Cryptocurrency exchange markets keep ‘popping out’ like new Justin Bieber songs as the demand for possessing and/or trading digital assets increased rapidly over the past year. Exchange markets like Binance managed to create an active community of over 6 million traders worldwide, dominating the scene in a matter of months. Therefore cryptocurrency trading is a new and unregulated area for governmental institutions and that on its turn creates numerous risks that traders might ‘close their eyes’ on when creating a new account on these popular online brokerages. In this article, we’re going to take a look at some of the most common risks a trader agrees to carry when signing up for an account on an unregulated online cryptocurrency exchange market.

Before diving into the issues that might come up while using an online exchange platform, we must understand how a modern online based cryptocurrency exchange market works.

Crypto Wallets On The Exchange Market Are Not Actually Yours

Creating an account on an exchange market, let’s say Binance, for example, will give you the ability to buy, sell and trade digital assets with a fixed set of pairs, decided by the market (usually BTC and ETH are mandatory for every cryptocurrency market – and there might be pairs that work with a specific market, for example on Binance you can trade against BTC, ETH, BNB, the native currency of Binance, and USDT). When depositing an amount of ETH to your ETH Wallet on Binance, you can track that amount via EtherScan. What you will notice tho is that when you trade your ETH for let’s say XLM, your XLM Wallet on Binance will indicate that you have an equivalent amount of XLM to the ETH used for the trade and the ETH will be subtracted from your ETH wallet, while if you take a look at your ETH Wallet on EtherScan again, you’ll see that no transactions ever happened and your ETH is still there.

Why is that happening? Well, basically Binance gives you the right to claim the amount of XLM you possess if you choose to withdraw your XLM to a cold wallet but until you do that, even if you see that you have an X amount of XLM, you have nothing. You have the idea or a concept that can be translated into the right to claim a specific amount of XLM if requested. Until that moment, Binance will give you the illusion of having these coins while having your ETH untouched.

Of course, Binance and every major exchange posses enormous amounts of all the digital assets they represent and they can cut you a share from their stash everytime you want to make a withdrawal. Again, until that point, they will not touch your ETH or BTC or whatever was your initial deposit.

In a nutshell, you don’t own your wallets or coins inside the exchange market, you buy and sell the right to claim a specific amount of coins based on the amount of ETH or BTC you trade for that coin. That is the reason you will hear many people saying that “it’s not safe to keep your funds in an exchange market.”

Risks That Must Concern Any Trader Before Entering An Online Exchange Market

Over the last year, we experienced infinite individual hacker attacks, DDoS attacks, and sabotage on exchange market databases messing with wallet ids, stake information and even the transactions themselves. That can quickly lead to a panicking situation where markets lose the control of their cold wallets and users lose all their funds since they never had any actual funds, but instead, they just had a claim on the funds of the exchange’s wallets.

Bitfinex got rippled last year, and the same thing happened to Bittrex. Both exchanges claimed that a DDoS attack was responsible for the loss of funds, while they never managed to find the “hacker” or the leak in their system that allowed for someone to breach their security (which btw holds a wall of hundreds of millions behind it).

Mercatox was constantly going offline for no reason for tens of hours or even days, last time it was closed for 3 days straight in the beginning of the year (2018), leaving users literally with 0 information about what is going on. An official twitter announcement only said “all coins safe – no worry”. One of my affiliates have deposited an amount of 1,5 ETH to his Mercatox wallet and he’s been waiting for it for months. He tried to contact the team infinite times with 0 luck or even a tiny tip of response.

Japanese major market Coincheck claimed it was under a DDoS attack just last month, losing an amount equal to $500,000,000 if not more in USD. Again, they said they don’t know who did this and how he managed to breach the extremely tight security, neither how he managed to get away with that sum supposing that he must have had access to thousands of wallets simultaneously.

Yesterday, Binance, the largest cryptocurrency broker was closed for almost 30h for the first time in its history, claiming an unexpected “maintenance” leaving all users frozen for more than a day, and just as I am writing this I hear that KuCoin exchange is down as well for no pragmatic reason.

What’s Really Going On Behind The Scenes During “Maintenance” ?

Before we start to speculate, let me tell you this: most of the exchanges, either refunded their users’ or found an alternative way to payback for the inconvenience caused by their side. Very generous of them, or something else is going on?

When all of our accounts enter ‘freeze’ mode “for our safety”, the market owners themselves have full access to the funds and since the funds are literally gathered in 2 piles of BTC and ETH, nothing stops them from simply “gambling” with this overloaded stash of money for the next hours or even days sometimes. The more professional the team behind the exchange market the faster they can double or even triple the total value of the entire market and return to “functioning normally” again. Then they will send you a message saying “sorry for the inconvenience, you can use your funds again” and yeah they will return everything you thought you were missing back.

In some cases, they might go as far as telling that it was a ‘robbery’ and that they are so ‘good’ and ‘kind’ that they will repay half a billion to the users. While they’re A. paying you back with your own money. B. They probably made x3 times of what their whole market is worth, so “helping” you with half a billion should not be a problem. C. They get major exposure and coverage from A grade news agencies because….$500,000,000 USD was stolen right? And that good exchange market gives everything back to the poor losers. What a Robin Hood-like story.

Last but not least, and most of you clever ones already know that, but take it as a reminder: when you set an order, the market knows exactly when and what you want to buy or sell, they have an algorithm that compares every order at the same time and creates limit orders for the exchange itself. For example, if the exchange based on their database and users knows that most of the users want to sell their BTC at $20,000, the exchange’s trading bot will sell all its BTC at $19,999. If you want to buy BTC at $5,000, the trading bot will buy everything at $5,001. So if you really wanna make a difference and a profit, don’t be predictable and avoid alarms and limit orders. You should trade instantly based on current facts and not be giving your decisions freely and openly to the algorithm that literally steals from you.

We might have no regulations at the moment, but we shouldn’t get used to that since it is what allows this kind of situations to become more frequent in the sphere. You should own your own wallets and access to your funds at any moment. Otherwise, what is the point of trading? Luckily regulations are on their way and next-generation exchange platforms will already have implemented licenses for financial services they want it or not. I am not saying Binance or any of the pre-mentioned exchange markets are bad, but I think we can do better than that, accurate, transparent, regulated, user-focused.

I know that this one was a bit biased and personal, but I’m sure you’ll understand the nature of the situation and spare me this one. Don’t forget to let me know your thoughts on this in the comments below. Do you think cryptocurrency exchange markets are good as they are? And if not, what should they be focusing on from now and on?

Reporting for The Independent Republic, Ross Peili




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