A cursory examination of the history of Bitcoin and cryptocurrencies explains why it is risky to leave your cryptocurrency assets in exchange. Since 2011, hackers have stolen nearly $1.65 billion in crypto assets, and the trend is rising. Keeping your digital assets in an exchange wallet entails additional dangers, therefore holding your bitcoin there for an extended period is not a smart choice.
The Risk of Leaving Cryptocurrency in Exchange
A cursory examination of the history of Bitcoin and cryptocurrencies illustrates why it is risky to leave your cryptocurrency assets in exchange. Since 2011, hackers have stolen nearly $1.65 billion in crypto assets, with the figure growing by the year. When adjusted for inflation, that equates to a staggering $12.6 billion loss, according to Hackernoon.
Aside from hackers, issues may emerge within the exchange. Any exchange can mismanage, lose, or engage in fractional reserve banking. You may have heard about the recent QuadrigaCX scandal, in which the owner died with all the secret keys, purportedly denying access to $190 million in user cash.
Perhaps you’ve heard of the infamous Mt. Gox exchange, whose founders were blissfully unaware of continuing breaches that lasted over two years as the company lost 650,000 BTC.
Exchanges are appealing targets for hackers because they hold billions of dollars in cryptocurrencies. Hacking a cryptocurrency exchange is usually far more profitable than hacking a bank vault. It’s like a pot of gold at the end of the rainbow. However, instead of a leprechaun, they must outwit an exchange’s security systems. As a result, exchanges are extremely vulnerable to highly sophisticated cyber assaults.
Consider the following facts:
- On average, exchanges lose $2.7 million every day, and we expect this amount to rise in the future.
- Hacking assaults are growing more sophisticated. It’s a tremendously satisfying pastime, so it pays for the rising time and works spent plotting hacks.
- Exchanges are not companies in cybersecurity. They manage financial marketplaces foremost, and history has shown that they cannot guarantee top-tier security.
However, there are situations when you simply must use one. In that circumstance, it is preferable to choose a well-established, secure service rather than an unknown, unsafe, or plain irresponsible platform.
How to Identify a Secure Exchange
There is no assurance that you will not become a victim of another high-profile breach, but using a reputable and highly secure exchange decreases your risks dramatically. The greatest and most trustworthy platforms are transparent about the security they provide and present you with a myriad of solutions to safeguard your account. Here are the most frequent security procedures to check for when selecting a trading platform.
1. HTTPS
A valid HTTPS certificate is required for secure exchanges. Your browser will validate it automatically by displaying a lock in the address bar. The HTTPS protocol is an encrypted variant of the HTTP protocol. It prevents data from being captured and changed while being sent to a web server. It should be available on any respectable bitcoin exchange.
2. Password protection is essential
Good exchanges do not permit the use of a weak password. A safe password requires you to use a combination of lowercase and uppercase characters, symbols, and numbers, guaranteeing that no one can brute force it.
3. Authentication using Two Factors (2FA)
It is vital to have your accounts secured with 2FA. Most exchanges provide a variety of 2FA options, including software, SMS, and hardware devices. If you cannot safeguard your account using 2FA, the platform is highly unsafe. Because hackers may forge your phone number, SMS authentication is the weakest type of 2FA. When better secure choices are available, try to avoid them. The most frequent technique is to use Google Authenticator to set up two-factor authentication. It is a straightforward, yet safe and effective method.
4. Cold Storage
Check to see if the exchange stores user cash in cold storage. It is significantly more difficult to steal funds that are locked offline than it is to steal funds that are housed in a hot wallet.
5. The ability to whitelist IP addresses and withdrawal addresses
Check to see if you can whitelist particular IP addresses for accessing your exchange account. It automatically bans logins from other places if enabled. Some exchanges, on the other hand, allow you to whitelist your withdrawal addresses. If you can do so, the exchange will only enable you to withdraw money to previously approved addresses.
6. Additional precautions
Other security technologies used by exchanges include multi signatures, suspicious activity warnings, email encryption, phishing prevention, and others. Extra security measures will not harm you, and as long as they properly execute them, they make exchanges secure temporary storage for your cryptocurrency.
7. Insurance for Funds
Because cryptocurrencies are still mostly unregulated, most platforms are not required to adhere to FDIC reporting standards or securities investor protection processes. Nonetheless, some exchanges take extra efforts to protect their assets from theft. Although this is an excellent selling point, most of these insurance plans do not protect individual accounts and instead apply to the entire exchange.
EndNote
Regardless of the security precautions used by exchanges, it is stupid to trust them entirely. As the history of the exchanges shows, no platform is immune to hacking, and problems usually arise when you least expect them. As a result, it is preferable to take matters into your own hands and create a private digital wallet for yourself.
Also read: What is Tokenized Bitcoin? Explanation of Tokenized Bitcoin on Ethereum
