- Exchanges Have the Possibility of Getting Hacked
- Their Customer Support Staff Could Get Social Engineered
- They Could Shut Down Throughout Times of Crisis in Their Hosted Country
- They Could Potentially Shut Down During a Crypto Downward Spiral
Before we really get into the details as to why you shouldn’t leave your crypto on an exchange, you have to look at one of the best, real-world examples, that actually happened.
The Unfortunate Story of Mt. Gox
Let’s take a trip back to the early 2010s, where Bitcoin was dominant, and quite possibly the only cryptocurrency at the time dominating across all of its competition. As such, it was obviously popular, and a lot of people were trading it. Now, Bitcoin was in its infancy when Mt. Gox came to the scene. Yes, we’ll be looking at that Mt. Gox.
You see, in 2013, the price of Bitcoin was starting to reach over $1.000 for the very first time. Obviously, people started getting excited. What nobody expected, was its sudden fall. In fact, its price fell to $300 within the same year. It would take Bitcoin two more years to get back to the $1.000 mark again. This is what we like to call, the dark era of Bitcoin.
Now, if you don’t know the story, let’s look at the history of Mt. Gox. This was one of the first bitcoin exchanges, and it was based in Shibuya, Tokyo, Japan. It originally launched in July of 2010, and by 2014 it handled over 70% of all Bitcoin (BTC) transactions on a worldwide scale, which was truly impressive, to say the least. This was the place to trade, it was the largest Bitcoin intermediary and the leading exchange in the world, what could possibly go wrong with such dominance?
Well, In January of 2014, Mt. Gox went offline, and 850.000 BTC was lost forever. Do you know why? Someone, without access, got ahold of a haul that at the time was valued at $460 million. This led Mt. Gox to file for bankruptcy and began liquidation proceedings in April of 2014.
In other words, the funds were kept in a hot wallet, got hacked, and the exchange ultimately crashed and burned as a result.
While nobody likes to see something like this fail, it’s truly a fascinating example as to why you shouldn’t really leave your crypto funds on an exchange for prolonged periods of time.
The Reality of Cryptocurrency
If you’re on a quest to get yourself some cryptocurrency, unless a friend literally gives it to you, the best way to acquire them is through a crypto exchange. Cryptocurrency exchanges are one of the best ways through which you can get some coins, however, many people who use these exchanges for the very first time, make one of the biggest mistakes once they get their hands on some tokens. They keep them in the exchange wallet, instead of putting them in their own wallet.
Well, here’s why that might not be the brightest idea a person can have.
Not True Ownership
You don’t really own your currency that way. While you can store any coins or tokens that you purchase on your exchange wallet, you do not actually own that wallet. Exchange wallets are quite different from personal wallets, in the sense that they are just hot wallets for trading. If something happens on the exchange, you won’t have any control over your coins, as they won’t be in your custody. At this point in time, they’d essentially belong to the exchange in a way. This is one of the main warnings you get from any ICO, that you should never use exchange wallets to receive tokens. ICO participants do not really have access to the private keys on the exchanges, and if the tokens are sent to these addresses, they cannot be accessed by the participant.
In other words, centralized exchanges do not give you the private keys, or the password to your money, they just give you access to your money with a user name and a password on their website. If their website disappears, your money disappears with it.
The only way you have true ownership of your crypto assets is if you hold the private keys. You should be the only person in possession of those keys, and if you do, it does not matter if a website is down, if you lose your device or your hardware wallet app, you’ll always be able to reinstall the app somewhere else and retrieve your crypto assets on a new device, just by entering your private keys. This is something you do not have as an availability if you keep your crypto on an exchange.
Another concern you might have is the fact that cryptocurrency exchanges are just the bridge between decentralization and centralization. Now, if we look at cryptocurrency, we can clearly see that its whole point is to decentralize everything. Exchanges however are centralized. This brings an issue, in fact, many issues. This means that, without much of a reason, your assets could potentially become frozen. Owners of the exchanges can tell their customers that their crypto access will remain safe, however, it would have no responsibility to return the money. This is due to the fact that there isn’t really any regulating body that holds the exchanges responsible for returning lost money, nor insurance if anything were to happen. Something to think about.
Now, let’s finally discussed the previously mentioned example in greater detail. Mt. Gox is a prime example of what we know as a hacking risk. This is because, in addition to the lack of regulation and the inability to guarantee the safety of the assets, there’s always the threat of an exchange getting hacked. In fact, exchange hacks might be more common than you initially think. Combine this with the lack of regulations, and once the exchange you end up using gets hacked, well, say goodbye to your tokens.
On the flip side, the blockchain itself is very secure and essentially un-hackable, however, the centralized nature of the exchange itself makes the tokens vulnerable.
Here’s a thing not really talked about that often, but what if the token, could potentially be delisted from the exchange? This is actually something quite common, and when it happens, it happens due to the fact that the token in question becomes unprofitable for the exchanges to carry, due to the fact that there is not enough trading volume. If the exchange delists them, or if they drop in value too much, they would be under the withdrawal limit, so you won’t have access to the min any case.
Lack of Privacy
Another thing we need to discuss is privacy. Privacy is a concern for many people, and it might be one reason many people might want to use cryptocurrencies for making transactions. The exchange can simply freeze all of the accounts and force their customers to fulfill the KYC requirements by verifying their identity and fully registering all of their details. This can occur without any warning, and there is no middle-period where the customers of the exchange can withdraw their cryptocurrency before the new policy takes place. One day you’ll just wake up, and you’ll have to verify your identity, which is a real bummer.
How to Find a Secure Exchange
If you trade a lot, then it makes a lot more sense to keep the currency on the exchange and reduce the potential fees that occur when transferring the funds between the cryptocurrency exchange and your wallet.
While they are not completely secure, as offline, cold wallets would be, there are still some steps you can take in order to ensure the maximum security of your currency, while you are in the process of buying, selling, or trading.
While you should absolutely always store your cryptocurrency on your own personal wallet, where you have the private keys if you’re trading, here’s what you need to look out for.
- HTTPS – always ensure that the exchange you are trading on has a valid HTTPS certificate, which your browser will automatically confirm by displaying a lock on the address bar.
- Secure Passwords – the best exchanges won’t allow you to set just any password, no more “password123” for you. It might ask you to mix regular and capital litters, with symbols, numbers to ensure maximum security.
- Cold Storage – you can always check If the exchange uses cold storage to store user funds, as it’s a lot more difficult to steal from storage devices that are locked offline, than those that can be accessed through the internet, known as hot wallets.
- Two-Factor Authentication – this essentially adds another layer through which you need to confirm your account. This could be in the form of an SMS, or in the form of an email. So, if someone ends up guessing your password, you’ll have a second layer of security they won’t access as easily.
While you should never leave your crypto on an exchange, at least you now know what to look out for if you eventually simply have to for various reasons.
If you’re smart with your crypto, you will have full control over it, and this is why it is essential to pick a Coin Wallet such as Coin.Space in order to keep your funds as secure as possible.