Cryptocurrency Security: How to Choose the Safest Exchange for Trading

Date: 15 September 2023

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Despite the risks associated with crypto trading, many people continue to maintain a high level of interest in cryptocurrencies. High returns can be considered as one of the primary reasons for it. Cryptocurrencies have historically seen rapid price fluctuations, which can provide opportunities for significant gains.

Additionally, many people are attracted to the decentralised nature of cryptocurrencies, which are not controlled by central banks or governments. This decentralised nature provides greater freedom and privacy in financial transactions, which some people find appealing.  

To have a general view, when it comes to centralised crypto exchanges, there are some great opportunities as well as risks. Below we will try to outline what the typical problems with centralised exchanges are and we will also suggest safer alternatives to decentralised exchanges.

Risks of Centralised Cryptocurrency Exchanges

Centralised cryptocurrency exchanges made trading in crypto much easier and more convenient but unfortunately, there are some considerable risks that should be taken into account by every crypto owner. Here are some of the risks associated with using centralised cryptocurrency exchanges: 

Security Breaches: Centralised cryptocurrency exchanges are a prime target for hackers due to the large amount of money and data stored on their servers. In 2022, the Ronin Network was hacked and attackers managed to steal a whopping $625 million in Ethereum and the USDC stablecoin. The North-Korea backed Lazarus Group was allegedly behind this attack. 

Insider Trading: Centralised cryptocurrency exchanges are often operated by a single entity, which can create conflicts of interest. Exchange operators can use their access to insider information to engage in unethical trading practices, such as front-running or pump and dump schemes. 

Liquidity Risks: Cryptocurrency prices are highly volatile, and the liquidity of a cryptocurrency depends on the trading volume on the exchange. If an exchange has low trading volume, it can lead to liquidity risks, where users are unable to buy or sell their cryptocurrencies at a fair price.

Regulatory Risks: Many countries have introduced regulations on cryptocurrency trading, which can impact the operations of centralised exchanges. In 2019, the Canadian exchange QuadrigaCX filed for bankruptcy after its founder died, leaving $190 million worth of cryptocurrency inaccessible due to regulatory issues.

Counterparty Risks: When using a centralised exchange, users must trust the exchange to hold their funds securely. However, if the exchange becomes insolvent or engages in fraudulent activities, users can lose their money within minutes. In 2014, the exchange Mt. Gox filed for bankruptcy after losing 850,000 bitcoins due to fraud and mismanagement.

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How to Make Secure Transactions Through Decentralised Crypto Exchanges

As we already saw, centralised exchanges are susceptible to hacking, liquidity risks, regulatory problems etc. But there are some great ways in which you can trade in crypto and also reduce your exposure to cybersecurity risks. 

Selecting the right exchange is the main step you have to consider. Before depositing any funds, ensure that the exchange is regulated by a government agency and has a good reputation in the crypto community. You can also have two-factor authentication (2FA), which adds an extra layer of security to the account. It is also essential to use a strong and unique password and enable email or SMS notifications for all account activities. Finally, one should avoid using public Wi-Fi or unsecured networks while accessing the exchange.

Additionally, you can follow another trend and start using decentralised exchanges (DEXs). DEXs are a better alternative to centralised exchanges for several reasons. These are: 

  • DEXs do not have a central point of failure, making them less vulnerable to cyber-attacks. 
  • DEXs do not require users to deposit funds into a central server, reducing the risk of losing funds to hacks or scams. 
  • DEXs are generally more transparent and have lower fees than centralised exchanges.

On such exchanges, users have better control over their assets. On centralised exchanges, users do not have access to the private keys of their wallets, which are held by the exchange. This means that users do not have complete control over their funds and are subject to the exchange's rules and regulations. 

In contrast, DEXs provide users with complete control over their funds and allow for more privacy and anonymity.

Unlike centralised exchanges that require users to entrust their assets to a third party, DEXs operate on blockchain technology, enabling peer-to-peer transactions without the need for intermediaries. This eliminates the risk of hacks and insolvencies associated with centralised exchanges, where users often lose control over their funds. 

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Decentralised cryptocurrency exchanges (DEXs) offer a compelling alternative to their centralised counterparts, primarily due to their fundamental principles of trustlessness, security, and user empowerment. 

Furthermore, DEXs promote financial inclusivity by allowing users to trade directly from their wallets, preserving privacy and reducing the need for intrusive KYC procedures. Ultimately, decentralised exchanges embody the core ethos of cryptocurrencies, promoting self-sovereignty and resilience against censorship and regulatory overreach, making them a superior choice for those seeking a more secure and democratic way to engage in the world of digital assets. 

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