Why is it safer to keep your bitcoins offline than online on Coinbase?

I'm trying to think of a good way to store my bitcoins somewhere but I can't really think of a way to do it without

1) having something physical (eg. USB key) that can get lost or destroyed 2) having some sort of password (that I can forget)

The problems with either of those things is I'm planning on leaving my bitcoins to sit for a long time so by the time I need to sell them, I may not be able to remember all the details.

I was thinking maybe I should just leave my coins on Coinbase. At first that sounds more risky giving my coins for somebody else to manage, especially given what happened to Mt Gox.

However, whilst cryptocurrency is kind of like the wild west, Coinbase is a legitimate company. They're also fully insured so if they do get hacked, it doesn't sound like I would be on the hook for any loss. In addition, accessing the coins requires two factor authentication and furthermore, they have my identification details. So these features protect me against me losing access to my own coins.

So please explain why it is safer to keep my own coins offline where I would have to manage and implement my own security instead of just keeping it on CoinBase where they have professionally implemented security, contingencies for if I lose my credentials and where my coins are fully insured?

Kodi Mac

Posted 2017-11-13T13:27:45.560

Reputation: 21

Answers

Let's assume you keep your bitcoins on the exchange for 5 years. If the company behind the online wallet goes bankrupt, is hacked, or is malicious, you lose your bitcoins. If you kept them on a hardware wallet and kept the mnemonics in another, safe location, you can still recover them in case of fire, disaster, turmoil.

Mt.Gox taught us that trusting in another's private keys for your holdings is not a good idea. Many of the people who lost hard in that episode are still waiting for a reimbursement.

BlackBeltBob

Posted 2017-11-13T13:27:45.560

Reputation: 447

An answer over here https://bitcoin.stackexchange.com/questions/53108/is-it-safe-to-store-all-my-coins-on-coinbase says "Coinbase has insurance that protects every customer against the loss of digital currencies. If digital currencies are stolen, Coinbase's insurance company will make you whole. Also, if you are a U.S. Citizen, your U.S. Dollar wallet (USD) is protected up to $250,000.00 by F.D.I.C insurance"

– user16081 – 2018-01-06T15:04:19.327

it also states that "This insurance policy does not cover any losses resulting from the compromise of your individual Coinbase account." So if you get hacked, you get nothing. Also, many people are not in the us. I'm pretty sure my country will insure nothing. – BlackBeltBob – 2018-01-08T10:02:13.203

fair enough. As a computer professional my concern is much greater that Coinbase will get hacked than me personally. (they are obviously a much bigger target with a lot more surface). And what you have advocated "trusting in another's private keys for your holdings is not a good idea" puts you at the same risk regardless whether you use coinbase or any other wallet. If you are holding the keys yourself and get hacked, kiss your money goodbye. – user16081 – 2018-01-08T19:51:08.127

I guess a hardware wallet addresses this? But compared to any other software based wallet, I don't see any disadvantage for Coinbase in this regard. – user16081 – 2018-01-08T20:01:10.500

Centralization risks include:

Government shutdown/freezing of assets (would not be covered by insurance)
Hacking/insider stealing in excess of insurance coverage
Mistake moving of cold storage resulting in accidental catastrophic loss
Network/backend issue preventing withdrawals

Additional loss of value:

Nonpayment/delayed payment of forked tokens or loss of airdropped coins (either bitcoin forks not supported, or airdrop of less popular ethereum-based tokens such as the OmiseGo airdrop which was not credited)

hedgedandlevered

Posted 2017-11-13T13:27:45.560

Reputation: 973