Crypto Exchanges: Why They Are Risky For Your Digital Assets

Many people who invest in cryptocurrencies use specialized crypto exchanges to buy, trade, sell and later convert their assets to fiat currencies.

If you are new to the crypto world, then you are surely aware of the buzz surrounding Crypto Exchange Platforms and you might be eager to start trading there instantly. However, we would advise you to be a bit cautious and do a little research before you sign up on an exchange.

Exchanges present themselves as safe and reliable entities where you can store and trade your assets, but is that really the case? There are some big question marks that loom over crypto exchanges, so let’s see why they are risky options for your digital assets.

What is a Crypto Exchange?

Let’s start with the basics here. A Crypto Exchange works very similarly to a stock exchange. They allow you to buy, sell and store digital currencies like Bitcoin, Ether or Tether. In addition, crypto exchange platforms offer an array of trading and investing tools that you can utilize.

Crypto Exchanges function as they charge fees for your transactions, which can be based on the volume of your transactions or the kind of trade you execute.

Security Measures

No one can deny the fact that reliable crypto exchange platforms use (or at least try to) implement robust security features, such as:

• 2FA – a fundamental security layer that asks users to provide a second form of verification.
• Encryption technology – SSL and TLS protocols are common security measures that exchanges use to encrypt communication between them and the users.
• Biometric authentication – you will need to use unique biological traits to access your account – fingerprint or facial recognition.
• Regular security audits – exchange platforms conduct penetration testing all the time to review their security infrastructure.
• Risk management and anomaly detection tools – these tools monitor your activity in real-time and search for unusual patterns that may be a security threat.

So, Where is the Risk?

So, on paper, exchanges obviously have robust security measures in place, so where is the risk? Well, there are a number of factors that indicate exchanges may not be the safest place for your digital assets.

One such risk is that you essentially trust your assets with a third-party entity that may not have the same security measures as banks or other financial institutions. That way, your funds are exposed to potential hacking attempts, which can leave you empty-handed.

All of the reputable crypto exchange platforms store big amounts of assets from their customers, so they are attractive targets for malicious hackers.

Another reason why crypto exchanges are dubious in the eyes of many investors is the lack of regulation in the crypto sphere. Without the safeguards of legislation from governments, investors can find themselves in a situation where they won’t be able to recover their assets if something goes south.

Furthermore, the exchange platform itself may become insolvent or be mismanaged, and this is a very serious scenario that can leave you without your valuable assets. Remember, the exchange platform keeps custody of your private keys, thus your cryptocurrency, so you trust them to keep them safe.

Of course, a big portion of the responsibility to keep your assets safe falls exclusively on your shoulders. You need to make sure never to reveal your private keys to anyone and secure your account properly – always use 2FA whenever possible, that is the bare minimum you could do!

Crypto Exchange Collapses

You are now aware that storing your digital assets in a crypto exchange is challenging, to say the least.

There are numerous risks attached, as seen above, so we can further emphasize that claim with some practical examples of crypto exchange platforms collapsing:

1. Gox – for a few years, Mt. Gox handled around 70% of Bitcoin transactions, but in 2014, the platform suffered a massive security breach. Users lost hundreds of millions of dollars in Bitcoin, which they never recovered.
2. Cryptsy – established in 2013, Cryptsy ran great until a security breach in 2016 resulted in the loss of millions of dollars in crypto.
3. QuadrigaCX – a Canadian exchange platform that launched in 2013 that had a rather unusual collapse. Its founder, Gerald Cotton, died in 2019, and shortly after, it was revealed that only he had access to the platform’s cold storage wallets that held most of the assets. So, he took his password to the grave, as well as the private keys stored in the cold wallet!
4. FTX – one of the fastest-growing crypto exchange platforms, FTX, collapsed overnight in 2022. That crash happened as a result of a lack of liquidity and mismanagement of tools.
5. Voyager – a crypto exchange platform that struggled for some time and decided to sell its assets to FTX, who, as seen above, had a pretty bad ending story!
6. Celsius – established to be an experimental crypto bank, nearly $1 trillion was lost when it collapsed.

Safer Options For Your Cryptocurrencies

Well, although you can never be 100% secure and certain about cryptocurrency wallets, there are a couple of options that are much safer than a crypto exchange.

We are talking about software and hardware non-custodial wallets that eliminate the need for third parties, letting you have full control over your assets.

Hardware wallets go the extra mile, as they don’t require an internet connection to function, so your wallet is always offline. A hardware wallet is a physical device that stores your private keys, and to access them, you need the physical hardware device and the security phrase or PIN attached.

On the other hand, we have software wallets that store your private keys on a device of your choice – mobile or laptop. There are a couple of downsides here:

• You need an internet connection to access your wallet, so you still leave the door open to hacking attempts.
• Your private keys are only as secure as your device

Verdict

Overall, leaving your cryptocurrency in an exchange platform is a very risky endeavor as there have been several cases of exchanges being hacked. As no central authority protects you if you lose your digital assets, in case you lose your funds for whatever reason, you will be left with nothing.

So, before leaving your cryptocurrency in an exchange, you should always consider its security measures, or choose non-custodial software or hardware wallets instead!