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SECURITY: How Not To Lose All Your Money: Centralized Exchanges

I wrote about the problems, fraud, hacking and corruption in the crypto business in Chapter Three. This represents just the tip of the iceberg when it comes to the dangers that await cryptocurrency investors. In my more than five years of crypto investing, I have never lost funds due to any of the typical risks in the crypto business. In this chapter, I will explain what you can do to avoid losing all your money.

CENTRALIZED EXCHANGES

When investing in cryptocurrencies, you will not protect yourself from using centralized exchanges. So think of them as a necessary evil. The less you have to deal with them, the better. The shorter your funds are in their possession, the safer.

Crypto exchanges are targeted by hackers all the time and even the major players in the business such as Binance, Bitfinex and Coinbase, are not spared. Despite the fact that sometimes funds can be recovered or the exchange takes responsibility for the lost money, it is not guaranteed and the recovery process can take ages. The customers of the Mt.Gox exchange hacked in 2011 are still promised today that they will be able to recover at least some of their lost Bitcoins.

Very often, when there are high price fluctuations in the crypto market, due to investor panic or euphoria, for instance, there are problems logging on to the exchange or withdrawing funds, which can take up to several days. Any attempts to contact Customer Service during such hectic times are generally futile effort. There are cases where exchanges block customers’ funds for reasons that are not always clear, and it can cost a lot of time and require strong nerves to unblock them. Kraken exchange kept blocking several thousand dollars of a friend of mine for over six months. During this time, he often tried unsuccessfully to work with customer service to prove that he was not a drug smuggler or did not launder dirty money.

One day I transferred cryptocurrency worth €2,000 to the Binance exchange for the second time in my life with the plan to withdraw this amount to my bank account. After making the crypto transfer, it turned out that I was blocked from withdrawing funds to my bank. Customer service told me that transfers to/from the bank were blocked because my previous transactions were suspicious. However, due to Binance’s company policy, I could not be told what was suspicious and how I could prove that I never did anything wrong. This will forever be a company secret. The problem could be solved indirectly by transferring cryptocurrency from Binance to another exchange, from which I managed to get the funds out to the bank.

Revolut Bank, where I have an account into which I was withdrawing funds from the Bitstamp exchange at one point also asked me to prove that I was not a criminal. It eventually accepted my documents but threatened to close my account if I continued to deposit funds into it from the Bitstamp exchange. Perhaps the reason for the whole situation was not suspicion of criminality but the fact that Revolut also has its own crypto trading platform, so Bitstamp is a competitor?

The exchanges I use, such as the current Bitstamp, Bitkub and Zonda (formerly Bitbay) regularly freeze my accounts, requesting re-verification of identity and tax residency information. Fortunately, so far this happens when I don’t happen to have funds or transfers pending with them. However, taking into account the fact that I never know when the next verification awaits me, I always try to keep my funds, which are held by the exchange even for a short period, in small amounts. I prefer to make several or even over a dozen small transfers in a row, rather than a single large transfer that will be blocked for an unknown period of time.

Centralized exchanges often offer a whole array of other services, such as crypto wallets to hold funds, staking platforms or savings accounts and much more. Taking into account all I described above, I have never used these types of services. I do not intend to do so and I recommend you to stay away from them too. By using exchanges and the products they offer, the exchange, not you, is in possession of your private key which is the equivalent of your bank account PIN. Stick to the principle of not your keys, not your crypto.

If I have not convinced you yet, make sure you carefully read the terms and conditions of the exchange you are using. Many, if not all, of them have, among other things, a statement there that they reserve the right to retain your funds forever without giving reason thereof or to use them for various purposes in the event of bankruptcy or other problems with their platform.

Read more in my book ‘Second Crypto Revolution: Build Generational Wealth With Richard Heart’s Crypto Ecosystem’.

‘Second Crypto Revolution’ is now also available as an audiobook! Click here to listen!

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