Switchboard. Hardware Wallets: Risks of Leaving Your Coins on Exchanges | Posted by SatoshiLabs | October 2023
In 2014, Mt. Have you heard about the Gox incident? This was one of the most infamous Bitcoin exchange hacks, with users losing approximately 740,000 Bitcoin. Alternatively, the QuadrigaCX exchange may close unexpectedly, resulting in significant loss of customer assets. Recently, the bankruptcy of the FTX exchange left many users in financial difficulties. All of these examples highlight the risks associated with leaving assets on exchanges.
But there are still over 400 million people taking the risk of storing their cryptocurrencies on exchanges 😕.
In this post, we will compare the benefits of self-storage over storing your coins on an exchange.
When you purchase cryptocurrency on an exchange, the coins are not automatically withdrawn to your personal wallet. The exchange allocates your crypto funds to your account on its internal ledger, but remains the custodian.
Think of it like money in a bank account. In traditional banking systems, your money and assets are under the control of third parties, making them vulnerable to potential security risks, privacy breaches, and even access restrictions.
To actually own cryptocurrency, you need a wallet that gives you full ownership of your assets. Self-custody.
Hardware wallets like Trezor provide an ideal solution for self-management. The Trezor hardware wallet acts as a key manager. This wallet securely generates and stores your private keys. offline, which uses this private key to enable crypto transactions and generate public keys for receiving crypto. Most importantly, your private keys never leave your device. This means your private keys are never exposed to the internet or potential hackers.
Despite the benefits such as convenience and liquidity, storing coins on exchanges comes with risks.
- Exchange wallets are prime targets for hackers and cyberattacks. Over the years, billions of cryptocurrency assets have been lost due to exchange breaches. (Here’s a report from Cointelegraph that considers funds lost to exchange hacks over the past 10 years.)
- As a custodian, the exchange can suspend withdrawals or withhold assets in the event of a bankruptcy or investigation. You have to trust them to stay solvent and give you access.
- Exchanges regularly collect personal customer data, such as ID verification, for regulatory purposes. If your system is compromised, you are exposed to a privacy breach.
- Exchange outages can deny you access to your funds when you need them most, especially if prices are volatile.
Self-storage through hardware wallets expands,
- Security and Control: You have direct control over your cryptocurrency, reducing the risks associated with hacking or third-party failures.
- seclusion: With a self-storage transaction, you can maintain your privacy by not having to disclose your personal information to a third party.
- freedom: Enjoy individual financial sovereignty, which is the core principle of decentralization.
There can be only one hardware wallet winner in this competition. Cryptocurrency exchanges offer convenience, but they also come with significant centralized risks. To exercise true ownership of your coins, you must withdraw them to a hardware wallet that manages your private keys.
The hardware wallet Trezor acts as a key manager. These wallets securely generate and store your private keys offline, protecting them from hacking or third-party errors.
Don’t be lulled into a false sense of security by storing your coins on an exchange. Manage your cryptocurrency now! Have you seen the latest Trezor model?
