In recent years, the world has seen an explosion in the popularity of cryptocurrencies. As a result, there has been a corresponding increase in the number of centralized cryptocurrency exchanges. These exchanges serve as marketplaces where investors can buy and sell various cryptocurrencies such as Bitcoin, Ethereum, and others.
While centralized exchanges have made it easier for investors to trade cryptocurrencies, they also come with some significant risks. One of the most significant risks is leaving large amounts of crypto assets deposited on centralized exchanges. In this article, we’ll discuss why you shouldn’t leave large amounts of crypto assets on centralized exchanges and what you can do to keep your assets safe.
Centralized Exchanges Are Vulnerable to Hacks
The primary reason why leaving large amounts of crypto assets on centralized exchanges is risky is because these exchanges are vulnerable to hacks. In the past, we have seen several high-profile hacks on centralized exchanges that have resulted in the loss of millions of dollars worth of cryptocurrencies. For example, in 2014, Mt. Gox, one of the largest cryptocurrency exchanges at the time, was hacked, resulting in the loss of over 850,000 bitcoins, worth over $450 million at the time.
More recently, in 2019, the New Zealand-based exchange Cryptopia was hacked, resulting in the loss of approximately $16 million worth of cryptocurrencies. And just in 2021, we have seen two major exchange hacks – the hack on the Japanese exchange Liquid, which resulted in the loss of over $90 million worth of cryptocurrencies, and the hack on the South African exchange Africrypt, which resulted in the loss of approximately $3.6 billion worth of cryptocurrencies.
While some centralized exchanges have improved their security measures to prevent hacks, the risk of a hack is still significant. Therefore, leaving large amounts of crypto assets on centralized exchanges increases your risk of losing your assets due to a hack.
Centralized Exchanges May Freeze Your Funds
Another reason why leaving large amounts of crypto assets on centralized exchanges is risky is that these exchanges may freeze your funds. This can happen if the exchange suspects that your account has been compromised or if there is an investigation into your account for any reason. If your funds are frozen, you will not be able to access them until the issue is resolved, which can take weeks or even months.
For example, in 2019, the cryptocurrency exchange Bitfinex froze the funds of some of its users, citing suspicions of money laundering. The freeze affected approximately $860 million worth of cryptocurrencies, and the affected users were not able to access their funds for several weeks.
Furthermore, some centralized exchanges may have withdrawal limits, which can prevent you from withdrawing large amounts of crypto assets at once. This can be particularly problematic if you need to access your funds quickly.
Centralized Exchanges Are Not Insured
Unlike traditional banks, centralized cryptocurrency exchanges are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. This means that if the exchange is hacked or goes bankrupt, you may not be able to recover your assets.
While some centralized exchanges may have insurance policies in place, these policies may not cover all types of losses or may not provide full coverage. Therefore, leaving large amounts of crypto assets on centralized exchanges increases your risk of losing your assets permanently.
What You Can Do to Keep Your Crypto Assets Safe
Now that we have discussed why leaving large amounts of crypto assets on centralized exchanges is risky, let’s talk about what you can do to keep your assets safe.
Firstly, consider using a hardware wallet to store your crypto assets. Hardware wallets are physical devices that store your private keys offline, making them less vulnerable to hacks. Some popular hardware wallets include Ledger Nano S and Trezor.
Secondly, consider using decentralized exchanges (DEXs) instead of centralized exchanges. Decentralized exchanges operate on blockchain technology and allow users to trade cryptocurrencies directly without the need for a centralized intermediary. DEXs offer a higher level of security and privacy as users retain full control over their assets and private keys. Some popular DEXs include Uniswap, PancakeSwap, and SushiSwap.
Thirdly, if you must use centralized exchanges, consider only depositing small amounts of crypto assets at a time. This reduces the risk of losing a significant amount of assets if the exchange is hacked or goes bankrupt.
Fourthly, enable two-factor authentication (2FA) on your exchange accounts. 2FA adds an extra layer of security by requiring users to provide a second form of verification, such as a code generated by a mobile app or a fingerprint scan.
Fifthly, regularly monitor your exchange accounts and enable notifications for any suspicious activity. This way, you can take action immediately if you notice any unauthorized transactions or login attempts.
Finally, consider diversifying your assets across different wallets and exchanges. This way, if one exchange or wallet is hacked, you will not lose all of your assets.
In conclusion, leaving large amounts of crypto assets on centralized exchanges is risky due to the potential for hacks, frozen funds, and lack of insurance. As the popularity of cryptocurrencies continues to grow, it is essential to take steps to protect your assets. Consider using hardware wallets, decentralized exchanges, and enabling 2FA on your exchange accounts. Additionally, regularly monitor your accounts and diversify your assets across different wallets and exchanges. By taking these steps, you can reduce the risk of losing your crypto assets and ensure that your investments remain safe and secure.