Top 5 Reasons Why You Shouldn't Store Cryptocurrency On An Exchange
Exchanges can suddenly go out for maintenance, block a withdrawal, or go bankrupt. These and other problems can be avoided by keeping your digital money in a third-party wallet.
Crypto exchanges are in trouble in 2020. The number of sites that have closed since the beginning of the year has grown by 56% compared to 2019, to 75, and large companies, such as BitMEX, are in litigation with the US authorities. Clients of the OKEx exchange lost access to the withdrawal of funds, and Roskomnadzor listed the Binance website into the register of prohibited ones (which, nevertheless, did not affect its work in the country).
Keeping money on a crypto exchange is the easiest and most convenient way, it is at the same time extremely insecure. There are several main reasons why you shouldn't keep a large amount of digital money on your trading platform account.
Even large and well-known marketplaces sometimes go out for sudden technical reasons. Solving the problem may require several hours, during which the site's clients often cannot access their accounts. This means that it will not be possible to withdraw your cryptocurrency or conduct a transaction with it during technical work. This can cause losses if there is a strong market movement at the time of the repair.
In September, hackers whacked into a major cryptocurrency exchange KuCoin. According to The Block analyst Larry Chermak, they stole about $ 280 million in USDT, Velo, Orion, Ocean Protocol, and other tokens. This is the third-largest attack in the history of the crypto market.
No cryptocurrency exchange is protected from hacking. Now large companies have special insurance funds for such an issue. However, even if the leaders of the exchange start the process of paying off customer losses, it may spend for months or even years. Some companies (after hacking) promise to reimburse only part of the losses or completely refuse responsibility.
Many cryptocurrency exchanges are closed after major hacker hacks or due to a drop in trader activity. After that, users cannot withdraw their cryptocurrency for a long time. For example, clients of Cryptopia (a New Zealand site that closed in the spring of 2019) have still not been able to get their funds back.
Audit firm Grant Thornton (which liquidates Cryptopia) explained that the exchange had more than 900,000 users and supported up to 900 different coins, so the process of withdrawing funds cannot be quick. Only by the end of 2020, the company expects to begin accepting applications for the return of user assets, after which the affected customers will need to verify their accounts and data on a special portal.
There are crypto exchanges launched by scammers. If you transfer cryptocurrency to such a platform, you will no longer be able to withdraw it. Technical support can answer that there are problems with the platform or give any other argument to prevent the withdrawal of coins. You should work with popular platforms that have existed for more than a year. If we talk about an unknown platform, so it is better to start working with a small amount in order to first check whether the withdrawal option works.
The withdrawal of funds may turn out to be locked due to an investigation against the heads of the crypto exchange. This was the main concern of BitMEX's clients, whose co-founders and top managers are accused by the US authorities of maintaining an unregistered trading platform and violating regulatory requirements, including those related to money laundering and customer identification. Despite the investigation, the withdrawal of funds to BitMEX remained open.
At the same time, OKEx has suspended the withdrawal of funds after one of the holders of the private key needed to confirm transactions, and he has dropped out of contact. The company claims that he cooperates with law enforcement agencies, this concerns his personal affairs and is not related to the exchange.
Also last week, October 22, without any warning, the ability to deposit and withdraw funds was disabled on the DragonEx site. The company explained its decision as a "crisis of confidence" to centralized platforms, which intensified due to the incident with OKEx.
Users who held funds on DragonEx will not be able to access them until at least November 2. If the company is by that time unable to restructure its debts and restore efficiency, it will be forced to close.
In order to avoid such problems associated with storing cryptocurrency on a cryptocurrency exchange, it is enough to have a third-party wallet (preferably "cold", a device that does not require a permanent connection to the Internet) and transfer to the trading platform only the amount necessary for the trade.
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Cold wallets are supposed to offer a maximum of security, but what good are they if you first have to transfer the contents to an exchange to be able to sell. No problem if you only hodl and never sell, but who wants that?
In any event, aside from maybe 5 or 10 exchanges, all others are a trap, scam or a time bomb. One has to be careful. Also important to mention, DEFI and decentralised exchanges like Uniswap will provide more flexibility in the future, whereby you can trade/swap coins directly from you cold wallet, not needing to trust any exchange.
We still need time to mature in this market, but yes, do not STORE your coins on some no-name exchange.