Coinbase is one of the most popular exchanges for trading cryptocurrencies for fiat and vice versa. It’s easy to use, is licensed for trading within the U.S. and multiple other countries, and is a safe and secure business with a lot of venture capital backing it. But when it comes to forks of cryptocurrencies, that is where it falls short.
Private Keys and Forks
Whoever holds the private keys for a cryptocurrency holds the actual coins. When coins are stored on an exchange or other site, such as Coinbase, it is not you that is in control of them: it’s the site. A great way to explain this is that you essentially have an IOU – sort of like having cash deposited at a local bank. This is an important thing to keep in mind because it means when forks happen, accessing them requires the private keys. Since Coinbase does not give them to you, it’s entirely up to them whether or not they want to go through the work to give the new coins out, and if they don’t, you’re out of luck.
While Bitcoin Cash is one of the most well-known forks for Bitcoin, there have been 30+ forks and airdrops so far. Coinbase has supported just one of those (BCH), so if you have been keeping coins on their exchange, you’re essentially losing free money or the ability to hold the forked coins for possible appreciation in value. This also includes altcoins, like Ethereum and its Ethereum Zero fork.
Use Exchanges for Exchanging – Not Wallets
The general consensus has always been that exchanges should only be used for trading coins. Past that, the rule is that if you do not hold the private keys to your coins, you don’t actually hold/own anything. While it wasn’t as big of a deal years ago when there weren’t forks happening, it’s becoming more of an active loss of income. To see some of the coins you might have already missed out on, you can check out BTCDiv. Here, you can input your public Bitcoin address and it will tell you if there are any forked coins still associated with it (unclaimed). While you won’t be able to access any of them if they were stored on Coinbase, it is a great way to illustrate the potential losses.
Protecting Private Keys
If you pull coins to your own wallet so that you can capitalize on securing your own coins for the future, checking out this article on wallet options is a great idea. You will ideally use a hardware wallet for maximum protection, and since all of them will also give access to your private keys, they can all be utilized for accessing forked coins going into the future. While there is no guarantee that there will be more forks happening, it’s still a great step to make, as it’s the safest way to ensure that you are truly being your own bank.
Exchanges as Hot Wallets
Hardware wallets can be used as hot wallets (those you use for sending and receiving funds, sort of like the one you carry around, not holding the bulk of your coins), but exchanges can be as well. This is really up to personal preference, as there will always be risks involved in storing coins on any exchange, regardless of how safe we fell about them. For the most security, coins should be held locally anytime you are not actively trading, buying, or selling them, and they should be sent to and withdrawn from exchanges when you are.