Logically speaking, someone’s cryptocurrency is only as safe as the storage method that they use. Exchanges are, for the most part, seen as the least secure location to store cryptocurrency, whereas offline wallets are the most reliable. Be that as it may, there is a trade-off between the comfort of entering and exiting positions and the security of an investor’s holdings.
Questioning the safety
Crypto markets have a reputation for being extremely volatile. This nature has created traders who lack long-term conviction yet proceed to play the crypto markets during short-term or mid-term swings.
These traders typically hold short-term positions, though they otherwise hold their capital in a stablecoin such as USDC or USDT. Tether’s USDT is undoubtedly the most popular stablecoin available on the market. For these traders, holding funds on an exchange seems like a more logical route to take, especially when they are in a speculative position. With that said, if awaiting an opportunity, it is still wiser to hold their funds offline or, at the very least, in a non-custodial wallet.
For derivatives trading, traders need to certify their solvency by depositing collateral serving as a security deposit. Those who use platforms like BitMEX, Binance Futures, FTX Exchange, and other exchanges focusing on derivatives must abide by these collateral requirements if they want to trade.
Putting aside the types of trades a user could execute, what also needs to be considered are the exchanges’ differences. For instance, the risk stemming from fund storage on Bitstamp versus HitBTC or BitForex is worlds apart.
Assuming users have done their due diligence, there is clarity when determining what is safe and what is unsafe. Coinbase, for example, retains only 2% of its total crypto holdings in a hot wallet. The rest will instead go into cold storage. The exchange also has insurance that will provide coverage for any loss from the hot wallet, which adds another layer of safety.
No matter the exchange, leaving coins on an exchange is only an option if a short-term trader is aiming to leave an existing position. In the end, it is always smarter to be safe than sorry.
How to know if an exchange is secure
One cannot predict whether or not they will become a victim of a high-profile hack. Nevertheless, selecting a highly secure and reputable exchange will drastically reduce the chances. The most reliable platforms are open concerning the level of security they provide. What’s more, they provide a collection of tools that will help make accounts secure. All in all, you will want to use a safe exchange, with Crypto Exchange being an example.
.Below are some of the most common security practices to keep an eye out for when deciding on an exchange.
- HTTPS: Secure exchanges will always have a valid HTTPS certificate, and browsers will automatically corroborate it with a lock symbol in the address bar. HTTPS thwarts any attempts to capture and alter data being sent to a web server. Every trustworthy crypto exchange should have it.
- Two-Factor Authentication (2FA): It is important that accounts be under the protection of 2FA. A lot of exchanges offer users an array of 2FA methods, some of which include software, SMS, and hardware devices. A platform that does not provide an option to secure accounts with 2FA is likely very insecure.
- A secure password: The best exchanges will not allow a weak password. A secure password will require a mixture of regular and capital letters, numbers, and symbols. This effectively ensures that no one can easily guess it.
- Cold Storage: See if the exchange employs cold storage as a way to store user funds. It is harder to steal funds that are locked offline than those being held in a hot wallet.
- Whitelisting IP & Withdrawal Addresses: Check to see if it is possible to whitelist specific IP addresses for connecting to exchange accounts. When it is enabled, it will automatically prevent logins from other locations. Some exchanges offer an alternative method by offering an option to whitelist withdrawal addresses.
- Additional precautions: Extra security measures will not hurt in the long run, so long as they are implemented properly. If so, they can make exchanges safe temporary storage units for cryptocurrencies.