Is it safe to keep my cryptocurrency in an exchange?

As cryptocurrency continues to reach new all-time highs, many previous skeptics have become enthusiastic investors. However, joining the world of crypto is more than learning about how wallets work or buying and selling on sites like Crypto Exchange. The process becomes a little more complicated and requires the safekeeping of these assets in a secure wallet. Currently, there are two main places to store your cryptocurrency, a hot wallet and a cold wallet. Users are encouraged not to think of this decision as one or the other. Instead, cryptocurrency exchanges caution investors to use both to ensure the safekeeping of their funds.

Below a comparison will be conducted on the different methods of safe cryptocurrency storage. It is important to note that depending on how much cryptocurrency is at your disposal, different wallets will be better suited to you.

Web wallets

Hot wallets are also known as online wallets. Investors can access these online wallets through devices connected to the Internet such as computers, phones, or tablets and are what users deposit their money to when keeping their funds on an exchange. Cryptocurrency exchanges are among the most popular places for new investors to store their assets since they simplify the process. That said, the cryptocurrency exchange controls the funds held in a web wallet, making it slightly riskier when it comes to theft and fraud. Especially as more people begin using the platform and the appeal for hackers continues to grow. Therefore, users are encouraged to only store a small amount of their crypto on exchanges and only if they are planning to trade it.

Doing some background research, users will find Coinbase, a large cryptocurrency exchange only keeps 2% of its total holdings online. The platform stores the remaining 98% of its funds in cold storage. Binance, which follows a similar storage pattern, faced an online hack costing them 7,000 bitcoin. After these events, newer exchanges like CryptoExchange have set a standard for customer insurance to cover investor’s holdings at least in part. Most exchanges have also created dedicated security teams to help secure user’s private keys and have had no major hacks as a result.

On the other hand, many people cannot secure their keys and have misplaced their funds. For these, a trusted centralized exchange might be a safer option for cryptocurrency storage.

Software wallet

A hot wallet can also take the place of a software wallet. These wallets are free to use. Users can download the wallet to their phone or desktop to later open the application and make bitcoin transactions almost instantly. Again, software wallets are on the Internet, so it is important to ensure your software is updated to reduce the risk of online theft.

Desktop wallets

Another secure alternative to cryptocurrency exchanges is wallets that you can download on the computer. These wallets will store and manage the private keys for each user, so there is less risk of being hacked. Unfortunately, the trade-off for this type of wallet is that the user may be required to download the whole cryptocurrency exchange, which may be 150 GB or more. Depending on the device, users may greatly reduce the functionality of their computer. Additionally, sound IT and security practices will also need to be kept up to date to avoid malware attacks.

Hardware wallet

Some users have built up quite the amount of wealth through cryptocurrencies. In this case, the best storage option will be a hardware wallet (also known as a cold wallet). A cold wallet is created specifically for the safe storage of digital assets and offers the greatest security since it is separate from the Internet. Your assets will be less vulnerable to online attacks when they are offline.

That said, this storage method is harder to use and access. So, for short-term storage, these wallets are not recommended. These devices can also be expensive. However, the investment is well worth it in most cases.

Selecting your storage method

The immutability of cryptocurrency transactions is both a safeguard for investors and a caution. Many hackers are drawn to this feature of cryptocurrencies since, unlike traditional banks, a blockchain transaction is permanent. Therefore fraudulent parties that commit crimes online may never be tracked down by authorities.

However, the answer to it being safe to “is it safe to keep my cryptocurrency on an exchange” isn’t a simple yes or no answer. It depends on many factors, including the investor’s exchange, the holding amount and their overall goals.

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