Why you shouldn’t keep Cryptocurrencies on an Exchange Wallet

Cryptocurrencies are usually purchased on an exchange and by default they would be stored on the wallet of the respective exchange. This is the best way to get your hands on coins, but it is not the best way to secure and store your assets.

A noteworthy distinction in this cryptocurrency space is that the blockchain technology itself is secure and uncounterfeitable, but the exchanges themselves and ownership of your assets is the security vulnerability in this ecosystem.

Store coins yourself. You fight hackers yourself, and guard from losing wallet yourself. Computer breaks, USBs gets lost.



Store on an exchange. Only use the most reputable, proven secure, exchanges.



Or move to DEX, disrupt ourselves. https://t.co/Ci4ux9I3VD — CZ Binance (@cz_binance) January 15, 2019

Many users of cryptocurrency do not understand the importance of this wallet decision and the security risks you face, and therefore a large proportion of cryptocurrency investors still have their coins stored on the exchange wallet.

Whilst it is convenient for trading to keep your assets on an exchange, It is risky for a number of reasons:

You do not have ownership of the coins

Coins that are stored on the non-custodial wallet of the exchange have their private keys still owned by the exchange and not by the user. Please utilise exchange wallets just as hot wallets for trading and not for long term storage of coins.

During the 2017 Initial Coin Offering (ICO) boom many ICOs were telling participants not to use exchange wallets to receive tokens, as the user is left to the whim of the exchange rather than owning the private keys themselves.

Exchanges are centralized and unregulated

Blockchain assets are mostly decentralized, but the exchanges themselves are centralized and are a major point of concern in this largely unregulated market. Exchanges cannot guarantee the safety of the funds as there will always be openings to vulnerabilities from the exchange side. They don’t necessarily have any responsibility to return money to customers, however the larger and more trustworthy exchanges have certain insurance measures and guarantees in place for users.

A number of possible scenarios could happen to the exchange that could impact your access to your funds and coins, some examples below:

An exchange under investigation will have its users funds frozen and trading halted (e.g. a securities commission reviewing the business practices of the exchange)

An exchange under a security threat will either have your funds under direct risk of hacking, or trading and access to funds halted and frozen

An exchange may delist your coins, which is possible when unprofitable exchanges carry coins that do not have enough trading volume. Your coins could be unrecoverable if an exchange has removed trading pairs for that asset and has withdrawal limits in place.

Security risk from hacks

Hacking is the major concern for crypto assets left on exchanges, as exchanges are constantly under these hacking threats and may not have the business or security policies in place to protect or reimburse your funds.

Security is improving rapidly in this space, but successful hacks are still common, especially outside of the major exchanges. Some recent and noteworthy security breaches below:

The largest exchange at the time, Mt GOX, was hacked in 2011 and 2014 and still has many users still not receiving their funds. Over 850,000 BTC was stolen in the 2014 hack and was largely the catalyst for the 2014 bear market.

Canadian exchange QuadrigaCX recently lost $200m of user funds in 2019

A New Zealand exchange Cryptopia suffered a security breach with significant losses in Jan 2019, with customers completely losing their funds

Conclusion

For any coins that need quick access to the exchange for trading and transacting they can be kept on the exchange wallet, but it is recommended to keep this to a minimum to keep your funds safe. For the majority of your funds for investing and saving purposes they should be kept on your own wallet.

Which Cryptocurrency wallet should you use?

Cryptocurrency wallets come on different platforms with a variety of different features, and they are the first step to using cryptocurrencies. There are many options available, including desktop wallets, mobile wallets, and offline hardware wallets.

Our Cryptocurrency Wallet Guide for information on what wallet to choose and why