Is it safe to store cryptocurrencies on an exchange

Selecting a place to store cryptocurrencies is the first priority for every investor.

Can cryptocurrencies be stored on an exchange and how do the platforms secure the assets?

The choice of where to store cryptocurrencies determines the safety of savings, their usability and capital management capabilities.

Cryptoassets can be stored in cold or hot wallets, depending on their owner's goals and plans.

The safest method of storing crypto-assets is on a cold wallet, which is not connected to the internet and is therefore well protected against hacking through the network.

Cold keys are stored on the device itself. This method of storage is suitable for long-term investors. However, if the user plans to trade cryptocurrencies and does not want to spend money to purchase a special device, the choice more often falls on the hot wallets or the exchange.

The cryptocurrency exchanges.

Cryptocurrency exchanges provide an opportunity to store cryptocurrencies in their wallets.

Such wallets don't require you to download the full blockchain, can be used on mobile devices, and have a fairly simple and user-friendly interface.

This way of storing cryptocurrencies, however, has its own advantages and disadvantages.

Benefits and drawbacks of storing cryptocurrencies on an exchange

Inbuilt exchange wallets are integrated into the developed infrastructure of the trading floor. This feature is the main advantages of storing cryptoassets on the exchange: Wide exchange possibilities. Users have full access to a large number of cryptocurrency pairs and can convert cryptocurrencies into fiat currencies or other assets at any time.

High liquidity. It's easy and fast to sell or buy a crypto-asset on the exchange, and commissions are low.

Skilled support is available on the exchange.

Qualified customer support. Wallet support is provided by a team of specialists who will help resolve any problems quickly and save the user time and money. Platform accountability.

The major exchanges store hundreds of thousands of customers' money. If someone gets hacked and stolen, the reputation and financial health of the exchange is at risk, so exchanges often take out liability insurance, set up reserves for compensations and work with other platforms to get the cryptocurrencies back if they are stolen.

From an exchange wallet you can withdraw money to any other cryptocurrency wallet, it can be deposited in a convenient way. However, storing cryptocurrencies on the exchange has some disadvantages: Private keys are stored by the exchange. The private key for confirming transactions is stored on the exchange server, not with the user.

In 2018, cryptocurrency investor and entrepreneur Trace Mayer proposed a «Proof of Key» plan and urged crypto-asset owners to withdraw money from exchanges on the ten-year anniversary of Bitcoin's creation. However, his plan did not receive widespread support. It's easier to track transactions.

It's easier for criminals and intelligence agencies to track transactions through withdrawals from exchange wallets. Exchange wallet coin mixers are generally unavailable.

The owner has no control over risk. The risk of hacking is always on the side of the exchange, and the user has to trust that the site's employees can keep his crypto-assets safe.

How Exchanges Secure Crypto Assets Most major cryptocurrency exchanges have been hacked at least once, so users are often wary of storing their coins on an exchange. According to analytics company CipherTrace, cryptocurrency fraudsters stole $1.9 billion in 2020.

But most of that amount, about $1.1 billion, was obtained by criminals through fraudulent schemes and pyramid schemes, not through hacks of cryptocurrency exchanges. Nevertheless, the sophistication of hackers is growing - last year, criminals stole $150 million worth of crypto-assets as a result of hacking the KuCoin exchange.

But cryptocurrency exchanges are learning from past mistakes and are constantly improving their security systems. According to Oleg Kurchenko, CEO of digital asset exchange Binaryx, most major cryptocurrency exchanges have created a sophisticated and secure system of exchange wallets.

1. Cryptoasset allocation. All exchange money is distributed between cold and hot wallets in proportions of about 95/5. Each exchange chooses what percentage of money is kept on hot wallets. «We leave only 5% of assets on hot purses to ensure liquidity, the rest is split up and placed in isolated cold storages, which are printed out as needed»" says Oleg Kurchenko.
2. Secure storage of personal data. For the safety of personal data of exchange clients usually an outside company is responsible that professionally provides similar services to many firms and ensures the best protection of users' personal data from leaks. For example, Binaryx works with a European service provider, which is responsible for the processing and storage of users' personal information. It manages the entire infrastructure, and the exchange receives the data already processed and encrypted.
3. Multilayer security for hot wallets. Security specialists pay great attention to the protection of hot wallets, which are most often targeted by attackers. Access to the server with hot wallets is protected by a multi-layered security system. «In order to process payments and make transfers from hot wallets to cold wallets, our employees are logged in with a personal login and a one-time generated password. Two-factor authentication (2FA) also works when accessing hot wallets. The final point in confirming a transaction is an email to the corporate email on the platform domain. All of this happens on software with high encryption algorithms».
4. Verification as a way to protect customers. While many cryptocurrency owners continue to look for workarounds and refuse to go through KYC procedures for reasons of anonymity, account verification is becoming an increasingly powerful tool to protect users' money. For example, on many platforms, only a verified user can withdraw funds from the platform. To prevent theft, only users who have passed KYC verification can withdraw money. In addition, we recommend to connect Google Authenticator for additional account protection»" - says CEO of Binaryx exchange.
5. Security audits. The largest exchanges conduct regular security audits, which involve both internal specialists and external companies. This allows for timely elimination of security gaps and ensures safety of users' money. Each cryptocurrency owner must choose a wallet for storage and find a balance between convenience and security that meets his or her needs. Sometimes users store most of their money in a cold wallet and use an exchange wallet to trade crypto-assets or withdraw into fiat currencies. Some prefer to use exchange wallets exclusively. It all depends on the investor's goals and their plans for their money. Before making a decision, it is necessary to adequately evaluate all possible when choosing a way to store cryptocurrencies.

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