Understanding why it is risky to keep your crypto assets at an exchange requires only a cursory familiarity with Bitcoin and other cryptocurrencies. More than $1.65 billion in cryptocurrency has been stolen since 2011, and that amount is growing exponentially.
Storing cryptocurrencies in an exchange wallet for an extended length of time is not a smart idea because of the additional hazards associated with doing so.
Here’s why.
A brief look at the history of Bitcoin and cryptocurrencies reveals why it is dangerous to leave your crypto funds in an exchange. Since 2011, over $1.65 billion worth of crypto assets have been stolen, and the numbers are getting bigger every year. According to Hackernoon, that amounts to a jaw-dropping $12.6 billion loss when values are adjusted for inflation.
Aside from hacks, With the recent failure of the FTX cryptocurrency exchange, it is even more important for bitcoin and cryptocurrency investors to take their assets into self-custody. Understandably, investors are apprehensive of centralized exchange firms due to widespread allegations that many of them are bankrupt and/or operating with insufficient reserves.
Due to the billions of dollars in bitcoin held by exchanges, they are tempting targets for hackers. In many cases, hacking a cryptocurrency exchange is more lucrative than breaking into a bank. It’s the equivalent of finding a pot of gold at the end of the rainbow, but this time they have to trick an exchange rather than a leprechaun. Therefore, exchanges are extremely vulnerable to highly sophisticated cyber assaults.
Consider these facts:
- On average, exchanges lose $2.7 million each day, and that number is only expected to rise in the coming years.
- Hacking attacks are getting more sophisticated all the time. Due to the high payoff, more and more time is being invested into planning hacks.
- Exchanges do not employ professional-level security measures. They are in the business of running financial exchanges, and past experience has demonstrated that this sector cannot provide the highest level of security.
- There are a number of exchanges that are insolvent, but the amount of withdrawals made in a panic did not approach the level seen at FTX.
Quite unexpectedly, the CEO of a major cryptocurrency exchange has encouraged investors to withdraw their holdings from the platform. The CEO of Paxful, Ray Youssef, recently used Twitter to caution investors about leaving their cryptocurrency on an exchange. Youssef’s email to users, which was included in the article as a screenshot, warned recipients to withdraw their funds from Paxful and any other exchange immediately.
The email begins by assuring the recipient that their money is safe on Paxful and that he himself would never have access to his clients’ money. However, the next line suggests that bitcoin owners start keeping their coins in cold storage and solely use exchanges for making trades.
My only duty is to assist you in any way I can. That’s why I sent a message to all of our users earlier asking them to start keeping their Bitcoin in cold storage. According to the CEO’s email, “you should not maintain your money on Paxful, or any exchange, and only save what you trade here.” For too long, Youssef said, “we have trusted others to hold money on our behalf,” but “you’re at the mercy of these custodians and their morality,” as was the case with the banks in 2008 and FTX more recently.
There is no assurance that you won’t become a victim of another high-profile attack, but if you use an exchange that has a solid reputation and a good level of security, your chances of becoming a victim are greatly reduced. The most trustworthy and effective platforms are those that are transparent about the level of protection they offer and provide you with a wide variety of tools to keep your account safe. When selecting an exchange, here are some of the most typical security practices that you should look for.
HTTPS. All transactions that are secure use an HTTPS certificate that is current. It will be confirmed immediately by your browser, which will indicate this by flashing a lock in the address bar. A variation of the HTTP protocol that uses encryption is known as HTTPS. It prevents the data you are transferring to a web server from being captured and altered in any way. It is expected that all trustworthy bitcoin exchanges will have it.
Secure password. A good trading platform won’t let you use a password that’s too easy to crack. A safe password requires you to use a combination of lowercase and uppercase characters, symbols, and numbers to prevent brute-force attacks.
Two-Factor Authentication (2FA). It’s vital to use two-factor authentication to keep your accounts safe. The majority of markets provide a variety of second-factor authentication options. If two-factor authentication isn’t an option, the platform is probably not very safe to use. Second factor of authentication SMS authentication is the weakest since hackers may fake your phone number. If there are safer alternatives, you should use them instead. Establishing two-factor authentication by means of Google Authenticator is the norm at this point. It’s a low-risk method that gets the job done.
Cold Storage. Check to see whether the user money are being kept in cold storage by the exchange. It is a much harder to steal money when they are locked away in an offline wallet, as opposed to when they are kept in a hot wallet.
Ability to Whitelist IP & Withdrawal Addresses. Check to see whether you may connect to your exchange account using specified IP addresses by whitelisting those addresses. If it is turned on, it will prevent users from logging in from other places automatically. Alternately, several exchanges have the ability to whitelist your withdrawal addresses, which allows you to more securely withdraw your funds. In the event that this is possible, the exchange will restrict the withdrawal of your money to just the addresses that have been pre-approved.
Other precautions. Exchanges use a wide variety of additional security mechanisms, such as multi-signature authentication, warnings for suspicious activity, email encryption, and protection against phishing, amongst many more. Extra security measures won’t affect you in any way, and as long as they’re put into place correctly, they make cryptocurrency exchanges a reasonably secure place to temporarily store your digital assets.
Funds Insurance. Due to the fact that cryptocurrencies are currently operating in a largely unregulated environment, most platforms are not required to comply with the FDIC reporting laws or the securities investor protection processes. However, some markets go over and above to protect their customers’ money by purchasing insurance. However, the majority of these insurance plans do not protect individual accounts and instead only apply to the exchange as a whole. While this is an excellent selling feature, it is important to note that individual accounts are not covered.
Known platforms that insure their funds are Binance, Kucoin, Bybit and Coinbase.
The Most Secure Crypto Exchanges of 2023
I included in a post the exchanges I believe are the safest for 2023. you can find it here:
https://medium.com/@globalcryptojournal/the-best-crypto-exchanges-after-the-ftx-collapse-in-2023-7a46daa02cc8
It is nevertheless naïve to put one hundred percent of one’s faith in an exchange, regardless of the many safety precautions that it takes. The history of cryptocurrency exchanges demonstrates that no platform is hack-proof, and problems often arise when you are least prepared for them. For this reason, it is preferable to take things into your own hands and set up a private digital wallet for yourself.
Andreas Antonopoulos, a well-known crypto expert and security entrepreneur, has these words to say:
Your Keys, Your Bitcoin. Not Your Keys, Not Your Bitcoin
