1. The Myth of Exchange Safety: Why Storing Crypto on an Exchange Is Risky
Many people believe that keeping their cryptocurrency on an exchange is safe due to the ease and convenience these platforms offer. However, centralized exchanges are vulnerable to various risks, including hacking, insider attacks, and even sudden closures.
Take the example of Mt. Gox, once the largest Bitcoin exchange. It collapsed in 2014 after being hacked, resulting in the loss of 850,000 Bitcoins. Similarly, QuadrigaCX, a Canadian exchange, shut down after its founder died, allegedly taking the private keys to millions of dollars’ worth of cryptocurrency with him. These incidents highlight the inherent risks of storing your assets on centralized platforms.
2. “Not Your Keys, Not Your Coins” – The Importance of Private Keys
The main issue with storing cryptocurrency on an exchange is that you don’t control your private keys—the cryptographic keys that grant you access to your funds. The famous saying in the crypto world goes, “Not your keys, not your coins”. If an exchange gets hacked or decides to freeze your account, you could lose access to your funds entirely.
Essentially, when your cryptocurrency is stored on an exchange, you are entrusting the platform with control over your assets. Without access to your private keys, your coins are at the mercy of the exchange’s security measures, which may not always be foolproof.
3. Better Security: Personal Wallets and the Role of Decentralized Exchanges
To safeguard your cryptocurrency, it’s recommended to store it in a personal wallet, where you retain control over your private keys. There are two main types of wallets:
- Hot Wallets: Connected to the internet, these are more convenient for frequent transactions, but they’re also more vulnerable to attacks.
- Cold Wallets: Offline wallets, like hardware wallets (e.g., Ledger, Trezor), offer much higher security because they aren’t exposed to online threats. Cold wallets are the preferred choice for long-term storage of large amounts of cryptocurrency.
Decentralized exchanges (DEXs) also allow you to trade directly from your wallet, providing more control over your funds. However, DEXs come with their own risks, including the complexity of use and vulnerability to phishing attacks.
In summary, while exchanges are useful for trading, personal wallets, especially cold wallets, provide far better protection for long-term storage, reducing the risk of theft or loss.