What is the cheapest way to withdraw Bitcoin from Exchanges?

Are you looking for the the cheapest way to withdraw Bitcoin from an exchange? In this guide, we’ll explore the options and strategies to minimize fees while ensuring privacy and security.

Why Holding Funds on an Exchange Is Not Recommended

When you buy Bitcoin on an exchange, you can indeed save some money due to competitive prices. However, it’s crucial to avoid storing your cryptocurrencies on the exchange for several fundamental reasons:

Vulnerability to Cyber Attacks: Exchanges are online platforms vulnerable to cyberattacks. They have been targets of numerous hacks in the past, leading to users losing their funds.
Lack of Control Over Private Keys: When your Bitcoin is on an exchange, you don’t have complete control over your private keys. This means you don’t truly own your assets and rely on the platform’s security.
Regulatory Restrictions: Exchanges can be subject to government regulations, and they may freeze or restrict your funds under certain circumstances.
Fractional Reserve Possibility: Some exchanges may engage in “fractional reserve” practices, where they don’t possess all the Bitcoin they claim. This poses a risk when everyone tries to withdraw their funds simultaneously.

To ensure the security and full control of your Bitcoin, it’s essential to transfer your assets to a wallet you control. However, our goal will be to prevent anyone from associating your wallet with your identity.

The Cheapest Withdrawal Method: Lightning Network

While withdrawing Bitcoin on-chain can be expensive due to transaction fees, there’s a more cost-effective and privacy-conscious method: the Lightning Network.

Choose an Exchange with Lightning Support: Start by selecting an exchange that allows withdrawals via the Lightning Network. Kraken, for example, is one such exchange.
Generate a Lightning Invoice: In your Lightning-enabled wallet (e.g., Wallet of Satoshi), create a Lightning invoice.

Withdraw Your Bitcoin: Paste the Lightning invoice into the exchange (e.g., Kraken) and withdraw your Bitcoin. Kraken will send your Bitcoin via the Lightning Network to your chosen wallet.

Further Anonymize Your Bitcoin: For added privacy, consider “hopping” your Bitcoin through several Lightning wallets, sending the funds between them for a negligible fee (this is not mandatory at all, you can skip directly from Wallet of Satoshi to Muun, you cannot use Muun directly for the invoices, the wallet does not support such feature, otherwise we would use Muun directly). Eventually, as a final step, transfer your funds to a Muun wallet.
Conduct a “Submarine Swap”: In your Muun wallet, perform a “submarine swap” to convert your Lightning Bitcoin to on-chain Bitcoin (BTC). This can be done directly in Muun, it is very easy and you do not have to adjust any settings. Once you receive the funds, they will be on your wallet, if you send them to an on-chain address, the swap is made automatically. The fees will be higher than on Lightning but still reasonable compared to the exchanges’ on-chain fees. This method is still cheap in 2023 and adds an additional layer of security, but it might get more expensive if Bitcoin price rises a lot.

By following this method, you can significantly reduce withdrawal fees and maintain a level of privacy, making it a viable solution, especially in 2023.

Alternative Option: CoinJoin

Another option to obscure the origins of your Bitcoin is to withdraw them to another address and use a CoinJoin. In a CoinJoin, users pool their Bitcoin, making it challenging to trace individual transactions.

In practice, joining transactions through CoinJoin can be challenging due to several factors. When done right, to maintain anonymity, participants must use a Tor network, possess coding knowledge, and trust one another.

To address these issues, developers created tools to automate the process for most users. There are tools, such as Wasabi Wallet and Whirlpool by Samourai Wallet, aimed to improve anonymity and facilitate the process. However, there is ongoing debate regarding the trustworthiness, security, and effectiveness of these wallets in anonymizing Bitcoin holdings.

The CoinJoin is a valid option as well, but in our opinion is easier to use lightning for this purpose.

Conclusion

While withdrawing Bitcoin from an exchange can be both cost-effective and private using the Lightning Network, it’s essential to stay informed about evolving technologies and regulations. This is, in our opinion, the cheapest way to withdraw Bitcoin from an exchange (and one of the safest). Nevertheless, keep in mind that the methods described here are current as of 2023, and the cryptocurrency landscape is continually changing.

Always prioritize your security and privacy when managing your digital assets. If you have withdrawn your Bitcoin to your cold wallet, we recommend you to check out our BitJig solution, to add another security layer to your seed phrase.