Are cryptocurrency exchanges safe?
This is a question that many people are asking themselves these days. There are a lot of scams going around, and no one wants to be scammed.
In this post, we will cover everything you need to know about the safety of your crypto coins, tokens, and fiat money in the hands of exchanges.
And also help you answer the 5 most important questions that you should ask before signing up for an account and trusting an exchange with your money.
Before that lets take a look at…
What are Cryptocurrency Exchanges?
A cryptocurrency exchange is an online platform where people can trade cryptocurrency coins and tokens.
They are often the best way to buy and sell crypto coins with other users or fiat money (government-backed currencies).
Crypto exchanges operate a bit like a stock exchange: people are able to trade cryptocurrencies and tokens, just as they would common stocks.
People can also use some crypto exchanges to swap one type of cryptocurrency for another.
For instance, if someone wanted to get rid of Bitcoin but found that it was too complicated or expensive to sell on the open market, he could instead trade his Bitcoins for Litecoin at an alternate site while still receiving money in fiat currency.
The most popular crypto exchanges are:
- Binance (which also has its own coin)
- Coinbase (which is available worldwide) and
- KuCoin (one of the largest for discovering hidden gems)
There are over 300 cryptocurrency exchanges, but not all offer the same sort of service
And yeah, I can’t recommend all, as there are levels to each of their security.
Anyone who is considering investing in cryptocurrency or trading on a crypto exchange should perform due diligence and research to ensure that the site they are using is safe, secure, and legitimate.
We’re going to dive into some things you should always check and consider when choosing an exchange.
5 Questions to Ask When Considering a Crypto Exchange
In our Crypto exchange vs wallet comparison, we highlighted why you should never store your coins on exchanges.
But that doesn’t mean, you shouldn’t settle for an exchange that guarantees your buying, trading and selling safety.
Here are some things to consider before trusting an exchange with your money:
When considering a crypto exchange, it is important to ask yourself the following questions:
#1. Is there sufficient technical security? Does this company have any history of hacks?
Security is a top priority for most people who are considering using an exchange.
Companies should have adequate security measures in place to protect your data from hackers and malicious actors, as well as ensure that you can access the crypto funds stored on their servers when needed.
One way to reduce risk is by selecting exchanges with strong technical security like cold storage wallets and two-factor authentication enabled (i.e., Google Authenticator).
You’ll also want to review whether or not companies offer third-party auditing of their systems annually – this will help provide reassurance that they take protecting user information seriously.
Finally, it’s important to find out how often these exchanges undergo cyber attacks? How do they handle them?
Are any customer accounts breached during these times?
#2. Does my country have any restrictions on using this service?
You’ll want to find out if your country has any restrictions on using your choice of crypto exchange.
If you are in the United States, for example, it is illegal for US citizens to use exchanges that are not registered with FinCEN as a Money Services Business (MSB).
This may limit your choice of cryptocurrency exchange services depending on where you live and work.
For instance, Coinbase only operates in over 100 countries – including Canada, Singapore, and Australia but excluding a few places.
This means that if you are living outside these specific nations there might be greater limitations when it comes to which crypto exchanges can provide their services internationally.
The other thing worth noting about international transactions is whether your bank supports them or not.
#3. How long does verification take…
And what are some examples of documents that might be required?
Verification takes about two days and can be expedited to one day with additional information and documents.
Some examples of the types of documents that might be required are a photo ID, utility bill, Social Security card, proof of address or driver’s license.
Review your individual company requirements for verification before submitting any information as well since each may vary slightly in what is necessary.
Make sure the verification process isn’t a complicated one.
#4. Are user data protected?
There are many ways you can get your data stolen, but being safe doesn’t have to be hard.
Choose an exchange that processes your personal information according to the European Union’s General Data Protection Regulation and keeps it private for good.
That doesn’t share them or resell them to third parties.
Some companies have additional security safeguards in place for sensitive data, including encryption software and physical locks on doors.
In addition, most if not all major cryptocurrency exchange websites offer two-factor authentication as an added safety net for their customers so that even if someone’s password is compromised they cannot log into the account without a second form of verification (typically something like entering a code sent via text message).
#5. Are they reliable, easy to use and intuitive?
Most cryptocurrency exchanges are designed to be as intuitive and user-friendly as possible.
The best way to find a suitable exchange is by reading forums or reviews before opening an account with one, paying close attention not only to the interface but also specific features such as available cryptocurrencies for trade, fees charged per transaction, security measures in place, etc.
Cryptocurrency traders do not always need complex layouts or even knowledgeable customer support staff because they are often able to self-manage portfolios through online platforms that are easy enough for beginners yet still have advanced trading options if more experienced users require them.
Some companies offer mobile apps so you can access your trades on the go while others provide 24/hour live chat support services which is useful at times.
#6. How long have they been around?
Only a handful of cryptocurrency exchanges exist today which means there isn’t much competition when deciding on one.
But also because regulations haven’t caught up yet.
In order to find a reputable company, research how long they’ve been in the market and (again) how many countries are available for trading.
Some cryptocurrency exchanges have only operated since 2019 which means that there’s not enough data on them yet.
But some have already built up trust with their customers over time by providing continuous updates of any changes so you know what to expect before utilizing their services.
#7. What are the security measures taken by exchanges?
Always take your time to look for an exchange that has a great security track record.
Look into how the company secures your funds against theft and loss, such as cold storage or two-factor authentication (also known as “two-step verification”)
Look at what kind of insurance policies are in place to reimburse customers if anything goes wrong.
If you can’t find any information on this topic, look elsewhere or be prepared to lose all money invested with them.
Furthermore, it is important you know the people behind these exchanges, and who runs the site before using their services. It’s always best practice to use exchanges that operate independently – not ones that are owned by another institution.
This will ensure they are more financially stable too.
Lastly, if the company isn’t transparent about who’s behind it – or worse yet, can’t prove their identity legally – then do not use them.
Are Cryptocurrency Exchanges Safe?
If your choice of Crypto exchange ticks all of the conditions above – then you’re on the right track.
I already did some of the hard for you.
Here are some of my best cryptocurrency exchanges:
- Coinbase
- Binance
- KuCoin
- Kraken
Here’s my complete guide on cryptocurrency exchange works.
Which goes a bit in-depth on picking the best one for you. Plus, including which ones are best for beginners and traders with more experience, and types of exchanges.
Online exchanges are one of the most convenient ways to trade cryptocurrencies, but they are not a safe platform to store or save your coins or tokens.
Crypto wallets are the ideal place to store your digital assets.
I explained why right here in my exchange vs wallet post.
Final Thoughts
There are many reasons to be cautious about crypto exchanges.
What’s important is understanding the risks, being prepared for them, and ask the questions above before signing up.
Once you’ve done that, it’ll be much easier to invest safely on cryptocurrencies using any exchange of your choice.
The most important thing is figuring out what kind of risk profile matches your investment goals before investing in anything at all.
This way, you can make informed decisions, set expectations correctly, and avoid making major mistakes down the line.
Once you’re satisfied with your own level of understanding and preparation, there are two things left:
Do some research on exchanges that may fit your needs (again – don’t put money into any exchange until they’ve checked these points), then open an account where they feel comfortable depositing funds.
