In traditional finance, counterparty risk is the chance your lender, exchange, or trading partner defaults. In Bitcoin, it’s minimized if you self-custody. The moment you hand over your private keys to a custodian (like a centralized exchange), you introduce the risk they could freeze your withdrawals or go bankrupt.

Peer-to-peer solutions, multisignature contracts, and decentralized protocols further mitigate counterparty risk by removing intermediaries or enforcing trustless dispute resolutions. Ultimately, “Not your keys, not your coins” serves as the go-to mantra for reducing the likelihood you’ll lose funds due to another party’s failure or malice.