Keeping your digital assets in a crypto exchanges is risky, so storing your cryptocurrency there for a long period of time is not a good idea.
Risks of Leaving Cryptocurrency in Exchange
A brief look at the history of Bitcoin and other cryptocurrencies shows why it is not safe to leave your crypto funds in an exchange. Since 2011, over $1 billion worth of crypto assets have been stolen, and the numbers are getting bigger every year.
Aside from hacks, the trouble may arise from within the crypto exchange. Any exchange may mismanage, lose, or even participate in fractional reserve banking. You may have heard of Mt. Gox exchange, whose founders were oblivious of ongoing hacks and the exchange lost 650,000 BTC.
Crypto exchanges are enticing hacker targets because they have billions of dollars worth of cryptocurrency. Quite frequently it’s much more profitable to hack a crypto exchange than a bank vault. It looks like a pot of gold at the end of the rainbow, except instead of a leprechaun they must outsmart security measures of an exchange. Consequently, exchanges are incredibly prone to experiencing highly sophisticated cyberattacks.
- Exchanges lose $2.7 million every day on average, and this figure will probably rise in the future.
- The hacking attacks are becoming more and more elaborate over the time. It’s a highly-rewarding activity; so it pays for ever-increasing time and effort spent on plotting hacks.
- Exchanges are not cybersecurity enterprises. They run financial marketplaces first, and experience shows they can’t guarantee top-notch security.
With large sums at stake, crypto hacks, schemes, and complicated attacks are unlikely to go away.
Although we know it’s risky, sometimes there is no other choice other than keeping your cryptocurrency in exchanges. In that case, it’s better that you use a proven, secure service, rather than an unknown, insecure, or irresponsible exchange.
How To Distinguish A Secure Exchange
There’s no guarantee that you won’t become a victim of another high-profile hack but selecting a well-known and highly secure exchange significantly reduces your chances. The best and most reliable exchanges are open about the level of security they provide and give you a plethora of tools to secure your account. Here are the most common security practices to look for when choosing an exchange.
HTTPS. Safe and secure exchanges have a valid HTTPS certificate. Your browser will automatically confirm it by displaying a lock in the address bar. HTTPS is an encrypted version of the HTTP protocol. It prevents capturing and changing data you’re sending to a web server. Every good cryptocurrency exchange should have it.
Secure password. Good exchanges don’t let you set a weak password. A secure password asks you to use a mix of regular and capital letters, symbols, and numbers, thus ensuring that no one can hack it.
Two-Factor Authentication (2FA). Having your accounts protected by 2FA is extremely important. Most exchanges offer multiple 2FA methods like software, SMS, and hardware devices. If there is no option to secure your account with 2FA, then the platform is quite insecure. Also, hackers can counterfeit your phone number, so the weakest form of 2FA is SMS authentication. Try to avoid it whenever more secure options are there. The most common practice is to set up two-factor authentication via Google Authenticator. It is a simple, yet secure and effective approach.
Cold Storage. Check if the exchange uses cold storage to store user cryptos. It is much more difficult to steal cryptos that are locked offline than those which are held in a hot wallet.
Ability to Whitelist IP & Withdrawal Addresses. See if you can whitelist specific IP addresses for connecting to your exchange account. If enabled, it automatically blocks logins from other locations. Alternatively, some platforms offer an option to whitelist your withdrawal addresses. If you can do so, the exchange will enable your funds to be withdrawn only to the previously approved addresses.
Other precautions. Exchanges employ many other security tools such as multi signatures, suspicious behavior alerts, email encryption, phishing protection, and others. Extra security measures certainly won’t hurt you, and as long as they are well implemented, they make platforms quite safe temporary storages for your cryptocurrencies.
Funds Insurance. Cryptocurrencies are still wildly unregulated, so most platforms have no obligation to follow FDIC reporting regulations or securities investor protection procedures. Yet, some exchanges take extra precautions and insure their funds from being stolen. Although that is a great marketing point, most of these insurance policies do not protect individual accounts and apply only to exchange as a whole.
Regardless of all the security measures that exchanges employ, it’s still not wise to trust them unconditionally. As the history of the exchanges shows, no platform is considered to be hackproof, and issues always take place when you expect them the least. Therefore, it’s better to take matters into your hands and fix yourself a private digital wallet instead of keeping your cryptocurrency in risky exchanges. As renown crypto analyst and security entrepreneur Andreas Antonopoulos says:
“your keys, your bitcoin. Not your keys, not your bitcoin.”
Here you can find a list of exchanges with most trusted wallets.