September 25, 2020

It’s up to you to properly protect your cryptocurrencies part 1

There are many ways in which you can “store” your cryptocurrencies, and our goal today is for you to learn exactly what the differences are between doing it one way or another and what you are exposed to in each case. This will give you another insight and you will learn how to better protect your active crypto.

Knowledge is power. So today we’re going to show you how to apply it.

You may have heard of hot and cold wallets, but for most people starting out in this world, it is most convenient to use the exchange as a wallet, as this is the most common way to access the crypto market and where we execute the purchase of the assets.

The first and most important thing you should know is that cryptocurrencies are not stored in any of the places mentioned above. The cryptocurrencies are in the blockchain. Each of the assets has its own chain of blocks, and what we know as wallets what they contain is the key that allows you to make a transaction within that chain of blocks.

The difference between the public key and the private key

The public and private keys are necessary to carry out a transaction. The public key is used to receive funds while the private key is used to sign transactions.

Therefore, the private key is fundamental since it represents the ownership of the wallet and the one that allows to send funds.

Using the exchange wallet is not the best idea

Satoshi Nakamoto created bitcoin with a vision, to use blockchain technology so as not to depend on a trusted third party and to create the decentralized economy. With the exchanges, we have a third party again and fall back into centralization.

Having the assets in the exchange portfolios involves some risks that we have to take into consideration:

  • Not having the private keys:

When we use the services of an exchange, all we have is a username and password. They are the ones who keep the private keys and assets, and for the user, only one value appears on the platform. It is like what we know in traditional banking, since when we deposit money in the bank, the only thing we see is an accounting entry and something that tells us that we have X money, but we really don’t know exactly where it is or if it even exists.

There have been and unfortunately will continue to be cases in which exchange houses disappear overnight, and when you try to access you realize that the page does not exist, as happened with the MTGOX scandal or more recent cryptopia, among others.

Without the private keys, you cannot access your funds except through their services. If the page disappears, goodbye to your cryptocurrencies.

  • The target for hackers

For a person or group of people with dark intentions to steal assets, it is much more succulent to try to steal them from an exchange than from a user. Exchange houses are constantly in the sights of hackers to take advantage of a security breach and thus steal a significant amount of money, as happened recently with the Spanish firm 2Gether, from which they managed to steal 1.3 million dollars and this has harmed all their users.

  • Regulatory issues

Although this should not be a problem if you are a legitimate user, exchanges are subject to each country’s regulations, so you should also take into consideration that any regulations they have to apply may affect you as a user, as is already the case with AML/KYC policies or request justification for any suspicious movement, which may be given by the request of the government in question.

Conclusion:

Exchanges are a bridge between trust money and cryptocurrencies and allow us to trade with many of them. There is no doubt that their service is essential.

However, for all the above reasons it is not a good idea to have our assets in a wallet in an exchange if our intention is not to trade, in the same way that we would not go out for a drink with friends with 1000€ in our wallet as it would be a risk of theft or loss when we really do not intend to use that money.

Learn other ways to safeguard your cryptoactives, and the difference of having it in a hot or cold wallet by visiting the following article.