If you have dabbled in cryptocurrencies, you know that the most efficient way to buy and sell cryptocurrencies is through a cryptocurrency exchange. An exchange, just like a bank, will store your crypto funds in a crypto wallet.
Crypto traders can opt to use a centralized exchange such as Coinbase or use a decentralized exchange. When using a centralized exchange, you have to deposit your crypto on the exchange to make trades. On a decentralized exchange, users retain full control over their assets at all times. However, centralized exchanges are still the most popular option due to their high liquidity.
Facts About Centralized Crypto Exchanges
Since the crypto industry was launched in 2009, centralized exchanges have become the most popular method of buying and selling these assets. However, as with any nascent online industry, crypto exchanges have been faced with numerous security challenges.
For instance, since 2011, crypto exchanges have lost over $19 billion worth of crypto assets to hackers. Various studies estimate that the problem of scams and hacks in the crypto sector is growing at a rate of 41% annually. As the hype around crypto-assets grows, new exchanges launch quickly to cash in — without proper security measures. In some cases, exchanges are set up with the explicit purpose of robbing innocent victims. A good example of this is the QuadrigaCX exchange scam, which was run by a career con artist.
One reason why the crypto sector is so enticing to hackers is that most law enforcement officials are still playing catch up. Consequently, the tools needed to catch perpetrators of these crimes are still in development. For now, most of the efforts go into preventing bank fraud in the fiat financial system. Another reason why crypto hacks are so enticing to hackers is that crypto transactions are irreversible.
Why Storing Crypto Assets On An Exchange Is Dangerous
One of the best examples of why storing crypto assets on an online exchange is so dangerous is the Mt Gox hacking saga. At the time, it was the biggest hack of a crypto exchange in the history of the digital asset sector. Victims lost millions of dollars of Bitcoin, which is now valued in the billions at current market prices.
Besides being hacked, other dangers come with storing crypto coins on a centralized exchange. For instance, mismanagement at the exchange could mean the loss of private keys associated with your assets. When that happens, there is no way to retrieve these assets. While modern crypto exchanges have redundancies in place, sometimes a confluence of events could mean all those measures fail.
Another risk is that personnel at the exchange could decide to steal the crypto coins. While crypto exchanges institute rigorous checks when hiring employees, there is always the risk of greed overtaking someone entrusted with private keys.
Finally, there is always the risk of authorities seizing assets at a centralized crypto exchange. In such an instance, crypto coins could be held up in litigation for years as the investigations carry on. Due to the lack of proper regulation for the sector, there is no telling what a government agency might decide to do on short notice.
Summary
Leaving crypto assets on a centralized exchange is generally unwise. Traders should only put an amount in the crypto exchange that they intend to use to make traders. In some instances, exchanges themselves will impose temporary bans on withdrawals and trading. Due to the volatile nature of the crypto market, it could mean that you miss opportunities to grow your crypto investment.
If you plan to become a crypto trader at crypto exchanges, always ensure that you leave only what you need to trade in it. The rest should be stored in an offline wallet such as a paper wallet or a hardware wallet such as Trezor. In the crypto industry, the mantra is “not your keys, not your coins.” If you are not in full control of your private keys, there is always a risk you could lose them.
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