How to Avoid Losing Crypto on an exchange
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Cryptocurrency exchanges are the lifeblood of the crypto world, providing a way for people to buy and sell tokens and coins. But they can also be a source of heartache and loss, as many people have found to their cost.
In this article, we look at how to avoid losing crypto on an exchange. Not all exchanges are created equal, and some are far more reliable than others so ensure you research before using any platform.
One of the reasons for FTX's bankruptcy was poor liquidity due to improper management on the part of the executive. Following a recent report suggesting potential leverage and solvency concerns, investors and traders began to panic, attempting to withdraw all their funds from the exchange at the same time. This mass exodus of funds drained the reserves of the exchange and the lack of liquidity crippled their operations, leading them to eventually go bankrupt. This is why it's important to use exchanges with high levels of legitimate liquidity so you can ensure that your funds won't be subject to sudden mishaps like we saw with FTX.
Besides FTX, FTX US as well as other smaller corporations affiliated with FTX have filed for bankruptcy, citing the same reasons of poor liquidity. This serves as a reminder to be extra cautious when choosing the exchanges you entrust with your funds - the old adage 'if it's too good to be true, it probably is' rings especially true here.
Top 6 security tips to keeping your crypto safe
So far, we’ve covered the importance of researching the exchange you want to use and the potential pitfalls associated with poor liquidity. Now, here’s a handy list of the top six security tips to keeping your crypto safe:
1. Keep your crypto in a personal wallet, not on an exchange
Exchanges are great for converting and trading the various types of coins, but the safest place to store your crypto is in a personal wallet. This way you own the coins, as the saying goes “not your keys, not your crypto”.
If the exchange gets hacked, goes bankrupt or the website goes down, you’ll retain access to your coins as the wallet will not be connected to the internet or the exchange in question. Moreover, the majority of wallets include an extra layer of security such as two-factor authentication.
Usually, wallets don’t have geo restrictions, however there might be a few differences depending on the type of the wallet you use. For the hardware wallet, prices can vary by location, whereas for web and software wallets you might run into the country restrictions mainly due to the regulations. But if you want to use the best crypto wallets in the UK or the US such as Ledger, Exodus or Trezor, you are very likely to have access to them.
2. Use a strong password and two-factor authentication for your personal wallet
This ensures that even if someone manages to guess your password, they still won’t be able to get into the wallet without the additional layer of security provided by two-factor authentication.
Two-factor authentication (2FA) is the use of two different methods to authenticate the user's identity. It typically involves the use of a password or PIN, as well as an additional factor such as a fingerprint scan, voice recognition, or text message sent to the user’s phone.
3. Do not store all of your crypto in one place - diversify your holdings
Even the most secure wallets can still be subject to theft and hacking. Diversifying your holdings across multiple wallets will ensure that even if one wallet gets compromised, the rest of your funds are still safe.
4. Know the risks associated with each type of cryptocurrency
Different types of coins come with their own set of risks and it’s important to understand the pros and cons of each before investing.
For instance, the Ethereum network is much more susceptible to hacking than the Bitcoin network, due to its use of smart contracts that can be manipulated by bad actors.
5. Stay up to date on security threats and updates for your personal wallet and exchanges
Keep an eye out for any news regarding the exchange you’re using and the wallet you’ve chosen - new technologies, bug fixes, or other solutions may help keep your funds safe from potential attackers. Additionally, make sure to always download the latest versions of the software associated with the exchange in order to ensure the highest levels of protection against malicious intent.
6. Be careful when sharing personal information online - use encryption when possible
Finally, the most important security tip is to ensure the privacy of your online identity. Be mindful of the data you share online, and if possible, always encrypt the sensitive information before sending it out.
Protect yourself from potential losses
Cryptocurrency is a great way to invest and trade with the added benefit of decentralization. However, unless the proper precautions are taken to secure the funds, one’s crypto investments may be at risk. To help protect yourself from potential losses due to negligence or malicious intent, be sure to keep these tips in mind!