Most of us are pretty familiar with trading on a centralized cryptocurrency exchange being unaware of the risks associated with the process. Today’s article is a summary of the top 5 risks associated with these platforms which most of us are unaware of.
Before we go any further, a short disclaimer: this piece of content is not written to cause panic or FOMO among readers. For the majority of retail investors, a reputable exchange such as Binance or Coinbase is sufficient.
Lack of Self Custody
While the majority of exchanges have strict security measures in place, such as two-factor authentication or a withdrawal password requirement, all of these are designed to provide secure access to your account on the exchange but not to the cryptocurrency you have bought or kept in it.
The actual funds shown on the account dashboard are just normal server entries made by the exchange to keep a track of who owes how much & to whom. Comparing this with Indian stock markets, whenever you or I buy a share the instrument is actually transferred to our own demat account maintained with CDSL or NSDL.
The broker never gets to keep the securities with them which makes the entire process more secure and regulated for the retail investor.
That being said, the best solution to this problem would be using a hardware wallet or a self-custodial wallet like Metamask. By using these applications or devices, we get to actually own our assets and not rely on some exchange safety measures. This comes with its own set of risks like no dedicated customer support, the risk of hacks, and theft of wallet keys.
Liquidity Issues
While we trade on any Indian exchange, I am sure many of us have already noticed the price difference with international platforms. While one may get confused finding the exact reason behind it, the reason most commonly observed is the lower liquidity.
Indian exchanges have a smaller order book if you compare it with Binance for example. The lower volumes eventually lead to illiquid markets and more time is taken to execute buy or sell orders. The price bids are usually higher by a margin of anywhere between 1 percent to 10 percent in Indian Crypto exchanges.
Another possible reason for this price gap is the lack of deposit options. As of writing this article, India is in a grey zone where we don’t have the Crypto regulations as a nation.
Banks are hesitant to offer smoother banking options like UPI and exchanges are unable to open deposits & withdrawals for all crypto assets. The lack of regulation is effectively hurting small retail investors who have to pay higher prices for the same assets that can be bought at cheaper rates globally.
Risk of getting hacked
Exchanges use hot wallets to process the day-to-day deposits and withdrawals of users. These hot wallets have millions if not billions of dollars worth of cryptocurrencies stored in them, which makes them a lucrative target of hackers and bad actors.
A simple Google search can show you the biggest ever hacks done on these exchanges which have led to massive losses of user funds.
Centralized exchanges are risky and in terms of the safety of funds, it is always better to cross-check the security loopholes before losing everything. One way of making sure that your funds are safe in an exchange is to check whether they have insurance for the user’s funds or not.
Talking of big players, Binance has a concept of SAFU funds established way back in 2018 wherein case of a hack, the users will be compensated fully using it. The Secure Asset Fund was valued at $1 Billion US dollars in January 2022 which is a massive cover for the people using Binance.
Other players have third-party insurance providers like BitGo where a certain amount is insured against hacks and the exchange pays a certain yearly fee to the insurance company for the service. A crucial thing to check here among all the marketing gimmicks is the actual insurance cover for the exchange.
There are players who have a cover of only $500 million dollars but they claim of being always 100 percent insured. That’s misleading and regulations should definitely curb these wrong advertisements. With that being said, avoid those platforms altogether without any information on the insurance of user funds.
Claims of multi-signature wallets and robust security measures can be fraudulent and this has been proven again and again over the past market cycles. Exchanges can go bust after 1 major hack hence, avoid these platforms for your own safety of assets.
Market Manipulation through Bots
This one is rather controversial but there are people in the community who claim that big Indian exchanges have their own bots put in the order books who manipulate the buy/sell prices in the order books. These orders are rather small in size and are placed and canceled at frequent intervals to raise or lower the bid.
These bot orders can be easily tracked by looking at the live order book. Usually, they are small in size and are canceled shortly after being placed.
A great way to tackle these bots would be switching over to a platform with hundreds of millions if not billions traded in a day. With such deep liquid markets, manipulators can hardly affect the bids of live orders.
High fees for withdrawals and deposits
This is a rather hard pill to swallow but Indian exchanges currently don’t have any formal banking support for them. UPI which is the fastest and safest way to pay anyone in India for zero fees is not available to crypto businesses and hence they have to rely on payment gateway providers or Peer-to-Peer mechanisms to survive.
Apart from that, the high withdrawal fees for Crypto assets which are almost 3 to 4 times compared real-time gas prices are charged to transfer funds to self-custodial wallets. That’s what users have to face these days in India or else, some of the Indian exchanges have no option at all to withdraw cryptocurrencies.
All this leads to a premium paid by users in fees and charges while depositing funds or withdrawing them from these platforms. A great way to avoid this trouble in higher fees would be to check or ask someone before creating an account on these platforms.
Ending thoughts
If you have ever faced any such problem while using Indian exchanges then do share your stories with us on Twitter. The best ones will get a retweet from me.
Make sure to tag me – @99promitsaha
Thanks to Ethereum Push Notification Service
You may have already noticed that we don’t serve any ads on our website. That’s because of awesome projects like EPNS which help us sustain the website. If you don’t know about them already, it’s a decentralized Web 3.0-based notification platform. Unlike Android or iOS notifications, EPNS uses a decentralized approach to send alerts about your activities on DEXs and platforms like CoinDesk, MakerDAO, BTC Tracker, and more.
How to get started?
- Firstly, you’ll need to have a wallet like Metamask, WalletConnect, etc.
- You can then download the EPNS application from Play Store or App Store and sign up using the Wallet ID.
- If you’re like me, a Browser Extension must look like your favorite option.
- Go to the available notification channels.
- Click on “Opt-In” & Sign the popup. It’s free and doesn’t take any gas.
- That’s it.
The best part, EPNS is already working on a Wallet to Wallet messaging service. If you haven’t checked them already go now!
