2018 was a bad year for the cryptocurrency industry as a whole. Besides weathering the crypto winter which saw cryptocurrency prices hit multi-year lows, the industry also had record-breaking amounts stolen from cryptocurrency exchanges. In total, 2018 saw more than a billion dollars worth of cryptocurrencies hacked from exchanges. Naturally, users may wonder “what cryptocurrency security guides can we follow to avoid such losses?”
Today we would discuss a few simple steps which can help you protect your cryptocurrencies.
Storing cryptocurrencies on exchanges is extremely risky. In March 2019 alone, there were at least three hacks on cryptocurrency exchanges.
- Bithumb, a South Korean cryptocurrency exchange, was hacked for nearly $20 million worth of EOS and Ripple. The exchange is no stranger to getting hacked having suffered attacks on two other occasions. It was first hacked in July 2017, losing more than $7 million worth of Bitcoin and Ethereum. The second time this happened was back in June 2018 where hackers stole $31 million worth of Ripple.
- Coinbene suffered an attack in late March. While the exchange maintains that all funds on its exchange were secure, data scientists have noted suspicious activity in its hot wallet which appears consistent with a hack. $105 million worth of crypto was transferred from the exchange’s hot wallet into three different addresses.
- Dragonex, a Singapore-based exchange, also suffered a hack and bore losses in excess of a million dollars.
It is safe to say that exchanges have not become any safer as a store of cryptocurrencies. In light of such hacks, the simplest solution would be to avoid storing your funds on exchanges. Cryptocurrency exchanges are not cybersecurity companies. They are Fintech companies and may not have the requisite level of technical expertise to protect your funds. Furthermore, many crypto exchanges are not regulated and are not held up to the same compliance and security standards as traditional stock exchanges. Thus, if you ever need to execute a trade on a cryptocurrency exchange, move your funds off the exchange once your transaction is complete.
To allay the fears that users may have of using cryptocurrency exchanges, some exchanges have obtained insurance over the wallets of their users. However, the devil is in the detail. For example, Coinbase recently disclosed it had purchased $255 million of insurance coverage over funds held on its platform. However, this coverage only pertains to funds stored in its hot wallets. Therefore, should the funds held in their cold wallets get hacked, they would not be covered by insurance. While hackers may have a harder time accessing cold wallets, they are by no means impregnable. For example, an insider could compromise the security of such wallets.Also, another good practice users can take would be to sign up only for reputable exchanges. Avoid exchanges that are known to manipulate their trading volume. The Blockchain Transparency institute provides a list of exchanges that have engaged in wash trading.
One final tip for users would be to spread large transactions across multiple exchanges. You may be wondering “why the need for this”? Doing so helps you diversify risks. Cryptocurrency exchanges can go offline at any moment and with little notice. One software engineer from California found this out the hard way. Tong Zhou transferred close to half a million dollars worth of Bitcoin to QuadrigaCX and immediately sold them for Canadian dollars. He then initiated a withdrawal to his Canadian bank account but never received them as most of the funds on the exchange were locked up after the sudden demise of its founder, Gerald Cotton. To this day, the funds on the exchange have yet to be recovered and Ernst and Young have proposed that the exchange declare bankruptcy.
Given their vast stores of wealth, cryptocurrency exchanges will continue to attract hackers like bees to honey. Follow the three simple tips laid out above and hopefully you would never have to suffer unnecessary losses on an exchange.