Why exchanges are like banks. And how they lose you money.

If you own any cryptocurrency, be it Bitcoin or any altcoin. It might be intriguing to keep them on the exchange where you bought them after you did that. But this might ultimately lose you all your money. As recent events have shown.

Recently, a well known and somewhat big crypto-exchange got hacked and most of the funds, if not all, got stolen.

In my book, I state that the Blockchain can’t be hacked. That still stands. What can be hacked, however, are the exchanges where the coins are held. As I’ve stated in the book.

If you are one of the people who has lost their funds.

Well, shit.

It’s your own damn fault.

Mistakes were made

I, personally, had around $50 worth of coins lying on cryptopia. To be honest, I didn’t even know they were still there. Might make me sound like a decadent asshole, but oh, well.

The point is, I own that. I knew better so I should’ve moved these funds, but I didn’t. Why?

Laziness, blind trust, naivety. Probably all of them.

What an exchange actually is

An Exchange is a platform to exchange cryptocurrency. As the name suggests. It is not a wallet, or a safe or anything like that.

Its sole purpose is to grant the possibility to exchange your fiat or Bitcoin into shitcoins and the like. It can even be a source of passive income if you refer a lot of people to sign up there.

But it definitely isn’t a safe store for your coins.

You should never leave them on an exchange, unless you are trading them or you don’t care about losing that small amount.

Why? Because en exchange is like a bank.

A safe at a bank.

When you brought your money to your local bank back in the days, all they did was put that money in their safe.

When the bank got robbed, all the money was gone.

That’s how the exchanges work these days.

For banks these days it’s even worse since they use your money for other shit. So your money is actually gone before someone can possibly steal it.

But that’s another topic.

Why are you here?

Most of you reading this article probably came into the cryptocurrency space to make money. And I’m not judging you for that. That’s totally fine.

But maybe over time, you learned to love what Bitcoin and the Blockchain actually is and what it stands for.

And now you are making the same mistakes that drew you away from banks.

By leaving all the money lying around.

Do yourself a favor and store your coins safely.

Not on an exchange.

Am I wrong?

You may have come across the meme–if you can call it that–that “Funds are #SAFU” which is a play with the word “safe” and “waifu” from the CEO of Binance. It is also an acronym for “secure asset fund for users” which has the goal to come up for extreme losses in the case of security breaches on Binance or other frauds.

So, this notion came up that it might actually be safe to store your funds on Binance, because they actually have a fund which would cover your losses in such an event.

Because if you hold your coins on your own and you lose your keys, well, your money is gone.

Shortly after cryptopia got hacked CZ tweeted this:

Shortly after that he backpaddled and said people misread the tweet. He was actually just promoting his upcoming Decentralized Binance Exchange. We get back to the DEX narrative in a second, but first I want to address this notion in general since I believed in it myself.

I thought for the longest time that it is indeed safer to store the coins on Binance since they DO have the fund which would cover me in such an event.

Since I don’t trust myself to take care of my keys.

Repetitive history

But there is an issue with this which was brought up on Twitter. MtGox was “the most trusted Bitcoin exchange” back in the day. Remember what happened there?

old bookshelf indicating a repeat of history
“History is doomed to repeat itself.”

For anyone who doesn’t. Around 2013/2014 this was the biggest Bitcoin exchange trading around 60% of the worldwide Bitcoin volume. Just like Binance now. Then MtGox got hacked and about 650,000 Bitcoins were stolen or got lost.

You can calculate for yourself how much 650,000 Bitcoins would be worth today.

So THE most trusted exchange got hacked and pulled Bitcoin into a multi-year bear market.

Why exactly do we think this couldn’t happen to Binance as well?

Of course, security measures are better these days and there is a fund which would actually come up for losses. But all of them? For anyone? Or is the CEO of Binance probably going to exit-scam us all?

Who knows?

What you do know is that keeping hold of your coins yourself is 99% safe.

I say 99% safe because you might actually lose them.

But at least it’s your fault then.

And you didn’t get robbed.

Decentralized exchanges

A word which gets thrown around a lot recently is DEX. Decentralized exchanges. CZ from Binance mentioned it in his tweet above as well.

With current (centralized) exchanges the company providing said exchange (like Binance) has multiple “hot wallets” which contain most of the funds. This means a bunch of wallets hold the majority of coins of the exchanges’ users.

This obviously provides another possibility for hackers. Since they only need to hack one wallet.

The decentralized exchange doesn’t hold any coins. It is all peer-to-peer. Which means the users registered on this exchange still have their own wallet. Hackers would need to hack a lot of wallets to get a decent amount of money out of this action.

As far as we know now, a decentralized exchange would definitely be the safest form. But even then, your single wallet could be hacked. So I wouldn’t recommend having 5,000 Bitcoins lying on a DEX wallet.

How to actually be SAFU

Your only way to be actually safe with your coins is to store them on a cold storage or on your PC. Cold storage being the most secure here. This is a whole topic on its own and I won’t go too deep into detail here.

(I should probably write a blog post about it, now that I think of it)

A wallet on your PC is probably the best compromise between comfort and security.

It’s basically an application for your PC to where you transfer your coins. They are then stored ON your PC (technically, that’s not 100% correct, but it will do for now) and the only way to lose your coins this way is if your PC gets hacked (which is usually unlikely, especially if you take SOME measures to stop intruders). Or if your PC burns to the ground. Literally, if the hardware faults and you can’t get access to the hard drive anymore.

Which is a possibility, ofcourse. Don’t be fooled.

But rather unlikely. However, that is your decision.

You can find the wallet on your coins’ website.

Cold hard money

The other possibility is the cold storage, also known as hardware wallet. It looks something like this:

picture of a ledger nano S cold storage device
“The Ledger Nano S” Cold Storage

You can get one on Amazon here.

A cold storage is the most secure way of storing your cryptocurrency because it is on this small device.

Not on an exchange. Not on your PC. Or a random PC.

They sit on this device which you can store under your bed if you like.
But as you may have noticed already, you can technically lose this device and the coins are gone.

That’s your 1% of coins not being safe.

Still the safest method.

My personal advice would be the following:

  • On the exchange: Money you trade and you’re fine with losing
  • Software wallet on PC: Coins which cover a small amount of your net worth
  • Hardware wallet: Your biggest holdings

Obviously, you can do whatever you like. If you are more on the paranoid side, you can store ANY coins on the hardware wallet which aren’t actively traded.

In the end, it is up to you. Just don’t leave them on an exchange or you might lose them all.

Cheers,
Alex


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