When leaving cryptocurrency assets on exchanges where you do not frequently trade, you do so at your own peril and risk. A crypto exchange is not a bank, which, by nature, is interested in the security of your assets and alerts you about any danger that has arisen as soon as possible. Unlike banks, exchanges will not spend huge amounts of resources on such efforts.
You will not be called from a crypto exchange and notified about suspicious activities in your account. This is logical because the very concept of cryptocurrency implies that if someone got into your account, it could be you. And if it is not so, then all responsibility for the consequences lies solely on you.
The vast majority of crypto exchanges have lackluster reputations for the safety of their platform. There are several exceptions to this, among which are Coinbase Pro and several platforms that consider themselves completely invulnerable. But this approach is absolutely unjustified, because, despite the fact that the exchanges themselves were not yet hacked, thousands of individual accounts were. If you use cold or hot wallets, they are always a safer choice than storing assets directly on an exchange.
The Biggest Hacks
In 2014, the Mt.Gox exchange was one of the most massive Bitcoin exchanges. We can say that at that time, the exchange owned about 70 percent of the market share. But, in February 2014, there was an unprecedented hack carried out on the exchange which totaled losses of $473 million.
A few weeks after such a large-scale hacking attack, the company was declared bankrupt. As a result of this, since the exchange was one of the fundamental factors shaping the cost of Bitcoin, by March, the coin’s rate fell by 36 percent. To this day, Mt.Gox has not recovered the 650,000 lost Bitcoins.
"Despite the fact that the investigation is ongoing and not all the facts have been clarified, it is expected that most of the Bitcoins stolen from the exchange were withdrawn from its hot wallets, including all the currency stored in cold wallets, because of a ‘leak’ in one of the hot wallets,” commented Andrew Norry, a columnist for Blockonomi.
Another major theft occurred at the Bitfinex exchange. In August 2016, a wallet with several signatures got hacked in Hong Kong and gave hackers the opportunity to remove 120,000 Bitcoins from the site.
As early as 2015, for security purposes, Bitfinex decided to provide wallets with several signatures for its customers. Nevertheless, the decision played against them, because it was this loophole that the hackers took advantage of, as they were able to confirm illegal Bitcoin transactions using signatures that were shared among several accounts.
After this incident, Bitfinex literally got blacklisted, but two years later, it restored its reputation and got back on its feet. The Exchange released its own BFX coins for users with stolen holdings and slowly bought them back. Bitfinex also accelerated the withdrawal of funds and became an example of how an exchanger can regain the trust of its users.
Most recently, on June 20, 2018, Bithumb, one of South Korea's largest exchangers, became the victim of a $30 million hack.
Again, the fall in the rate of the world's first cryptocurrency was instantaneous as Bitcoin dove by five percent. It is noteworthy that since the exchange keeps the funds both on the hot wallets of the company and on the cold one, if not for their quick actions of evacuating a large number of funds, the damage could have been much more serious.
Why Should You Use Crypto Wallets?
By storing your crypto assets on the exchange, you entrust its management to protect your assets from hackers. In many ways, the safety of your savings depends on the professional competence, reaction speed, and honesty of the owners of the exchange. Therefore, it is preferable to use hot and cold wallets that you own the private keys to.
Their use is much easier than it seems. A hot wallet, of course, remains a little less safe than its cold counterpart because the latter is not connected to the internet. Nevertheless, hot wallets have several advantages:
They are easy to buy;
There is greater ease of access and usability when compared to offline wallets.
There are several options when it comes to a hot wallet. The instructions of each wallet will help you set up your private key, save your seed phrase, and set up two-factor authentication (2FA) if applicable. To access it, you just need to enter your private key credentials from websites, mobile websites, or applications associated with the wallet. From the application, you can also find the entire transaction history, check payments, or enter information to send transactions.
As for the option of a cold wallet, it too has a number of advantages:
Most USB devices are compatible with it;
Cold wallets are almost never hacked because their keys are completely offline.
Take care of your crypto assets and do not store them on exchanges!