Cryptocurrencies are decentralized digital currencies that use cryptographic encryption to secure financial transactions. These transactions are irreversible and they are recorded on a digital ledger that runs across a peer-to-peer network. This decentralized ledger is known as the blockchain. Cryptocurrencies can be acquired either by mining, or by procuring them on an exchange, after which they have to be stored in wallets.
An exchange is a website or platform where a cryptocurrency can be bought or sold. There are two types of exchanges:
a) Fiat Exchanges allow the buying and selling of cryptocurrencies with government-issued currencies like USD, EUR, GBP, etc. Payments can be made using various channels like Credit or debit cards, Bank transfer, ePayment etc depending on the exchange. Most of these exchanges offer their client a crypto wallet for keeping the cryptocurrencies bought. Examples of Fiat exchanges include Coinbase, Bitpanda, Bitstamp, etc.
b) Crypto-Crypto (C2C) Exchanges allow the trading of cryptocurrencies with each other, and usually allow account funding and withdrawals in certain base cryptos only. Most of these exchanges provide real quotes for crypto pairs in real time, a trading platform and crypto wallets. Examples are Binance, Kucoin, etc.
The cryptocurrency market is presently an unregulated market in most parts of the world. In an unregulated market where anyone, anywhere and at anytime can start up their own currency exchange, it is easy for fraudsters and non-professionals to go into the exchange business. There are over 500 exchanges today and many of them are operated by unknown vendors. This poses a problem. Not only is it hard to seek redress when things go wrong, but there is no accountability and no oversight to ensure that only the best cyber-security protocols are used to secure these exchanges.
This is why crypto exchanges are always targeted by hackers and cyber criminals. Many have already suffered malicious cyber attacks, fraudulent activities and crypto theft, which ultimately led to insolvency and collapse. A prominent example is the defunct exchange Mt. Gox. The exchange launched its operations in 2010 and rose to prominence soon after, controlling up to 95% of the market share at the peak of its operations. But, in 2011, the exchange was hacked and about 2,609 bitcoins were stolen. The funds could not be traced to anybody and it was gone for good. Being a big company, the exchange recovered and continued operations, but suffered another attack in 2014, leading to a loss of a whopping 750,000 bitcoins. This attack bankrupted the exchange and it shut down operations. Investors are yet to recover their funds 5 years after.
It is therefore important for any investor to learn how to secure his cryptocurrencies to avoid losing them when exchanges collapse. Here is how to protect your cryptocurrencies and avoid losing them to a potential hack or collapse.
Basically, it is a very bad idea to leave your cryptocurrencies in the wallets provided by exchanges. You normally don’t have access to the private keys of the cryptos purchased from an exchange. It should be an investor’s responsibility to protect his cryptos in this decentralized system. You cannot dispute a transaction, there is nobody to call to reset your keys if you lose them and if anyone steals your crypto assets, they are gone forever. So, take responsibility for your investment. The public and private keys are important codes that are used to move cryptocurrencies from one wallet to another. So, it should be kept safe by the crypto owner and not the exchange. As soon as possible, always move your cryptocurrencies out into a secured cold wallet. Paper wallets and offline wallets are equally safe. That way, even if the exchange collapses, your cryptos are safe. Never store your cryptocurrencies at the exchange wallets as it is unsafe to do so.
It is a good practice to encrypt and back up your wallet. When you create a wallet, you are given an option to save a set of words that can be used to call up your private keys. Save these words in an offline secure location.
Always verify exchanges before dealing with them. One day, you will need to buy or sell some of your cryptocurrencies. So be thorough when searching for exchanges. QuadrigaCX had shown signs that all was not well, even before the well-publicized purported death of its owner and the loss of all the coins in the exchange. Withdrawal requests were not being attended to in a timely fashion, and there were pending cases in court over the freezing of some of the exchange’s fiat money accounts. Some forensic reports have claimed that the exchange did not lose the funds due to the owner dying with the private keys, but that funds were being moved from the exchange’s wallets as far back as the 1st quarter of 2018.
You should therefore watch out for the following:
When it comes to protection of your investments on an exchange, you cannot be too careful.
Be careful with the cryptocurrencies you buy. Always do a research before buying into new cryptos. Some companies are fraudulent. They open an exchange, launch a crypto and have investors buy into the investment. After some time, they claim to have been hacked and vanish with the investments. This is known as “Exit Scam” and the crypto world have been experiencing it from time to time. An example is that of “LoopX” that happened in Feb. 2018. The company raised $4.5million from investors during the Initial Coin Offering (ICO). The company promised profits every week with its most advanced trading software. But, suddenly it pulled down its website, deleted its Facebook and YouTube channels and disappeared with investors’ funds. Watch out for unrealistic ROI promises, white paper documentation details, heavily promoted ICOs and the crypto team credibility. As much as possible, avoid fake exchanges and fake cryptocurrencies by exercising caution before buying into a cryptocurrency.
If you do not have the private keys to your cryptos, then, it is not yet yours. It is your duty to protect your investments especially in a decentralized cryptocurrency world. Exchanges are very important and their roles are very crucial but they are the major targets of crypto crimes and thefts. So, it is important to protect your investments by storing your private keys offline. Choose reputable exchanges by check their history and security practices before dealing.