When investing or thinking about investing in cryptocurrency, it’s a good idea to question the security of the platforms or ‘exchanges’ out there. This is especially true when you see headlines proclaiming hackers have stolen crypto from these exchanges.
How often do cryptocurrency exchanges really get hacked?
While crypto exchanges have a history of hacks, reputable and secure exchanges practice security measures like cold storage that minimize the likelihood of hacks. If you’re worried about potential hacks, it’s best to keep only small amounts on exchange wallets and keep the rest in a ‘cold’ wallet.
In this article, I’ll be covering what cryptocurrency is, what exchanges are, how often they get hacked, and what security measures are in place when trading cryptocurrency.
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What is a Crypto Exchange?
A crypto exchange is a centralized marketplace of sorts, where people owning cryptocurrency can come to trade their crypto for other types of digital currencies (Bitcoin for Litecoin, for example) or regular fiat currency like the U.S. Dollar or Euro.
Crypto exchanges, like the stock market, display and continually update cryptocurrency values as compared to popular fiat currencies, most commonly the U.S. Dollar. You can buy crypto using your bank account and have it transferred to a ‘wallet,’ which is essentially a bank account for cryptocurrency.
Every crypto exchange is different, so no single exchange is ‘best,’ just as no one bank is ideal for all customers. Some exchanges allow purchases of niche ‘coins’ or offer regular informational updates about cryptocurrency.
Every potential user of a crypto exchange has to evaluate and determine what they want out of their association with cryptocurrency. Do you want a niche form of crypto only offered by one exchange? Does another exchange offer better rates?
Types of Exchanges
There are multiple types of crypto exchanges, each with their own pros and cons. Generally speaking, there are three types: central exchanges, decentralized exchanges, and hybrid exchanges.
Centralized exchanges are notable because they’re operated by a company or organization, through which all crypto-to-crypto and crypto-fiat transactions occur. These exchanges typically have high liquidity, making trading fast and easy, but they are vulnerable to hacks and government regulation.
Decentralized exchanges don't depend on a company or central presence to facilitate transactions, opting instead to secure peer-to-peer transactions with blockchain technology. The most famous one is called UniSwap.
These exchanges operate automatically and have different risks compared to CEXs. For example, a DEX user may be targeted by a sandwich attack and lose part of their money when performing a transaction.
DEXs are still very nascent, and new attacks may arise any time. Moreover, their transaction volume is lower and crypto-fiat transactions are usually not supported.
Hybrid exchanges seek to address the disadvantages of both central and decentralized exchanges, usually using a type of escrow to hold assets being traded between parties on the platform.
How Often Do Crypto Exchanges Get Hacked?
It’s only natural to be worried about the security of anywhere you keep money - banks are generally considered secure, for example, but newcomers to crypto trading may be concerned that their hard-earned crypto can be stolen by malicious hackers.
As with virtually anything on the internet, it is possible to hack exchanges and get away with crypto.
In 2019, a record twelve crypto exchanges were hacked and over $290 million worth of cryptocurrency was stolen. Nearly every month, to this day, there are stories of crypto exchanges being hacked and thousands or millions of dollars of cryptocurrency being stolen.
It’s worth nothing that this doesn’t mean every exchange has been hacked, or that you should never keep your crypto in an exchange because it’s just going to get hacked next month.
It’s crucial to research any exchange you plan on using to ensure it offers enough security measures to give you peace of mind.
Hot & Cold Wallets
Before we get into that, you should understand that crypto wallets are composed of a public key, which is similar to a bank account number that anyone can see, and a private key, which is like a login that allows only you to actually access the funds.
Hot wallets are what we call cryptocurrency wallets that are online, and therefore vulnerable to hacks from elsewhere on the internet. Hot wallets are a necessity for anyone who regularly trades or spends crypto.
Cold wallets, by contrast, are crypto wallets inaccessible via the internet. This can be accomplished by putting one’s private key on a USB flash drive, piece of paper, or other offline means.
A cold wallet offers the best protection against hacking because it is like taking your private key completely off the web.
Ideally, you should have both a hot and cold wallet if you’re trading or spending crypto. The hot wallet should contain a small or moderate amount of crypto for day-to-day spending and trading, while the cold wallet would contain the vast majority of your cryptocurrency.
This way, you won’t have all your eggs in one basket.
How to Choose a Secure Crypto Exchange
Other than fees, altcoin listings, OTC transactions, and other specifics you may desire from a crypto exchange, you need to be on the lookout for security features exchanges may offer.
An exchange with a high level of security for its customers is more likely to be safe than one that doesn’t mention security very much.
What to Look For in an Exchange
- For best security, the exchange should practice cold storage, which is a method of storing crypto in an offline way to maximize security.
- If you’re concerned about hacks, choose an exchange that offers insurance for any crypto lost in an attack. This is not considered standard practice across all crypto exchanges, so read the terms and services to see if it is offered.
- The ability to enable 2FA - 2-factor authentication combines a username, password, and a piece of information only you can access or generate. 2FA minimizes hackers being able to access your crypto.
Beyond security measures, there are many other variables to be considered when choosing an exchange to use. The level of liquidity is a consideration, as high liquidity makes transactions complete faster and without the hassle of price volatility.
If you want to trade obscure altcoins, bear in mind that some exchanges charge exorbitant withdrawal fees for some altcoins. Otherwise, general transaction fees shouldn’t exceed 1% per transaction, and for larger transactions should be much less than that.
Ease of access is a final consideration, but an important one.
- Can you access the site from desktop and mobile easily, or only one or the other?
- Do you have to provide large amounts of personal information to the exchange to trade with them?
For many crypto investors, anonymity concerns can make some exchanges untenable.
All in all, you have to find an exchange that you can live with, even if some aspects of it aren’t all that desirable - maybe the fees are high, but they let you buy that altcoin you like that nobody else has.
Why Are Crypto Exchanges Targeted by Hackers?
Crypto exchanges are targeted by hackers because they are a centralized concentration of some of the largest amounts of wealth in human history, so naturally less scrupulous people are going to target them in attempts to steal some for themselves.
With the advent of computer security information everywhere, hackers are more prevalent now than ever before. As with any legitimate profession, computer security education can be used for malicious causes, including stealing cryptocurrency.
Finally, cryptocurrency exchanges are not top-notch cybersecurity businesses - they exist primarily in a financial capacity. Without a large amount of dedicated cybersecurity manpower and hardware, exchanges are huge and vulnerable targets.
Crypto exchanges may be very useful, but they’re also very juicy and vulnerable targets to malicious hackers. If security is your concern, you should keep your crypto in a private, secure, and offline wallet.
Otherwise, all you can do is to ensure an exchange’s security measures are up to your standards before using it.
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I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.