Should You Store Your Coins on Exchange?

Should You Store Your Coins on Exchange?

This article is part one of a series aimed to help investors make informed security decisions with their cryptocurrency. I’ll explain the benefits and risks to keeping your coins on the exchange where you bought them.

Is it okay to keep my bitcoin on an exchange like Coinbase or Poloniex?

When most investors start out, they store their coins in the same place as they bought them. Is this safe? For many new investors, this is a decision driven by a lack of experience. You may not understand the implications of deciding to keep your cryptocurrency on the exchange, or that you’re deciding at all.

Why you should move your coins off the exchanges.

In most situations, I recommend you move your coins off of the exchanges and into wallets where you have complete control; where you and only you have access to your private key. It takes some learning ahead of time, but this is simply the most secure way to protect your cryptocurrency. The odds of your wallet getting hacked are so astronomically small that it’s, for all intents and purposes, impossible. You will always be in control of your funds. You’ll never have to worry about another entity – the exchange or any hackers – denying you of what is rightfully yours.

Your exchange accounts have a target on their back for hackers.

For as long as there have been crypto exchanges, there have been hackers trying to break into them. With the massive amount of coins they’re in control of, the exchanges are an obvious choice for hackers to target. If Equifax can get hacked because of their poor security, how can you be sure these smaller sites are any better? And, with the way exchanges are set up, there are multiple ways for them to get in and steal your funds.

The most common way hackers steal¬†from investors is on the personal account level. Attackers somehow get access to your exchange account. It might be through phishing attacks where attackers pretend to be the site you’re trying to access and steal your login information, or perhaps they get your information from another insecure site where you use the same login information. Once they get access to your exchange account, it’s often as simple for attackers as clicking withdraw. All your funds are gone.

Though exchanges promise that your funds insured and protected, that usually comes with some strings attached. If you read carefully, you’ll often notice that this protection does not cover funds stolen through unauthorized access to your account. This means that if you are hacked and robbed of everything on your account, you’ll have no help from the exchange.

The exchanges themselves aren’t always safe, either.

On a grander scale, entire exchanges can and do get robbed for every coin they have. This can happen both through external forces as well as through employee theft. In some cases, this can surprisingly be the better scenario for you. If the exchange is trustworthy and properly set up, they’ll eventually return your funds. This is what happened with Bitfinex. On the other hand, the exchange may not be prepared to sustain the damage of a hack or theft and be forced to declare bankruptcy. This is what happened in the early history of Bitcoin with Mt.Gox.

It’s been a while since the last major exchange hack, but what are the chances that the last one has already happened?

Exchanges don’t even need to be hacked to run away with your funds.

There are some estimates out there that Poloniex alone holds the equivalent of billions of USD. That’s a lot of dough to trust in the hands of one, internet-based, organization. Certainly, it’s enough for whoever is in control of the keys to the wallet to forget their morals and at least think about running off with it.

The thing about cryptocurrency is that it’s intentionally impossible to reverse a transaction. By design, once the funds are in the hacker’s wallet, they cannot be taken back. There are no chargebacks. Who do you trust most in this world not to run off with your money? Hopefully that person’s yourself.

However, having funds stolen from you isn’t the only reason to keep your cryptocurrency off-exchange.

Exchange wallets are simply less flexible than your personal wallet.

If you invest in Ether and decide you want to branch out into ERC-20 tokens, you’ll have to check to see if your exchange accepts that token. Even if they do, you’ll often have to keep it separate from your Ether wallet, which means you can’t participate in contracts that automatically send the token to the address that sent it through your exchange. Which means, if you want to expand your portfolio to include these tokens, you’ll probably have to have a local wallet anyway.

Exchange wallets are slower.

Exchanges typically have policies in place that can delay your access to your funds. These often come in the form of a review of any withdrawal that you request. If you ever need to send cryptocurrency in a hurry, maybe in a fast moving ICO, or during a limited time offer of another kind, you could be out of luck.

Sometimes, despite all the negatives to it, it’s still better to keep your coins on the exchanges. I can think of two.

Why you should keep your coins on-exchange:

The first reason stems from inexperience:

You trust the exchange more than yourself.

Despite all the risks, it’s still possible that you don’t trust yourself with your cryptocurrency any more than the exchange. This is a situation I aim to prevent in the security course I’m developing. This scenario is unfortunate and totally preventable. The promise of cryptocurrency was to revolutionize currency; it grants each of us the ability to be as secure as a bank and as convenient as cash. Trusting all of your funds with a third party totally undermines these advantages. Luckily, this problem is totally avoidable. All it takes is a little education up front to eliminate all the risk that comes with trusting your cryptocurrency with anyone else. And, my Fundamentals of Security course makes it easy for you. It’s laid out in plain English; simple enough for anyone to follow.

But, sometimes you simply have to put up with the exchanges.

You’re trading on a daily basis.

The only time it absolutely makes sense to keep your funds on an exchange is if you’re making trades on a daily basis. If you’re trading every day, you’re going to have to accept the risk of trusting the exchange with your cryptocurrency. It likely doesn’t make sense to move your funds in and out of the exchange before and after every position you take. Decentralized exchanges promise to solve this problem, but for the time being, they don’t have the volume the centralized exchanges have, so they might not even be an option for you.

My recommendation: Keep your coins off the exchange as much as possible.

There’s just not very many good reasons that you should keep your coins on an exchange like Coinbase or Poloniex. If it’s your confidence stopping you from keeping your cryptocurrency as safe as possible, don’t let it. Instead, let me teach you everything you need to know to keep your coins safe. Sign up for my security course.

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