Keeping your money in an exchange may sound like a brilliant idea at first, but it's actually not recommended in the long-term. Why is that?

As the popularity of Bitcoin and cryptocurrencies in general has surged significantly in the past few years, so has the number of publicized hacking cases. Over time, hackers have been finding new methods to steal funds and are even able to move them around undetected. Meanwhile, the victims can only watch their money go as there's not much that they can do to stop it.

That being said, it is highly important to consider where you're going to store your crypto coins. Remember that crypto trading and investments are already risky, so you don't need other unnecessary issues like stolen coins to ruin your day. While keeping your funds in crypto exchanges might sound like a practical idea at a glance, it actually has a number of risks that should not be underestimated.

 

How to Store Crypto Funds Safely

Technically, there are two ways to store cryptocurrency, namely custodial and non-custodial. When crypto holders choose to store their assets on a crypto exchange, then that's considered custodial because they basically hand over security measures to the exchange. On the other hand, when users choose to hold their funds in a wallet that only they can access, it is considered non-custodial.

Both options have specific benefits as well as flaws and the best option may vary from one user to another. Generally speaking, non-custodial options are more secure but it is inefficient, as it takes time to deposit funds and leads to trading opportunities being missed. Custodial options, on the other hand, offer higher trading efficiency because all the funds are stored in the exchange. However, this method is considered riskier as it is more vulnerable to malicious attacks like hacks.

As a rule of thumb, non-custodial options are more suitable for long-term holdings. Offline wallets in particular are perhaps the safest choice as they are not connected to the internet, hence they are immune to hacks.

 

Is It Okay to Store Money in a Crypto Exchange?

Looking back at the history of cryptocurrency and past events, keeping funds in a crypto exchange is actually pretty dangerous. Since 2011, about $1.65 billion worth of crypto assets have been stolen from exchanges and the numbers are only getting bigger each year. Each exchange is able to hold billions of dollars worth of crypto assets, so it is unsurprising that hackers like to target crypto exchanges, especially the ones with low-security measures. As a result, exchanges are highly prone to sophisticated hack attacks.

Apart from hacks, other troubles may arise from within the exchange itself. Any exchange can make mistakes, miscalculate, or mismanage their funds. All of these can cause users to lose money that they store on the platform.

However, it is worth noting that storing crypto assets on an exchange is not always bad for crypto holders. The high volatility of crypto markets has made short-term crypto trading popular. Short-term traders frequently open positions and take advantage of small price movements throughout the day. To make things easier, they usually prefer to hold their funds on the exchange. Other than that, traders who use derivatives also need to deposit some funds on the exchange because they need to use collaterals.

That being said, holding crypto on an exchange is just simply inevitable at times. Therefore, it is much preferable to choose a secure and reliable exchange before depositing money.

 

How to Identify a Secure Crypto Exchange

There is no guarantee that you won't be the next victim of a new crypto hack case, but you can reduce the risks by choosing a safe and reputable exchange. When it comes to security, there are several things that you could focus on, such as:

  • HTTPS: The easiest way to identify a secure exchange is by looking at its HTTPS certificate. Every secure exchange must have a valid HTTPS certificate, which can be automatically recognized by your browser. Just look at the address bar and look for a lock symbol. This basically shows that the site is safe and they won't be able to collect or change your data without your permission, so all of the data that you're sending to the web server is well protected.
  • Two-Factor Authentication (2FA): This is quite an important protection for your account. Most exchanges offer a variety of 2FA methods, such as software, SMS, and hardware devices. The most common option is by using Google Authenticator. If there is no option for 2FA, then the platform is pretty insecure and hackers might break into your account unnoticed.
  • Strong Password: Setting up a strong password is highly necessary to protect your account. Some exchanges may allow you to set a weak password, but a good exchange must ask you to build a strong and unpredictable password. You might be asked to fulfill certain criteria such as a mix of regular and capital letters, numbers, symbols, etc.
  • Funds Insurance: Although the crypto market is still largely unregulated, some exchanges have decided to take extra precautions and put users' funds on insurance. This is certainly a great safety net for traders, but please note that such policies do not protect individual accounts and only apply to the exchange as a whole.
  • Cold Storage: Check if the exchange keeps users' funds in separate cold storage. Funds that are stored in cold storage are much more difficult to be stolen compared to those which are kept in a hot wallet.
  • Ability to Whitelist IP & Withdrawal Addresses: Check if you can whitelist certain IP addresses for connecting to your exchange account. This enables you to block suspicious logins from other locations. Other than that, some exchanges might offer an option to whitelist your withdrawal addresses, so you can only withdraw your funds to the previously approved addresses.
  • Extra measures: Exchanges can offer a bunch of other security measures such as multi-signatures, suspicious behavior notifications, phishing protection, and more. These policies are certainly great and worth to consider as long as they are well-implemented. This shows that the exchange is committed to protecting users from cyber-attacks and malicious activities.

See also: Exchanges with the Highest Cybersecurity Scores

 

The Bottom Line

The question of whether it's a good idea to store your crypto assets in an exchange actually doesn't have a definite yes or no answer. It all depends on the type of trading style and the goal that you want to achieve. As explained above, storing funds in an exchange can be beneficial for short-term traders who need to access funds quickly. However, this method is definitely not recommended to hold funds in the long-term as it is very risky.

Regardless of which exchange you use and no matter how tight the security measures are, there is no guarantee that the platform is completely safe. No exchange is immune to hacks and issues can always appear when you least expect them to. Therefore, you need to manage your funds well and allocate them in the right places. Deposit some funds in the exchange when you have open positions, then don't forget to withdraw your funds every once in a while. Don't let them pile up in the exchange for too long.

If you're looking for a safe place to store your crypto assets in the long term, the safest bet would be cold wallets. Alternatively, you can also try non-custodial exchanges or Decentralized Exchanges (DEXs), which are considered safer than centralized exchanges.