4 reasons why people still keep their crypto assets on centralised exchanges and the risks involved

“Not your keys, not your coin” may be an overused slogan in crypto, but it embodies everything crypto stands for.

With crypto, you’re expected to be your own bank, and that involves maintaining custody of your coins and taking full responsibility for their safekeeping.

As a result, you’re always told NOT to store your crypto assets on centralised exchanges.

However, can everyone do without storing their coins on an exchange? And what are the risks or benefits of keeping your funds on centralised exchanges?

That’s what we will be discussing in this article, including how to manage the risks accordingly.

Why do people keep their crypto assets on centralised exchanges

Despite the royal failures of centralised exchanges in 2022, people can’t seem to stop using them for many reasons.

1. They’re essential for fiat on-ramp and off-ramp

Centralised crypto exchanges make it easy for you to convert your fiat to crypto or cash out your crypto to fiat.

For this reason, many users keep their funds on an exchange, for easy movement between fiat and crypto.

Furthermore, most major crypto exchanges offer debit cards that allow users to spend the crypto in their account, worldwide.

So, they have become a kind of crypto bank for many users as their card services and benefits are even better than what your traditional bank offers.

2. Laziness or inability to maintain secure self-custody

Crypto makes you your own bank, and that puts the responsibility of a bank on you.

That means you’re responsible for the safekeeping of your funds and protecting them from hackers who are always looking for novel ways to relieve you of them.

First, you must get yourself an appropriate wallet and find good ways to store the private keys to your crypto assets that are both secure and easily retrievable by you alone.

All these take knowledge, skill, and resources to pull off and many people don’t have them.

But centralised exchanges, like your traditional banks, are very good at this. So, many users rely on them to keep their crypto assets.

With them, you never have to bother about finding a good wallet to use, storing and managing private keys, avoiding hackers,  or fearing losing your crypto assets to schoolboy mistakes.

Furthermore, if you ever forget the password to your exchange account, you can always contact support to help reset your password and regain access to your funds.

And if you die, your loved ones can go to the exchange and claim your crypto assets from them.

All these are very difficult with self-custody and your crypto assets will be lost forever if you lose your private keys or die without telling anyone how to access your keys.

3. Convenience

Centralised exchanges offer convenience and people love it as it saves them time and effort.

First, you can store all your crypto assets on a single exchange. You don’t have to deal with multiple wallets for different coins or have to manage and secure many private keys.

Secondly, you can convert one asset to another at the lowest fees and best rates without having to deal with multiple decentralised exchanges on the various chains.

For example, you can convert Bitcoin (BTC) to Ethereum (ETH) or EOS to Tron (TRX) natively without having to deal with the different DEXs or use cross-chain bridges.

Thirdly, major centralised exchanges offer several investment opportunities that allow you to earn more with your crypto assets all in one place.

Finally, the user experience and support services on centralised exchanges are a lot better than what’s obtainable in DeFi.

This makes it easy for many users to keep their funds on the exchanges and do more business there.

4. Active trading

Trading is essential for determining the prices of cryptocurrencies and providing liquidity to make it easy to buy and sell your crypto assets.

Without trading, there’d be no price discovery and it would not be easy for you to buy or sell a crypto asset.

Furthermore, some people are professional traders who make a living off of buying and selling crypto assets.

This is their own business and centralised exchanges are some of the best places where they do this daily.

And before they can trade on these centralised exchanges, they must first deposit their crypto assets there.

This is another reason some people keep their funds on exchanges — to use them for active cryptocurrency trading.

What are the risks of keeping your crypto assets on centralised exchanges?

Keeping your funds on centralised exchanges can be risky, as they are vulnerable to security breaches, regulatory problems, and operational inefficiencies.

Below, we discuss the top 5 risks of keeping your crypto assets on centralised exchanges and how to manage them.

1. Hacks and Exploits

Centralised exchanges hold large amounts of users’ crypto assets which makes them attractive targets for hackers.

So, if the exchange gets hacked or exploited you may lose all or a portion of your crypto assets on their platform.

Though these exchanges implement high-security measures to safeguard users’ funds, they’re not totally invincible.

However, you can take appropriate measures to protect your crypto assets on the exchanges by:

• using strong passwords,
• enabling two-factor authentication, and
• regularly monitoring your accounts for suspicious activity.

Furthermore, the major exchanges now have some form of insurance fund that covers users’ deposits in the event of a hack or exploit.

For example, in September 2020, the KuCoin exchange was hacked, resulting in the theft of approximately $281 million worth of crypto assets.

The exchange was able to recover about $204 million worth of assets, which were returned to KuCoin users affected by the hack. The rest of the amount was paid from the exchange’s insurance fund.

So, if you must keep your funds on an exchange, make sure to take serious steps to protect your account and only use reliable exchanges with strong track records and a publicly verifiable insurance fund.

2. Exit scam

The founders of the crypto exchange can disappear with little to no hope of ever getting your crypto assets on the exchange back.

The only way you can avoid this is to only use duly registered and regulated crypto exchanges managed by well-known public figures.

Avoid using obscure centralised exchanges whose founders or management teams are not visible or worse, anonymous.

No centralised exchange should have anonymous founders or management team and they should be duly registered in one or more jurisdictions with verifiable legal details.

3. Loss of anonymity or privacy

Most centralised crypto exchanges require you to complete know your customer (KYC) requirements to use the platform or perform transactions beyond a certain value.

Binance for example, will not let you do anything on the exchange without first passing KYC and some exchanges allow you to trade up to a specific value, beyond which you must pass KYC.

This means your activities on these exchanges are easily linked to your real-life identity, thus losing your anonymity and financial privacy.

4. Regulatory issues and government overreach

Your account and funds on centralised exchanges can be easily frozen or restricted due to ‘suspicion’ of illegal activities alone.

That means that at some point, there’s the possibility that you will not have access to your money on centralised exchanges whenever you want until such suspicions are investigated and cleared.

Furthermore, the exchange could be banned from operating in your jurisdiction and all your existing trades forcefully closed as Binance did with Australian users in February 2023.

In some cases, you will have to withdraw your funds from the exchange and your account closed as the exchange may no longer support your country.

5. Downtime

You’re trying to withdraw your funds on an exchange to settle an emergency and you get this annoying message that certain crypto assets or the exchange itself are down for maintenance.

And all you can do is wait until such maintenance are complete and the assets are available for withdrawals or trading again.

This is not uncommon with centralised exchanges.

Furthermore, centralised exchanges delist crypto assets or trading pairs all the time.

So, if you have a token on the exchange and it’s delisted, you must withdraw it to your own wallet or another exchange supporting the token within the g

Therefore, it’s important to keep track of the tokens you have on centralised exchanges and their status to avoid losing access to them.

Conclusion

Don’t let anybody tell you whether or not you should keep your crypto assets on a centralised exchange.

That said, do you keep your crypto assets on centralised exchanges or you’re 100% in DeFi? Share with us in the comments section below.