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For the last two weeks, you’ve spent a lot of time on the Internet learning the intricacies of the cryptocurrency world. You’ve encountered such cryptic terms as sats, shill, pump, and dump. You’ve read technical descriptions (or at least tried to do so), studied reviews and source comparisons, and didn’t stop talking about it until you’d rattled your friends. And you dreamed of the day when you would finally own one yourself. But that day never came…
What was my mistake?
“So, being deeply convinced of cryptocurrency and its revolutionary potential, you decided to buy an asset you noticed during your two-week search. You also chose the exchange because of its very low commission. That evening, you registered an account using your Email address. You chose a username and the most secure password. You then verified your account by sending a photo of your ID, name, date of birth, country, physical address and phone number. Your account is confirmed! You funded your account via wire transfer. You waited a bit… And the fiat is in! Finally, you are ready! And you took action right away. You entered the amount for the conversion. It’s confirmed. Done! The assets are bought! You loved it so much that you couldn’t help but tell all your friends about it. You spent the rest of the evening thinking about what you could do now and possible next steps as a real cryptocurrency owner. You went to bed and enjoyed dreaming about cryptocurrency, and your tokens stayed on the exchange…
What you did not expect was that the next day this exchange would be hacked. You knew about it as soon as you opened your eyes. Scared, you rushed to check, thinking it was a joke. You tried to log in. The exchange was under maintenance. You completely lost control of your assets and had no choice but to wait. Which you did. It was a very busy day. At night, you realized you had lost everything. Without the ability and strength to do anything about it…“
It only happens to others, because they lose control
Buying and holding your assets from a third party (such as an exchange) means trusting them to a third party. In other words, it means that you do not have full control over your assets – in terms of actions (since you cannot do whatever you want with them), in terms of ownership (since you do not really own them) and in terms of security (since they are vulnerable to hacking).
First, every time you want to interact with your cryptocurrency, you are essentially asking the exchange for permission to access it. Just like in a bank, you have to wait for your request to be processed and validated. The power of cryptocurrencies lies in their decentralization and individual empowerment. Leaving your assets on an exchange or other online platforms is like bringing in a third party. Especially since you are not the actual owner of your funds. For example, when you want to perform an action, such as a transfer, the request goes through the exchange or platform where you keep your assets. Your transfer may be blocked or you may be questioned about its purpose. Some restrictions may also prevent you from sending a certain amount of cryptocurrency. Or your transfer may simply be rejected. In addition, a third-party platform may limit your freedom of choice in terms of services or features by simply not providing them to you. Most exchanges offer staking, which is a way to be rewarded for participating in the network ecosystem. They tend to impose some options on you. For example, which organizations you can give your vote to on steaking issues.
In other words, leaving your cryptoassets on an exchange means letting that exchange decide how to manage your cryptocurrency according to the exchange’s rules, not your rules. In this way, control over your assets goes to a third party who then disposes of them.
Buying and storing coins on an exchange means there is no control over them
When you buy cryptocurrency through an exchange and just leave it there, you cannot be completely sure that the exchange will give it back to you when you ask for it. You also won’t have complete control over the assets. It is the exchange that actually controls your cryptocurrency because it holds the private keys to your funds.
What are private keys?
When you have $1, you either physically own $1 in fiat currency, or you have $1 in your bank account. The bank is the intermediary, officially confirming that you actually have the dollar (and converting it into fiat currency when you need it). When it comes to cryptocurrencies, there is no physical equivalent such as fiat, gold, diamonds or artwork. They are entirely digital. To ensure trust between network members, cryptocurrencies operate on the basis of private and public keys. While the “private key” is yours and reveals to you the right to spend the cryptocurrencies associated with it (and therefore must remain private), the public key is a public address to which all network users can send cryptocurrencies. Conceptually speaking, if your private key is your bank account password, then your public key is its number, for example your bank account number. The private and public keys together form a cryptosystem, which in a sense almost creates a “tangibility” of transactions. It communicates in code about any transaction in an encrypted and unchanged form. In other words, these keys prove that the transaction performed was actually signed by the owner of the funds and was not tampered with.
In order for you to be considered a full owner of cryptocurrencies, you must have private keys to the address in the blockchain. This is how the expression “Not your keys, not your cryptocurrencies” came about. This well-known expression in the cryptocurrency community sums up the problems with exchanges. If you leave your coins on an exchange, its employees own your private keys. Therefore, they also control your cryptocurrency.
If I don’t control my cryptocurrency, then what do I own?
Keeping your cryptocurrency on online platforms actually amounts to having an “IOU” (I owe you) promissory note, not the cryptocurrency itself. Otherwise, it’s a promissory note. A so-called IOU means “an unofficial document that acknowledges a debt owed by one party to another. Because IOU documents are unofficial, they contain no legal obligation to pay the debt or due dates. “Essentially, IOUs are nothing more than random notes that people create to remind themselves that they need to pay a debt in the future” – Binance Academy.
In addition to the lack of control over your cryptocurrency, the last but not least big risk when placing your asset on an online platform is security. Exchanges are centralized and intermediary platforms designed to facilitate transactions. They are not banks or vaults. If something bad happens to an exchange, like hacking, fraud, lack of liquidity, your cryptocurrency is gone. In most cases, it has no legal obligation to compensate you for your losses. Whereas banks have them (when the security breach happened on their side). In addition, anyone who can find out your login information can access and steal your bitcoins. You are not only vulnerable to an exchange being hacked, but also to your account being hacked. Unfortunately, this happens all over the world all the time. To give you an idea, here is a complete and updated list of cryptocurrency exchange hacks. It includes recorded losses in coins, fiat, and data. Despite efforts by exchanges to strengthen security, the number of hacks continues to grow. In 2018, Coindesk announced a “record year in the number of exchange hacks and lost funds.” Among them was the hack of the Coincheck exchange in Tokyo. At the time, it was considered the largest in history. About $500 million in cryptocurrency was lost as a result of its hack. In 2019, it was Cointelegraph’s turn to report a new record of twelve exchange hacks in one year. As a result, more than $292 million was stolen. There were more than $292 million stolen and more than 500,000 instances of customer identity theft.
The exact number of victims of hacking of both exchanges and individual accounts is unknown. But the fact that exchanges are susceptible to hacking is a fact. Unprotected exchanges and other online platforms are centralized intermediaries connected to the Internet, storing huge amounts of cryptocurrency. They are an “easier and more tempting target” for theft. That is why it is very important to regain control of your crypto-assets in order to properly protect them.
How do I regain control of my crypto-assets?
Now you get it: when you leave cryptocurrency on an exchange, you have no control over your private keys – hence, you have no control over your cryptocurrencies. As a result, you have no control over your own funds. The only way to regain control is to make sure that you are the direct owner of your assets and not hiring intermediaries for security and storage.
Hardware wallets are physical devices used to store your private key in an encrypted offline environment. This means the following:
1) your assets are securely stored away from anyone who is not a primary user;
2) you are guaranteed ownership and full control over your assets, because only you manage your money (without intermediaries);
3) they will not be vulnerable to hacking or cyberattacks on the Internet, unlike exchanges and other hot wallets.
In short, storing your crypto investments in a hardware wallet ensures that you actually own the asset and have full control over it in a secure manner.
If you go back to the whole buying process you went through on the exchange, the last but very important step was missed: safe storage. Since you are in control of your funds, if you own the keys, you should transfer them to a hardware wallet. This will allow you to actually own them and keep them safe.
