3 Reasons Why Exchange Wallets Are Bad for Storing Cryptocurrency
Active day traders keep cryptocurrency in exchange wallets across several exchanges to catch the latest market moves without losing time sending coins from one wallet to another. But, these traders make up a small minority of those holding their crypto in such way.
Leaving your cryptocurrency in an exchange wallet may be convenient, but with few exceptions, itʼs also the wrong thing to do. Centralized crypto exchange wallets come with several critical risks and are best used sparingly.
You Donʼt Own Your Wallet
The first and most glaring danger inherent in holding your crypto in an exchange wallet is the fact that you donʼt own the wallet. Every cryptocurrency wallet comes with two sets of keys — one private, one public. The public key doubles as your walletʼs address and is the key you give out to those sending you coins.
Your private key, on the other hand, is the key that represents the real ownership of your wallet. In theory, only you should know your private key, as it allows access to your coins. Anyone who knows your private key will be able to not only gain access to your wallet but can also do as they please with the digital assets stored inside.
In case you havenʼt noticed, centralized exchanges do not give you your exchange walletʼs private key. This means the key is in their ownership, not yours. The scary consequence of this arrangement is that the digital assets in your exchange wallet are not in your custody — meaning itʼs the exchange who owns your coins when you keep them in their wallet.
If youʼve ever wondered why ICOs are strict about not accepting contributions from exchange wallets, well, this is why. There are constant risks to centralized exchanges, and any one of them is capable of taking the trade offline. In such an event, your digital assets will be beyond your control, and thatʼs certainly not a risk worth taking.
Exchanges Make Their Own Rules
The irony in the current crypto exchange arrangement is that they are centralized services offering decentralized assets.
Usually, centralized institutions such as banks and securities exchanges are strictly regulated by oversight committees and governing bodies. Centralized cryptocurrency exchanges, on the other hand, arenʼt controlled by anyone except for just a few (Coinbase, for instance).
Without oversight or regulation, cryptocurrency exchanges can make up whatever rules and limits they like, ranging from daily withdrawal limits to inconsistencies regarding KYC (know-your-customer) laws.
Horror stories abound about exchanges freezing customer accounts at random, leaving those customers permanently unable to access their digital assets. Because these exchanges are unregulated, there is no guaranteeing the safety of the funds stored in their wallets.
Prime Target for Hackers
Letʼs be honest: hackers love targeting exchange wallets. Keeping your digital assets in an exchange wallet makes you an automatic target for hackers who indiscriminately go after exchange users.
While blockchain itself is immutable, the same canʼt be said for the third party exchanges used to trade blockchain-based assets. In recent years, over $1 billion has been lost to hacks on centralized exchanges, with the recent Coincheck hack accounting for well over $400 million of that total.
Keeping your coins on an exchange may seem safe enough, but it is a dangerous practice best left to day traders. Instead, keep your crypto on a hardware wallet such as those made by Ledger or Trezor. These wallets avoid all of the pitfalls of exchange wallets while giving you the financial freedom crypto is all about.
Another option for storing crypto assets is the investment portfolio of MultiToken. The choice of different types of portfolio rebalancing allows you to follow the most suitable investment strategy for you, and the help of arbitrage in the distribution of assets helps to increase your income.
