Cryptocurrency exchanges are a great tool for exchanging crypto, but they’re also fraught with risk. If you store your crypto on an exchange, it’s vulnerable to hacks and other threats that can have serious consequences. That’s why you should always keep your funds in a wallet that you control, instead of leaving them at an exchange.
Here are some factors to consider:
Crypto exchanges can get hacked
While exchanges are built to help you buy and sell cryptocurrencies, they lack the security measures necessary to keep your money safe. Some of them have been hacked in the past, and this leaves the possibility of it happening again.
Crypto asset theft has been on the rise since 2011, with more than $1.65 billion worth of crypto assets stolen by hackers and other criminals. Crypto exchange wallets may not be the most secure long-term storage method for your assets.
How do you keep your funds safe?
The most important thing is not leaving any money on an exchange for longer than necessary: if you don’t plan on trading off your coins for months or years at a time, it’s best practice not to leave them there at all.
It’s a lot easier to steal crypto from exchanges than it is to steal fiat currency.
First and foremost, there are billions of dollars worth of cryptocurrency in circulation right now and there are plenty of people who want to get their hands on this wealth.
Second, exchanges hold a large amount of money compared to banks or other financial institutions that custody money for individuals. Exchanges attract hacker targets as they store cryptocurrency worth billions of dollars and don’t have sufficient support for crypto security. Hackers find it more profitable to access an exchange with a bulk of crypto than the vault of a bank. However, hackers must outsmart exchanges’ security measures before they can infringe upon them and leave them prone to highly sophisticated attacks from cyber villains.
It’s also easy for exchanges to freeze your account. If you want more control over your money, why hand it off to a third party?
You have no way of knowing whether someone else can access your cryptocurrency at any time or that they’ll give it back when you need them to. You also don’t know how much risk they are taking on with your money—and those risks can be costly.
Some recent takeaways from the world of crypto
FTX’s collapse is considered to be among the most severe crypto-related frauds in history. Bankman-Fried, who was secretly using customer funds to bail out Alameda Research, left investors, customers, and even his own employees in the dark up until FTX declared bankruptcy on November 10.
In July 2021, FTX raised $900 million at an $18 billion valuation from over 60 investors, including crypto heavyweights such as Coinbase Ventures, Sequoia Capital, Paradigm, and others. Many of these investors also doubled down on FTX during its last funding round in January 2022.
Victims of Sam Bankman-Fried’s scam include venture capital firms and FTX-backed projects, who have lost tens of millions of dollars. But the biggest losers in the whole debacle are ordinary customers who used the exchange, believing it to be safe. Endorsements from Shark Tank’s Kevin O’Leary and Jim Cramer comparing Bankman-Fried to J.P. Morgan gave customers the impression that FTX was an upstanding business worth investing in.
How to remain on the safe side when investing in crypto
Some exchanges, like Binance, Kraken, Coinbase have taken steps to ensure that your cryptocurrency is safe, such as banning weak passwords and use of a valid HTTPS certification. When you enter such an exchange online, your browser has a way of automatically confirming crypto security by displaying a lock symbol in the address bar. Besides all this, a cryptocurrency exchange with two-factor verification that uses multiple methods to authenticate genuine users, like software, hardware and SMS, assures you of a good level of safety.
The bottom line is that if you want to hold your own crypto, you should never store it on an exchange without examining its security measures, founders etc. It’s a quick and easy way to risk your funds, and there are better ways to store them in the long run.
