Bitcoin is a cryptocurrency that works in a decentralized way. Before we move on to understand the issues of this topic, we need to clear out the most important part. A Bitcoin cannot be stored or hold at some place or a wallet. The Bitcoin you possess remains with the central Blockchain system. What you can actually keep is the private keys that are used to access the Bitcoin. These private keys are used to buy, sell and store the Bitcoin. And only these credentials are actually kept in an exchange or with yourself.
Safety of Private Keys:
Preserving your keys from any kinds of threat is certainly an important part but one has to understand that it has its limitations, cons and it depends on person to person. Exchanges aren’t that unsafe as they are portrayed but they are also not 100% safe. The safety of private keys therefore is an important issue that requires your concern. Before you choose what is better for you to keep your keys you need to first evaluate all the available options for storing the keys.
Understanding the Perspective in Favor of Exchanges:
Now how much safe is it to store your private keys with the exchange? If you are using some standard exchanges then you need not worry much about the safety issue. An exchange will have your address, address of the receiver and the details of the transaction plus the value of your account. Since you are trading on that exchange means that you show some amount of trust on them. These exchanges are bound by the legal framework. What more adds in favor of the exchange is if the user isn’t much concerned about privacy.
Here are some points that favor keeping your keys in exchange:
• You will get higher transaction rates in comparison to wallets
• It is not that the exchanges are entirely unsafe. Even if it happens you can easily have an insurance cover to protect your loss
• You can set master password to secure your Bitcoin and using that you can have access to your account
• These master passwords can be reset in case you forget the password
• The exchanges provide better user interface in comparison to wallets where you will store your keys
• These exchanges also provide customer service
• Exchanges also provide insurance cover similar to that of banks. In case you face some loss then through insurance you can recover back what you have lost
• Exchanges are legally bounded therefore they are relatively much secure than it is told
What makes the exchanges unsecured?
It is not entirely about security but keeping your coins in exchanges are also costly and it has some implications in comparison to private wallets. Here are some of them:
• You will not have access to your private keys in case you do then in case of security lapses, insurance cover will not be considered.
• Exchange is technically less secure than the wallet because it is a third party between you and your signing of contract from your wallet
• Your private details won’t be confidential and the exchange will have all your details including who you are and how much capital gain do you have
• Exchange is costly in comparison to wallets as you have higher transaction rates. They will also charge on keeping your credentials. One will also have to pay for security and insurance that will cover all your profits.
• Your exchange can be hacked and it has been hacked many a times which may expose all your credentials and even may lead you to loss.
The above points mention both the pros and cons of using exchange to keep your credentials. What is more important now is to know what could be better option than exchange? Can one entirely trust private wallets who may be desktop wallets, mobile wallets or hardware wallets?
Understanding the Private Wallets and the Issue they face:
Private wallets are of two types. One is the cold wallet and the other one is the hot wallet. The hot wallets are the ones like the desktop wallets, website wallets and the mobile wallets. On the contrary, the cold wallets are hardware physical wallets that store the private keys. They are relatively much secure than the other forms of wallet. You can able and disable the internet service of your wallet whenever you want protecting it from any kind of hack or misuse. Whenever you need to trade your coins you can use the internet.
A cold wallet from Trezor and Ledger Nano S are one of the most secured wallets where you can store your Bitcoin credentials. They are stored in an offline mode so your credentials are safe from any kind of misuse. What disadvantage that you will face using cold wallets is the user interface speed, smoothness in transaction, keeping your hardware wallet intact, extra charges to keep and buy the wallet.
Advantages of Crypto Wallets
The basic advantage of using private wallets to store your credential is that it is relatively much secure from keeping it in exchanges. You will have 100% authority over your wallet that makes it secure to the core. The other advantage is the privacy issue where your information will be kept intact with you rather than exposing it with others and especially your exchange.
Disadvantages Crypto Wallets
The major disadvantage of using wallets is that most of the wallets except the cold hardware wallets are prone to hack or misuse as they are somewhere connected to the internet. Only the hardware wallet is more than secure but it also faces some serious issues. What if your hardware gets lost? What if you forget to login using your credentials? If this happens then you will lose your Bitcoin.
The most important thing one has to carry in your mind is what is the purpose of keeping your wallet in pocket? Are you much concerned about the safety or privacy or not? Your loss will anyways be compensated using the insurance then why to panic much? It all depends on people to people who consider privacy an issue. After all the basic point of the cryptocurrency is anonymity and if it is lost then there won’t be much in cryptocurrency.
Exchanges like Bittrex Bitfinex Binance are Safe ?
Exchanges like Bittrex Bitfinex Binance and many other exchanges are not safteif you hold large number of Cryptos, Its better you keep all this in your wallet, Coinbase wallet are insured so if you keep in Coinbase then it is backed by insurance company. If you know that one NiceHash a digital exchange market place is hacked by hackers.
Exchanges who are using API to distribute their data are not 100% secure because there are chances that those website can be hacked using API.