All the crypto exchanges say their security is top notch, but don't just take their word for it. Read on to learn what extra security measures to look for.
When you buy cryptocurrency, it's important to do it safely. That's because this is still a new and relatively unregulated industry. While almost all bank or brokerage accounts have insurance and other protections in place to keep your money safe, the same can't be said for digital currency exchanges.
Some high-profile exchange hacks have shown how easy it is to lose your money. One example is Mt. Gox. Back in 2014, around 850,000 Bitcoins were stolen, worth about $450 million back then. Less than a third of them have since been recovered.
This is one of the main reasons why security is often a big concern when buying digital currencies. If you plan on investing in cryptocurrency, it's a good idea to make sure you're using an exchange that goes out of its way to protect your investments.
What makes an exchange extra secure?
Most of the big cryptocurrency exchanges have good security programs. User-level protection such as two-factor authentication (2FA) is pretty standard. When you activate 2FA, you'll need to provide additional information whenever you log on, such as a code you receive by SMS.
But users should look for an exchange that will go the extra mile to keep their Bitcoin and other currencies safe. Here are three additional security measures to look for:
- Insurance: When you put money in a bank account, it's usually FDIC insured, protecting it against theft or bank failure. Crypto exchanges don't have FDIC insurance. But the exchanges that take security seriously do provide additional insurance for your crypto. That way, if it gets stolen from the exchange, you may be compensated.
- Cold storage: Exchanges need to keep some currency in what's called "hot storage," which means it's online and accessible. Security-wise, you want an exchange that keeps the majority of assets in cold storage. That means it's offline, often air-gapped, and hard to physically access.
- Bug bounty program: The idea of bug bounties is to encourage independent security experts -- also called ethical hackers -- to find system vulnerabilities. Exchanges offer rewards so people will report security weaknesses rather than exploit them to steal your crypto.
Here are four top cryptocurrency exchanges that go the extra mile:
|Gemini says it has $200 million in crypto insurance coverage. It also insures the coins in cold storage and allows customers to buy additional crypto insurance.
|Majority of coins held in cold storage
|Coinbase says it insures all the currency held in hot storage.
|98% of currency held in cold storage
|Robinhood says its assets are insured by Lloyd’s against losses, including theft.
|Majority of coins held in cold storage
|Crypto.com says it has secured a total of $360 million in cold storage insurance against physical damage or destruction and third-party theft.
|100% of user cryptocurrencies are held offline in cold storage
For added security, use cryptocurrency wallets
Bear in mind that even if you use a super-secure exchange, for additional protection, you should look into crypto wallets.
If the private keys to your cryptocurrency get stolen, it will be almost impossible to get your money back. The most secure way to protect your digital currency is to use a cold wallet. That's a piece of hardware that you buy and keep offline so it's almost impossible to hack.
Since cold wallets aren't connected to the internet, you won't be able to easily access your crypto. A hot wallet, on the other hand, is a web-based, mobile, or desktop wallet. It's a good option for currency you want to access more easily. It's not as safe as a cold wallet, so you only want to store a small amount that you plan to use regularly.
There's a lot of risk involved in buying Bitcoin or any other digital currency. That's why it's a good idea to protect yourself and look for an exchange with insurance, cold storage, and bug bounty programs. If you do, you can be pretty confident you're doing everything to keep your assets safe.
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Emma Newbery owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin.
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