Key Takeaways
- Hacks and security breaches are common in crypto exchanges, so it’s important to use reputable platforms and take standard security measures.
- Beware of crypto scams, such as fake ICOs and Ponzi schemes, and always research before depositing your crypto on any platform.
- Regulatory issues can impact your access to crypto exchanges, so check the associated regulations and comply with any requirements before using an exchange.
With how popular and widespread cryptocurrencies like Bitcoin have become, more people are turning to crypto exchanges that make it easy to trade, invest, and store their digital assets.
You’ve probably used or watched ads about more than one of these platforms but probably don’t know all the risks attached. Here are six ways people lose money on crypto exchanges and how you can avoid these pitfalls.
1. Hacks and Security Breaches
Hacks and security breaches are commonplace in the crypto industry, mostly because of the digital nature of cryptocurrencies. Naturally, this also plays out in crypto exchanges. Hackers may attack the whole platform, an individual account or wallet on the platform, a transaction, or one of the exchange’s storage units.
CNN Business reports that hackers stole crypto worth $3.8 billion in 2022 alone, although this included crypto exchanges and decentralized finance (DeFi) protocols. Still, crypto platform hacks were common in 2022. For instance, hackers stole over $600 million from FTX’s wallet in 2022, a few hours after the exchange declared bankruptcy.
Ronin Network, Binance, Mt. Gox, Bitmart, and Coincheck are some other crypto exchanges that have been hacked—some among the worst crypto hacks ever. The hackers typically steal the private keys of investors or platform administrators or insert or exploit bugs or vulnerabilities in the exchange’s wallets or software.
You should only use widely recognized, safe, and reputable platforms with high-security standards. While this will not eliminate hacks, it’ll enable you to take advantage of standard security measures and information. Ensure you enable two-factor authentication, use strong passwords, protect your devices, and avoid phishing emails and links seeking to get you to reveal your account info.
Additionally, you can use a decentralized exchange (DEX) instead of a centralized one, as DEXs allow you to store your private keys. As a result, you may store your assets offline, using hardware wallets that are harder to hack. Even when using a centralized exchange, you can consider using one with cold storage.
2. Crypto Scams
Unlike hacks, which don’t require investor participation for loss, scams require your participation.
Several scam crypto exchanges are perpetrating scams in different forms, including fake initial coin offerings (ICOs), Ponzi schemes, pump-and-dump schemes, and fraudulent customer support. These scams typically involve promises of high returns, exclusive offers, threats, or deception. Ultimately, these exchanges take your crypto and manipulate the market or just disappear.
A popular example is the OneCoin scam. Thanks to the team’s aggressive marketing and the promises of massive returns, numerous people invested over $4 billion. However, the scam unfolded in 2017 after the mastermind, Ruja Ignatova, vanished.
Always research before depositing your crypto on any platform. Read the crypto whitepapers, check out team members, customer support, and the management, and read credible customer reviews. If you come upon any unsolicited offers that seem too good to be true, you should run in the opposite direction.
3. Regulatory Issues
Crypto regulations vary from country to country, and these laws change frequently. Some countries, like China and Saudi Arabia, ban crypto trading, some, like the United Kingdom and the United States, tax crypto trades, and some, like Malta and Germany, require KYC (know your customer) or AML (anti-money laundering) compliance.
These regulations can affect how you access and use crypto exchanges. They can also result in fines or the confiscation of your assets. Also, the regulatory stance of a country influences what happens to your assets in case of bankruptcy or hacks.
To avoid losses because of regulatory issues, check the associated regulations before using any crypto exchange in a country or region. Ensure you comply with any requirements or obligations that apply to you as a crypto user or trader. Then, before proceeding, check if the exchange follows know-your-customer (KYC) and anti-money-laundering (AML) regulations or any other legal requirements.
4. Technical Glitches on the Platform
The crypto exchange hardware, software, protocols, or services can malfunction because of bugs, errors, updates, overloading, or several other reasons.
No matter how fleeting, these glitches can cause transaction delays or errors. Sometimes, technical glitches can deny access to funds or expose funds to hackers.
Once again, always use reliable and tested exchanges with robust security systems; avoid those that always pop up in the news for unresolved technical glitches. When you pick an exchange to trade with, test it with small transactions. It might not be wise to jump right in with heavy trades.
Watch out for lags or error codes when using the exchange—for instance, when logging in or returning to a previous page. You should also report any strange issues or errors to the exchange’s support team, regularly monitor your balance and transactions history, and back up your data.
5. Market Volatility and Poor Trading Decisions
Due to the highly volatile nature of crypto markets, the prices of cryptocurrencies fluctuate widely and unpredictably. You can buy a token around noon, and its price and volume are massively different by midnight; it’s possible in crypto!
These wild price, volume, and liquidity fluctuations can affect profits and losses. You can rack up more losses if you buy or sell your crypto without a smart trading or investment strategy.
To avoid losses, you should have a clear and realistic trading or investment plan that suits your goals, budget, and risk appetite. This plan should include strategies, like only risking 1–2% of your capital per trade. However, limit how often you trade to avoid racking up transaction fees.
Educating yourself on the trends and indicators in the crypto market is also a good idea. You may also invest in artificial intelligence (AI) based crypto trading tools that’ll help you avoid impulsive trading and protect your profits.
6. High Transaction or Gas Fees
When you send or receive crypto, you incur transaction fees. Similarly, you incur gas fees when you execute smart contracts or transactions on the Ethereum network.
Transaction and gas fees vary across exchanges depending on network congestion, transaction complexity, and demand; sometimes, the fees can exceed the amount you send or receive. These fees can eat into your trading profits and savings over time.
Before choosing an exchange, check out its fees. Also, consider the assets you’ll be holding or trading; some networks, like Ethereum, incur extremely high gas fees. You can use platforms that offer low fees or discounts, like Layer 2 solutions (e.g., Polygon), decentralized exchanges (e.g., Uniswap), or aggregators (e.g., 1inch).
Moreover, you can time your trades to avoid periods of network congestion and high demand.
Hold Onto Your Assets on Crypto Exchanges
Crypto exchanges are a great way to hold or trade cryptocurrencies, especially because they are convenient and easy to use. However, they have substantial risks that can leave you without your crypto.
By understanding how you can lose money on crypto exchanges, you can make smarter decisions to safeguard your assets. Apply best practices like using reputable exchanges, complying with regulations, and trading safely. If you’re vigilant, you can successfully use these exchanges on your crypto-investing journey.