Because Cexes and banks are generally safer to majority of people. Sure, people are losing their money to scams even from their bank accounts, but imagine how much easier those scams would be when there's zero outsourced security measures for your cryptos, and when it would be standard to hold your own cryptos in self custody.

Since fundamentals of self custody are based to fact that users have their own responsibility, i would like to argue that majority of the people are stupid and non-tech savvy, so even if they would be responsible, they wouldn't have technical knowhow to keep themselves protected. Just the fact that huge amount of people can't keep their own computer safe, should be clear enough signal that most people couldn't handle the responsibility. Even pros get hacked, imagine how easy targets people who aren't tech-savvy are.

And i am not talking just about social engineering or pure old school hacking. Just losing the device where the private key is, is a realistic problem.
And unlike in insured exchanges/banks or CEXes that can afford to cove losses from hacks, it's not like insurance companies want anything to do with covering our self custodial bitcoins when we don't have any decent security measurements for them.

I understand that storing it in cex is against the whole bitcoin ethos, but realistically the whole ethos is based on the idea that all the users would be tech-savvy people.

There is no benefit in using CEXs for that matter either. Think about it. CEXs have minimum trading amounts and minimum size orders. They also have minimum deposit and withdrawal sizes and withdrawal fees. If you are holding a few dollars worth of crypto, then sure, buying a hardware wallet doesn't make much sense. But they are also not meant for such users. We can't call them investors.   

You will spend even more in fees when withdrawing from your CEX if that is the ultimate plan. Plus you pay exchange fees, and there is a possibility that the exchange won't allow you to withdraw everything as small amounts may be left in your exchange account.

This has gone horribly wrong several times in the past, where users have lost millions through such "investment schemes" earning yield. You can also get your exchange account hacked if you don't know what you are doing or the exchange itself gets hacked.

True. But one should invest some time into understanding how to use and work with the assets they are purchasing and not just blindly follow the herd.

What silly thing are we going to defend next after this, or are we going to agree with cz that almost everyone would likely lose their BTC store in their self custodial wallet, so in order not to lose it, they should store it in their binance account and enjoy the 'safu' promo. Bs, there is no way to defend having your coins stored in a centralized exchange, the exchange can come up at anytime and confiscate your funds, close your account, etc. in a hardware wallet, your funds are offline and you are responsible for your own security.

I can come with some points but most of them are already talked but still, let's go with it:

1. Exchanges provides an easy way to access and spend your money. In hardware wallet, you always need your device with you.
2. Exchanges also offers Earn Interest schemes over your Crypto, which might be one reason you might want to stick to it.

But in the end, "Not your keys, not your coins".

It is difficult to sound silly and defend something when I know the truth, but the excuse that someone can give is the ease of trading your cryptocurrency, from bitcoin to other cryptocurrency if you are considering investing in them too.

 Another argument can be the accessibility that some may argue exchanges have more than hardware wallets, and this is something that can be advantageous when you consider using bitcoin as a currency.

This conversation reminds me of people who won't travel on a commercial airliner because they think it will crash--so they get in a car instead, which is hundreds of times more dangerous, statistically speaking.

That said, the first thing I would ask here is how much money are we talking about here? The answer to that determines the entire conversation. If we're talking about the "cash" (cache) in your wallet--money you could lose and it wouldn't ruin your life--then keeping it on your physical person and self-guarding it is perfectly fine.

But if we're talking about your "life savings"--money that would ruin your life if you lost, and, money that a criminal would kill you for--then keeping that money on your own physical person is just nuts. As clever as you think you are, criminals will always be more clever--and more violent and ruthless. And as diligent as you think you are, you don't do this for a living so you will never be as good at it as somebody who does do this for a living.

That's why most Bitcoin, in terms of dollar-volume, is stored in some kind of centralized account by some centralized company: most people don't want to mess with being infosecurity experts. They do something else for a living and will pay an expert to help them out.

(Of course this completely discombobulates the original premise of Bitcoin, but as I've said many times here, Bitcoin hasn't been broadly used for its original purpose since about 2012).

Centralized exchanges can actually be pretty handy for some folks who dont wanna deal with extra responsibility of self-custody wallets.  Lets get real, not all of us are tech geniuses.  Losing that seed phrase or getting phished? Game over, man.  No take backsies.  But customer service at the exchanges can help sometimes, at least.

They handle security stuff so you dont gotta.  Two-step verification, safe storage - they got teams to keep your coins locked down.  And talk about easy access! Wanna make a quick trade? No problem.  Need your funds on the go? Phones your new wallet, baby.

But yeah, some downsides stomp all over the nice stuff.

Because there's an interest given 1%-3% per year for the "stake" Bitcoins on these exchanges.

Compared to us holding that in our hardware wallets or whichever wallet we prefer that has the private keys that we keep, we get no interest and are only dependent to the fluctuations.

That sounds enticing but still a no for me.

The reason why some people store their coins in an exchange is that they can trade right away and wouldn't have to spend for the transaction fee when transferring funds. In that case, you only need to pay transaction fee once you decided to withdraw your funds from ehe exchange. You can also stake your coins to earn profit where many custodial wallets doesn't have that kind of service although your coins are still in great risk when it comes to "not your keys not your coins".