While most crypto enthusiasts will never admit this, the crypto space is more volatile than most people think. Not only is there a chance that you could lose all your investments in the blink of an eye, but there is also a chance that the cryptocurrency exchange that you use has to declare bankruptcy.
This can happen for a variety of reasons including the sudden death of the founder like in the case of QuadrigaCX, a Canadian cryptocurrency exchange or a vicious hack from inside the company like the South Korean exchange, Coinbin.
There are more than a few lessons to be learned here. For both cryptocurrency exchanges and crypto enthusiasts who want to protect their investment, here’s what you should remember.
1) Use a hardware wallet
Online or hot wallets are free and that may be alluring. However, to protect yourself from such a drastic scenario, you need a hardware wallet. Secure, offline and not vulnerable to hacks, a hardware wallet will let you rest easy at night even if the cryptocurrency exchange ceases to exist by the time you wake up. Also, understand that there are some wallets more suited to some coins than others. For instance, if you want to trade Bitcoin, you need to research the best Bitcoin wallet and so on.
2) Study the exchange
It may be very tempting to choose an exchange that gives you the best NXT/BTC exchange rates, but it may very well be a high-risk high reward situation. Ask yourself these questions before you choose an exchange.
- Does the exchange have insurance that will help you recoup your losses if you do happen to store some coins in the exchange?
- Who has access to the private keys? Is there a system in place if the founder dies?
- Do they offer 2-factor authentication?
- Have there been any hacks in the past?
Learning the answers to these questions will help you determine whether the crypto exchange is right for you.
3) Stick to reputed crypto exchanges
New crypto exchanges keep cropping up with more frequency than weeds in an untended garden. While they may make it sound very exciting and labeling themselves as the new and hottest in town, be wary of new exchanges. There are several reputed exchanges that have been around for years without a single hack that may be better suited to protecting your investment. Now, this is not to dissuade you from giving a new exchange a try but proceed with caution.
4) Don’t invest your life’s savings in a centralized crypto exchange
No one would recommend this but even if you do believe that you can double or triple your investment, it is never a good idea to put all your eggs in one basket especially a centralized exchange. Centralized exchanges work much like a normal bank does in that you do not hold the private keys but rather the exchange does. Mt. Gox, Bitomat, Bitcoinica and Bitfloor are all prime examples of how things can go wrong very quickly for centralized exchanges.
In a nutshell, don’t trust someone else to protect your investment. Be wary of anything that seems to be out of place and keep your private keys on you.
