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David Balaban is a computer security researcher with over 15 years of experience in malware analysis and antivirus software evaluation. David runs the project which presents expert opinions on the contemporary information security matters, including social engineering, penetration testing, threat intelligence, online privacy and white hat hacking.
January 29, 2018


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How to minimise your risks when working with bitcoin exchanges

The virtual gold rush around the cryptocurrency ecosystem continues to entice numerous new aficionados around the globe.

The steady rise of Bitcoin since its emergence in 2009 has spawned a large community of traders who leverage their portfolios in a bid to get a return on investment. Furthermore, a growing number of end users and organisations are opting for the virtual currency as a day-to-day payment alternative.

The use of blockchain is also critical for cutting-edge tech such as smart grids, where digital cash allows the cluster of prosumers to gain momentum as a new player in energy production through solar panels.

Bitcoin exchanges are the common denominator across all these different use cases. Whether you are an active crypto-trader or a user who buys or sells some coins from time to time, exchange services are the essential conduits between you and the cryptocurrency marketplace.

But how secure are Bitcoin exchange transactions? There is a great deal of controversy in this regard, especially in light of the notorious Mt. Gox heist and the recent Nicehash hack, which resulted in losses of more than $60m.

But there are other risks associated with trading coins beyond the menace of hacker breaches and fraud.

Price volatility is one big challenge. Bitcoin’s value tends to fluctuate due to warning signals, such as news or rumours about security breaches and the like.  The price can change dramatically during a single trading day.

Since it takes exchange services some time to execute transactions, the delays may lead to significant losses over exchange rates.

The amount of Bitcoin traded at a given point in time is relatively small compared to capitals on conventional stock markets.

Another concern is liquidity. The amount of Bitcoin traded at a given point in time is relatively small compared to capitals on conventional stock markets.

It may, therefore, be problematic to transact a large volume of cryptocurrency in one shot. This is mainly a shortcoming for large organisations that may have to distribute transactions over periods of time and break them down into portions.

Consequently, companies may incur substantial losses in such scenarios because of the above-mentioned price volatility.

The counter-party risk stems from the fact that Bitcoin exchanges are mostly unregulated. There are hardly any reimbursement mechanisms addressing incidents where payments don’t go through.

Another thing to bear in mind is that digital cash transactions are not reversible. Some popular exchanges operate from offshore territories and lack transparent structure. It is advisable to always use trusted VPN services when working with online exchanges.

Although the benefits of trading cryptocurrency are indisputable, there is a significant degree of risk exposure.

Is it possible to stay on the safe side when dealing with Bitcoin exchanges? Well, nothing is ever guaranteed, but some recommendations are definitely worthwhile.

Don’t trust exchange services with your private keys

If you keep your Bitcoin in an online wallet on an exchange, then they have your private keys. Whoever has your private keys has your Bitcoin.

Let’s point something out – cryptocurrency is very convenient to use, but it’s also convenient to steal. When you opt out of keeping your own private keys, you opt into the hands of a third party. You willingly submit yourself to a company with a fancy website. That needs to change, so be sure to keep your private keys.

Don’t store big amounts of Bitcoin on an exchange

Of course, it’s unfair to completely dismiss the value of convenience that third parties at hot (online and connected) wallets have to offer, but they cannot guarantee the safety of your funds. Naturally, they all claim they’ll keep your funds safe, but several major breaches proved the opposite.

Keep a necessary amount of Bitcoin with them if you want to, but do not keep all your savings with them. It’s optimal to trade with 20-30% of your portfolio.

To increase your trades, consider using leverage rather than your own capital. This way, even if an exchange shuts down due to a breach or fraud, you won’t lose all your holdings. Also, withdraw coins to your own wallet as soon as you can.

Diversify funds across different counter-parties

Unless you are up to nothing more than a one-time transaction (it is sad, but a lot of people get introduced to Bitcoin when they fall victims to ransomware viruses) consider distributing your portfolio over several exchanges.

The benefit of doing so is obvious: it allows you to avoid a trade setup with a single point of failure. If one platform suspends withdrawals or fails in some other way – which is within the realms of possibility – you will stay afloat regardless.

Do some research

Before opting for a specific Bitcoin exchange service, don’t fail to scrutinise its reputation. Also, heed warning signals that may indicate possible security issues with the counter-party.

The Bitcoin trading community is highly responsive to problems with exchanges, instantly reporting them on social media. So make sure you look up the name of the service on search engines and surf sites like BitcoinTalk to stay on top of these issues.

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