain assets and has played an important role in the popularization of blockchain.

Whether you choose an exchange or a wallet, there is no right or wrong. The most important thing is for everyone to understand the logic behind wallets and exchanges, and then customize an asset allocation and storage plan that suits themselves.