Is it safe to keep my coins on Binance? Did you know that exchanges are considered the least secure venue to store cryptocurrency? Since Binance is one of the multiple exchanges, it is not the best long-term place for your crypto. Let’s dive in to understand why.
Is keeping coins on exchange a good idea?
Cryptocurrency exchanges are the best way to get some coins, but lots of people who use these exchanges make a mistake. They keep the crypto on their exchanges instead of transferring them to a private wallet.
Use exchanges for their sole purpose, as a platform to exchange your money for some bitcoin and other cryptocurrencies:
- Create your account (use our referral link to get 20% kickback of all your trading operations forever!)
- Fund you account
- Buy/Sell crypto
- Withdraw your funds and transfer them to your private wallet for long-term storage
Is Binance any different?
Binance is extremely secure and they keep adding new features to protect their users and their funds:
- Two-Factor Authentication (2FA)
- Universal 2nd Factor (U2F) authenticators
- Authorized Devices
- Withdrawal Address Management
- Cold Storage
- “SAFU” Fund
However, nobody can guarantee 100% that your money will be safe there.
Why is it dangerous?
Crypto security firm Ledger says that as much as $2.7 million in cryptocurrencies are stolen from cryptocurrency exchanges each day, and the number is only growing with 2018 breaking all previous records for total cryptocurrencies stolen. At the start of 2018, Coincheck kicked off the year with the largest hack in the history of cryptocurrency, losing over $500 million in NEM tokens in the process.
In total, over $1.5 billion in cryptocurrencies were stolen from exchanges in 2018. The number proves that there are indeed risks associated with storing assets on a cryptocurrency exchange. However, knowing that Coincheck accounted for a whopping one-third of all of the cryptocurrencies stolen, it is easy to understand that despite the large monetary value of crypto stolen, the thefts were confined to a couple of handfuls of cryptocurrency exchanges.
Here are a few reasons why you theoretically may lose your money:
1) Lack of Ownership
While you can store any coins or tokens you purchase on your exchange wallet, you don’t really own that wallet. Exchange wallets are different from personal wallets in that exchange wallets are ideally just “hot wallets” for trading.
If something happens on the exchange then you don’t have any control over your coins because they aren’t in your custody, they belong to the exchange. This is one of the reasons why ICOs tell their participants to not use exchange wallets to receive tokens. ICO participants don’t have access to the private keys on exchanges and as such if tokens are sent to those exchange addresses, they cannot be accessed by the participant.
The whole purpose behind blockchain and cryptocurrency is to promote decentralization. However, exchanges are in fact centralized, which creates a number of issues.
This means that in situations like the recent investigation of a cryptocurrency exchange in South Korea, assets can become frozen. While owners of exchanges can tell their customers that their crypto assets would remain safe, they can’t guarantee this.
Also, due to the nature of cryptocurrencies, the exchange would have no responsibility to return money to their customers. There is no regulating body holding exchanges responsible for returning lost money to customers, nor is there any insurance in case something happens.
3) Hacking Risk
In addition to the lack of regulation and the inability to guarantee the safety of assets, there is also the threat of an exchange getting hacked. Exchange hacks are relatively common, and due to the lack of regulation, once the coins get lost, that’s it. The owners of the coins can’t get them back from the exchange. While blockchain itself is very secure and essentially unhackable, the centralized nature of exchange makes them vulnerable.
4) Exchange bankruptcy (Mt. Gox).
Mt. Gox was a Tokyo-based cryptocurrency exchange that operated between 2010 and 2014. It was responsible for more than 70% of bitcoin transactions at its peak.
In the months leading to bankruptcy, customers expressed increasing frustration with problems withdrawing funds. Technical bugs prevented the company from having a firm grasp on transaction details, including uncertainty relating to whether bitcoins had been transferred to customers’ digital wallets. This issue was the result of a bug in the bitcoin software that allowed users to alter transaction IDs, sometimes referred to as “transaction malleability.”
The exchange suspended withdrawals after claiming to have found suspicious activity in its digital wallets. The news of the suspension resulted in the price of bitcoin plunging by 20%. The company discovered that it had “lost” more than 850,000 bitcoins, which represented over 6% of bitcoins in circulation at the time.
It filed for bankruptcy in the Tokyo District Court and was ordered to liquidate in April 2014. Most of the users have lost their money forever.
Why people still leave their crypto on exchanges?
Investors may opt to keep their cryptocurrencies on an exchange, either to continue to trade or at least leaving the option.
Another reason a cryptocurrency investor may leave a crypto asset on an exchange is to set a stop loss in case the price falls dramatically and quickly. Stop losses are types of cryptocurrency exchange orders that sell an asset if the price has depreciated below a certain, specified amount.
How is Binance different?
A very small amount of cryptocurrency exchanges feature asset insurance or have funds dedicated to refunding users in the case of a security breach. And Binance is one of them.
To protect the future interests of all users, Binance created a Secure Asset Fund for Users (SAFU). Starting from 2018/07/14, they have allocated 10% of all trading fees received into SAFU to offer protection to their users and their funds in extreme cases. These funds are stored in a separate cold wallet.
Where to store cryptocurrency safe?
At this point, it may sound obvious, that you should transfer the crypto from your exchange account to your private wallet. But how to choose the right one?
There are several types of wallets available:
- Hardware wallet
- Paper wallet
- Desktop wallet
- Web wallet
- Mobile wallet
Our choice is a hardware wallet which is a cold storage option that is considered as one of the safest possible.
It is a USB-like device with an OLED screen and side buttons to navigate through the interface of the wallet and comes with its native desktop apps for different cryptocurrencies. It is a battery-less device that you can connect to a PC or mobile device via USB even on an infected device.
A hardware device typically costs between $70-$150 but it definitely worth owning from the point of view of the safety of your cryptocurrencies. Most popular hardware wallets that now allow you to store more than 22 cryptocurrencies (including BTC) and +500 ERC-20 tokens are:
Move the crypto assets to a cold storage wallet for safekeeping. This is among the safest methods of storing cryptocurrencies for the long term.
If you still want to store your money on the exchange, don’t forget about these simple safety tips:
- Always use Two-Factor Authentication (2FA) or Universal 2nd Factor (U2F)
- Monitor your Security Settings: Device Management and Withdrawal Address Management
- Use a strong password for your Binance account and change it regularly
- Use only secure Internet connection and forget about the free public wifi
- Install antivirus software
Keeping coins on Binance isn’t the best idea. Even though it is one of the top exchanges and I would consider them to be safe. And the main reason is that nobody can 100% guarantee that something bad won’t happen like a hack or government regulations. Transfer your coins into a private cold wallet and leave just a small amount necessary for trading.