If you know how to trade cryptocurrencies, you also know that you can’t trade them without a crypto exchange. A centralized exchange is like a bank that stores your money, except that it’s entirely digital.

Crypto exchanges can be centralized or decentralized. Centralized exchanges (CEX) like Binance let you create custodial wallets, which means you hand over control of your money to the exchange, so it’s the exchange’s responsibility to keep it secure. On decentralized exchanges (DEX), however, your private keys stay with you. You are in control of your wallet on DEXs.

Given that this can be complicated for new users, it’s worth knowing how important it is for you to secure your assets safely.

Appalling Facts About Exchanges

Since 2011, crypto assets worth $19.2 billion have been stolen. In 2021 alone, investors lost $2.99 billion in frauds and hacks, and statistics show that scams and hacks are growing at a rate of 41% per year. As the hype surrounding cryptocurrencies increases, new platforms and projects also launch, sometimes to the misfortune of users. While some are legitimate, others just open up to scam the investors and run off with the money.

Either way, a crypto exchange is an enticing target for a hacker since it stores billions of dollars worth of cryptocurrencies. To put things in perspective, on average, exchanges lose $2.7 million every single day. It always helps to have strong security measures that keep hackers at bay, but even then, it doesn’t mean an exchange is completely immune to a hack, considering how sophisticated and elaborate hack attacks have become and difficult to thwart.

With these security risks, it’s not a good idea to store your money in a CEX for the long term. There are several reasons why CEXs are far from ideal for storing your crypto, and some of them might not be as apparent as you might think.

This illustration photo shows the Coinbase logo in the background as a person checks cryptocurrencies prizes on a smartphone in Los Angeles on April 13, 2021
This illustration photo shows the Coinbase logo in the background as a person checks cryptocurrencies prizes on a smartphone in Los Angeles on April 13, 2021 AFP / Chris DELMAS

Why Keeping Crypto on Exchanges Is Highly Risky

An Exchange’s Mishaps Could Spell Disaster

Hacking isn’t the only risk that exchanges face. They can also suffer from mismanagement and also risk losing private keys. For example, you might have heard of the QuadrigaCX controversy. The owner of the exchange died without putting measures in place to hand the private keys to someone. Consequently, the keys were gone for good and investors suffered heavy losses. Similarly, Mt. Gox was hacked over two years, something which the founders had no idea about. The investors lost a total of 650,000 BTC and haven’t been repaid yet.

Click to watch: https://www.youtube.com/watch?v=lCcwn6bGUtU

In some cases, entities can also start Ponzi schemes and make it seem legitimate. For example, the infamous Bitconnect pyramid scheme attracted hundreds of thousands of investors, claiming that they would receive an unreasonably high yield on their investments with Bitconnect (BCC). Similarly, Unicat was a project where the founders stole $200,000 in cryptos and could even control the investors’ tokens by exploiting a loophole in the smart contracts.

Risk of Being Hacked

In spite of security measures, anything that exists on the internet can be hacked. Even Binance, which is hailed as the largest and most secure exchange, was hacked and investors lost 7,000 BTC. However, Binance made up for the loss and repaid its investors.

There’s always the chance that an exchange could be hacked. NiceHash exchange was hacked in 2017 and lost $64 million in BTC. The exchange did repay its investors in full later.

If you’re a short-term trader, there’s no harm keeping your money in an exchange, but if you want to keep them long-term, think twice before you do.

Risk of a Rug Pull

rugpulls - crypto - rahul
Top 15 rug pulls this year, by cryptocurrency value stolen. Chanalysis

Image Source: Chanalysis

A rug pull is when a project pulls off an elaborate scam and absconds with the investors’ money. According to Chainalysis, investors have lost over $2.8 billion in rug pulls. One of the most notable rug pulls is the recent Squid Token.

Similarly, a Turkish cryptocurrency exchange called Thodex disappeared with $2 billion worth of cryptocurrencies this year. Investigations are underway, but there’s no sign the investors will get their money back. Following this, the Dogecoin-inspired AnubisDAO and BSC-based (Binance Smart Chain) exchange called Uranium Finance rug-pulled $58 million and $50 million, respectively.

Leaving Money on CEXs Is Unwise

Cryptocurrencies are extremely volatile. If you have $10,000 in your account, that figure might halve or double overnight. In rare cases, this could be an exchange trying to manipulate the market. In other cases, an exchange might not let you withdraw your funds. Even the most renowned exchanges, like KuCoin and Coinbase, have frozen withdrawals. KuCoin’s CEO said that high-frequency users may be unable to access the site, especially during big price movements, due to IT infrastructure limitations.

Being unable to withdraw money has remained a consistent problem with even the most renowned CEXs. An exchange may cite many reasons, but ultimately, you’re at the mercy of the exchange.

Privacy and Anonymity

Most CEXs require you to adhere to some form of a KYC process. It is far from anonymous. DEXs, on the other hand, have no such procedures. All you need is a wallet like MetaMask — no asking for documentation, making it far more private.

Not Your Keys, Not Your Coins

If you don’t have full control of your wallet, then it is no different from using traditional financial services. If your assets get frozen, withdrawals get suspended, or suffer from an attack, because of CEXs, then it is not your wallet. If you don’t have the key, it’s not your crypto.

DEXs have some limitations, but they are being addressed. It is far better than CEXs in almost every respect currently, so there’s little reason not to use them.

Rahul owns less than 1 BTC and 40 LRC.

International Business Times holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.