Is it safe to store my cryptocurrency in an exchange?
Recent hacks where strangers ran away with millions of digital currencies might get you into thinking twice about storing your money in crypto exchanges.
For beginners, one way to help you decide is to ask yourself: how long do you want to store your digital assets?
Long-term approach: Hard wallets
People who have been exploring the cryptocurrency world for a while would say that the most secure way of storing your crypto is using a cold wallet.
A cold wallet is an offline wallet. The most common type of this is a hardware wallet, which is a small device (like a USB drive) that stores your private keys.
It usually works this way:
Connect your hardware wallet to a computer
Choose the option “receive crypto” to generate an address (public key)
Send your crypto to that address.
Once you receive the crypto, disconnect the device from your computer.
Because the hardware wallet is not connected to the Internet, it remains inaccessible to hackers.
Another type of cold wallet is a paper wallet. It’s literally just printing your keys (to your digital wallet) on paper. Once the keys are printed out, they are erased from your digital wallet. They can only access your crypto if they have physical access to that paper.
It may be the best there is but cold storage is not spared from flaws.
Once you lose or damage the hardware or the paper, you can no longer access your crypto. It may be safe from hackers, but it’s not safe from a person’s negligence or forgetfulness.
It’s inconvenient. You have to plug it in every time you want to access your crypto. It’s mostly recommended to HODLers. HODL means “hold on for dear life.” It’s a strategy for crypto users who have a long-term approach to crypto investments.
Short-term and convenient approach: Cryptocurrency exchange
When you buy crypto in a centralized exchange, the exchange stores it for you by default. The wallet is provided by the exchange. It is called a custodial wallet because they hold custody of your assets.
Advantages:
Convenience. For frequent traders, using the wallet provided by the crypto exchange is the best option. Engaging in multiple transactions daily could be tedious if you are using a wallet outside the exchange. You will have to send money from the wallet to the exchange before entering a trade.
Costs less. There are costs involved in transferring funds from a wallet to an exchange and vice versa.
Friendly to beginners. Sending crypto from an exchange to a wallet means dealing with more than one system or interface. If a crypto trader is still not familiar with one or both, you might lose your funds. If you mistakenly put the wrong address (wallet), you won’t be able to retrieve your crypto.
Retrievable password. If you lose the keys to an external wallet, you might not be able to get your funds back. In an exchange account, however, you can just reset your password using your mobile number or e-mail.
Earning opportunities. Some crypto exchanges reward their users for holding their coins on the platform. In staking, for example, holding your BTC assures you a 5% Annual Percentage Yield (APY).
Disadvantages:
An exchange is not completely decentralized. You are still letting the platform hold your wallets, which leads us to the following risks:
HACKING. The list of exchanges getting hacked continues to grow. Crypto purists would want you to understand “not your keys, not your coins.”
STEALING. We need not go far. Your crypto exchange username and password could be stolen by someone you know. If you have not put enough safeguards, they can steal your funds within minutes. You may be able to counter this when by setting up two-factor authentication and other safeguards.
The verdict:
There’s no one-size-fits-all approach to this decision. The risks of storing your funds in an exchange are not just brought about by the platform itself. Users can also commit mistakes leading to financial loss whichever wallet they choose.
Some would argue that the reputable exchanges now learned to invest in security to ward off hacks. Other exchanges offer insurance to assure their users that their cryptos will be given back in case of a security breach.
Now that you are aware of the pros and cons of holding your funds in an exchange, decide first which do you prioritize the most: earning or security?
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