There is a saying in cryptocurrency that goes something to the effect of "if you don't hold the keys, it’s not your money." This is perhaps the single most ignored piece of advice in all of cryptocurrency and is the reason for the vast majority of lost funds including hacked funds such as when using exchanges.

Imagine Anonymous Banking

Imagine if you walked into a bank and opened up an account and all they gave you was your account number and a plain debit card with no name attached. Imagine they gave you all this information but did not actually attach your name to the account. You know you own the account because you have the debit card and account number but that is just not enough.

You can do most of your banking with that information alone. Others can send funds to your account using the account number. You can spend the money using your debit card. You can withdraw that money money from your ATM using your debit card. In fact most of your banking could be directly done using that information alone.

However as much of your banking as can be done with that information, there would be an equal amount of things you could never do. You could never withdraw more money than the credit card will allow in a day. You could never do direct deposits or have taxes returned directly to your account. You could never sign an ACH agreement. You could never transfer your funds to another bank. You could never take out a loan. So many things you would not be able to do.

Why? Because for those types of things, you need your name attached to the account, you need your ID to prove you are the person whose name is on the account and you need your banking account routing numbers. This is standard practice in banking. Without a name attached the bank has no way of knowing you are the real account holder so you are limited in what your debit card will allow. Without a routing number you can never transfer funds or have direct deposits done.

The point is, anonymous banking could never happen with the existing system. The bank needs details about who you are and you need information for routing purposes.

Cryptocurrency Compared to Banking

As cryptocurrency has no routing numbers, account numbers nor any personal information attached to it - a different method is used. There are pairs of key generated and those pairs of keys are used for everything.

A private key is half the key pairing, and it's the most important part of everything. A private key is effectively equivalent to your name AND routing number of your bank account. With it you can prove ownership, authorize transactions, make signature purchases and do all the things one would expect to be able to do.

A public key on the other hand acts as your ID and your account number. When you make a transaction, that transaction is signed with your private key and can be verified with your public key. This is the equivalent of signing a debit card transaction and the store owner asking to see your ID to verify the person signing is in fact matched to the person holding the ID.

Equally a public key is used to verify a cryptocurrency wallet address is real and send funds to that address, which can then only be spent or used by the person holding the private key for that address.

In all of this, the private key is the most important aspect of everything. The private key is how things are signed and how the owner is proven to be the owner.

Without a private key no one can access the funds.

Private Keys and Seed Words

Seed words are a method of generating a multitude of addresses on behalf of a user. Effectively seed words are used to generate both a public key and a matching private key.

These are used in what are known as deterministic wallets. Electrum for bitcoin would be an example of a deterministic wallet. You use one piece of software and it maintains dozens or even hundreds of different wallets addresses to make up an account.

Because of this, many people often consider seed words and private keys to be the same thing.

The point I am trying to make is that without those private keys or seed words, you don't actually have any control over your funds. It's equal to having a bank account with no way to prove you are in fact the owner and if someone else is holding those keys on your behalf, they are actually the owner of your funds, not you.

This is very important to keep in mind.

KYC Instead of Keys and Seeds

The vast majority of web based wallets and services, do not give you access to any seed phrases or private keys. Effectively this means when using them you do not own your cryptocurrency.

Sites like coinbase, coinpayments, and bitpay instead use KYC which stands for Know Your Customer. KYC is a practice used by companies to appease regulators which attaches a person's real name to their account.

This adds some level of protection when using services that don't provide you with your keys as you can in fact prove you had an account with the company. However there are serious flaws with this method.

First you cannot prove exactly how much crypto you had because you are relying on the service to be honest in their practices and second it relies on their properly keeping records on your account.

Even outside of this, because cryptocurrency regulations are very much lacking with no clear policies in most countries, you would still have a heck of a time if you had to go into a legal battle about missing funds.

Cryptocurrency Exchanges

Crypto exchanges are sadly the number one way to lose your coins. People find it more convenient to leave their coins sitting on an exchange so they can trade day in and day out and seem to not care about the security of their coins nor the fact that they don't actually own their coins as long as they are on the exchange.

Instead they trust exchanges to ensure their coins will never get stolen. This has caused user after user to lose their funds, often times thousands of dollars and tens of thousands of dollars at a time.

Countless exploits have been found in everything from password security of exchange wallets to the APIs an exchange has for accessing various features of the exchange. Funds have been drained time and time again from exchange after exchange.

When cryptocurrency exchanges are hacked, there seems to be very little that can be done legally. Some lawsuits have arisen from lost funds do to hacks but the truth is, when the exchange has no funds to replace missing funds with there is nothing that can be done.

A Possible Savior of Exchanges

This is why I am such a huge supporter of what NEXT.Exchange is doing. NEXT claims to have the solution to these problems, and the solution is merging centralized and decentralized exchange features into a hybrid exchange.

I have talked about next exchange before in my post Is it time to consider new approaches and bring in the NEXT.Exchange? but I can't stress enough how important this project will be.

They are set to begin testing version 2.0 of their project within the next week, and after testing they will of course be going live with version 2.0. One of the main features I am interested in, is their ability to grant access to privacy keys for each wallet their exchange supports while also allowing the more traditional ease of use features of centralized exchanges.

This single feature alone will have the potential of combating exchange based hacks. If a hack takes place all a user will have to do is create a new wallet for their coins on any desktop wallet software, important their keys and then send them to a different wallet address.

This is the single most important feature to me and what first caused me to take a serious look at NEXT.Exchange.

If they are able to achieve this, allow fiat currency pairing and keep trade volumes high enough I see no reason why they won't bring in a new wave of cryptocurrency exchanges while also overtaking the current top exchanges.

Back to the Matter at Hand

The point in this post is to get more cryptocurrency users to understand convenience is NOT worth the risk of potentially losing your money. Thinking it won't happen to you or that you don't have enough funds for it to matter - is a misguided thought.

Even if its a pain to do so always move your funds back and forth from exchanges each time you plan to start and stop trading, don't leave funds in web based based wallets or web services and at the end of the day keep in mind:

IF YOU DON'T HOLD YOUR PRIVATE KEYS, IT'S NOT YOUR MONEY!