Choosing a place to store cryptocurrencies is the primary task of every investor. Is it possible to store cryptocurrencies on the exchange and how do the platforms ensure the safety of assets?
The choice of a place for storing cryptocurrencies depends on the safety of savings, ease of use and the ability to manage money. Crypto assets can be stored in cold or hot wallets, depending on the goals and plans of the owner.
The safest method of storing cryptoassets is in a cold wallet that is not connected to the Internet and therefore well protected from hacking over the network. Private keys are stored on the device itself. This storage method is suitable for long-term investors. However, if a user plans to trade cryptocurrencies and does not want to spend money on purchasing a special device, the choice often falls on hot wallets or an exchange.
Cryptocurrency exchanges provide the ability to store cryptocurrencies in their wallets. Such wallets do not require downloading the full blockchain, can be used on mobile devices and have a fairly simple and user-friendly interface. However, this method of storing cryptocurrencies has both its pros and cons.
Advantages and disadvantages of storing cryptocurrencies on the exchange
Built-in exchange wallets are integrated into the developed infrastructure of the trading platform. This feature determines the main advantages of storing cryptoassets on the exchange:
Extensive exchange opportunities. The user has full access to a large number of cryptocurrency pairs and can convert cryptocurrency into fiat currencies or another asset at any time.
High liquidity. Selling or buying a crypto asset on the exchange is simple and fast, and the fees are low.
Qualified support service. A team of specialists is responsible for the maintenance of wallets, which, in the event of a problem, will help to quickly solve it and save the user time and money.
Site responsibility. Hundreds of thousands of customers’ money is stored on large exchanges. In the event of hacking and theft, the reputation and financial condition of the exchange are at risk, therefore, platforms often insure the risk of loss, form reserves for compensation and cooperate with other platforms to return cryptocurrencies in case of theft.
You can withdraw money from an exchange wallet to any other cryptocurrency wallet, it can be replenished in a convenient way. However, the storage of cryptocurrencies on the exchange also has disadvantages: the exchange stores the private keys.
The private key for confirming transactions is stored on the exchange server, not the user. In 2018, cryptocurrency investor and entrepreneur Trace Mayer proposed a Proof of Keys plan and urged crypto asset holders to withdraw money from exchanges on the 10th anniversary of Bitcoin’s creation. However, his plan did not receive widespread support.
Easier to track transactions. Through withdrawals from exchange wallets, it is easier for cybercriminals and special services to track transactions. Coin mixers for exchange wallets are generally not available.
The owner has no control over the risks. The risk of hacking always remains on the side of the exchange and the user has to believe that the site’s employees will be able to ensure the safety of his crypto assets.
How exchanges ensure the safety of cryptoassets
Most of the largest cryptocurrency exchanges have been hacked at least once, so users are often wary of keeping their coins on the exchange. According to the analytical company CipherTrace, in 2020 cryptocurrency scammers stole $ 1.9 billion.However, most of this amount, about $ 1.1 billion, was received by criminals as a result of fraudulent schemes and pyramids, and not through hacking of cryptocurrency platforms.
Nevertheless, the sophistication of hackers is growing – last year, as a result of the hacking of the KuCoin exchange, criminals stole $ 150 million worth of crypto assets. However, cryptocurrency platforms are learning from the mistakes of the past and are constantly improving their security systems. According to Oleg Kurchenko, CEO of the Binaryx digital asset exchange, most major cryptocurrency platforms have created a complex and secure system of exchange wallets.
1. Distribution of cryptoassets. All exchange money is distributed between cold and hot wallets in proportions of approximately 95/5. Each exchange itself chooses what percentage of money is stored in hot wallets.
2. Safe storage of personal data. A third-party company is usually responsible for the safety of personal data of exchange clients, which professionally provides similar services to many companies and ensures the best protection of users’ personal data from leakage.
3. Multilevel protection for hot wallets. Security specialists pay great attention to protecting hot wallets, which are most often the target of cybercriminals. Access to the hot wallet server is protected by a multi-layered security system.
“To process payments and make transfers from hot wallets to cold ones, our employees are authorized using a personal login and a one-time generated password. Two-factor authentication (2FA) also works when accessing hot wallets. The final point in the confirmation of the transaction is a letter to the corporate mail on the platform domain. All this happens on software with highly encrypted algorithms. ”
4. Verification as a way to protect clients. Although many cryptocurrency owners continue to look for workarounds and refuse to undergo KYC procedures for reasons of anonymity, account verification is becoming an increasingly powerful tool to protect users’ money. For example, on many sites, only a verified user can withdraw funds from the platform.
5. Security audits. The major exchanges regularly conduct security audits, involving both internal specialists and external companies. This allows you to promptly eliminate security holes and ensure the safety of users’ money. Each cryptocurrency owner must choose a wallet to store and find a balance between convenience and security that meets his needs. Sometimes users keep most of their money in a cold wallet, and the exchange wallet is used to trade cryptoassets or withdraw to fiat currencies. Some people prefer to use exclusively exchange wallets. It all depends on the goals of the investor and his plans for his money. Before making a decision, it is necessary to adequately evaluate everything possible when choosing a method of storing cryptocurrencies.
