Crypto Exchanges help facilitate trading or Crypto currencies, however, in recent years they have become more open to fraud and miss-management leading to overnight Crypto Exchange Crashes like FTX this year. In this article, we will explore 7 best practices for safer crypto exchange trading and give you a better understanding of why a Crypto Exchange might be ready for a crash.
What is a Crypto Exchange?
A crypto exchange is an online platform that allows users to buy, sell, and trade cryptocurrencies. These exchanges offer a variety of different cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and more. Additionally, many crypto exchanges also offer margin trading and advanced order types, allowing users to take further advantage of the volatile cryptocurrency market. Unfortunately, crypto exchanges can experience crashes due to sudden changes in market conditions or system malfunctions. In these instances, investors can potentially lose significant amounts of money if they are not adequately protected.
Examples of Why a Crypto Exchange May Crash
In recent years, crypto exchanges have become increasingly popular with investors looking to diversify their portfolios. Unfortunately, some of these exchanges have experienced catastrophic crashes due to a variety of reasons, leading to the loss of funds for many investors.
Some reasons a Crypto exchange may crash are as follows:
1. Security Breaches: Crypto exchanges are vulnerable to hacking and cyberattacks, which can lead to the loss of funds.
2. System Malfunctions: System malfunctions can occur due to software bugs, power outages, or human errors.
3. Market Volatility: Crypto markets are highly volatile and can experience sudden changes in price, leading to losses for investors.
4. Poor Liquidity: Poor liquidity can lead to drastic price changes, resulting in a loss of funds for traders.
5. Regulatory Uncertainty: Crypto exchanges are subject to a variety of regulations, and uncertainty about these rules can lead to losses for investors.
6. Poor Customer Support: Poor customer support can make it difficult for customers to resolve issues and can lead to losses.
7. Insufficient Funds: If an exchange does not have enough funds to cover customer withdrawals, then it may be forced to close.
8. Fraudulent Activity: Exchanges can be targeted by fraudsters who can manipulate prices and steal funds.
9. DDoS Attacks: Distributed denial of service (DDoS) attacks can overwhelm an exchange’s infrastructure, leading to losses.
10. Insider Trading: Insiders can use their knowledge of an exchange to their benefit and cause trading problems.
Examples of crypto exchanges that have experienced crashes include Bitfinex in 2016, QuadrigaCX in 2019, KuCoin in 2020, and most recently FTX in 2022. In each case, the cause of the crash was different but the result was similar: significant financial losses for many investors.
Here are the 7 steps you can take to help protect yourself from Crypto Crashes
1: Avoid New Crypto Currency Coins
Investors should exercise caution when considering investing in new crypto currency coins, as the recent crash of a major crypto exchange has left many investors with substantial losses. Market volatility and security breaches are a constant risk associated with the crypto currency market, and investors should be aware of these risks when considering whether to invest in any type of crypto currency. It is always advisable to perform thorough research into any investment before risking capital.
2: Use A Ledger Wallet
The recent crash of a major crypto exchange has left many investors wondering how they can safely store their digital assets. One of the most secure solutions is to use a Ledger Wallet, which allows users to store their cryptocurrency offline in a hardware device. A Ledger Wallet provides an extra layer of security, as it is not connected to the internet, making it impossible for hackers to access the user’s virtual funds. As cryptocurrency becomes increasingly popular and more exchanges emerge, safeguarding your funds with a Ledger Wallet is a wise decision.
3: Set Stop-Loss Orders
In light of the recent crypto exchange crash, experts advise investors to take preventative measures such as setting stop-loss orders. Stop-loss orders are a powerful tool for investors to protect their investments in volatile markets, as it allows them to set a limit at which their investments are sold in order to avoid further losses. Given the unpredictable nature of the cryptocurrency markets, setting stop-loss orders can be a great way for investors to minimize their risk and maximize their profits.
4: Trade With Risk Management In Mind
Cryptocurrency exchanges are a popular way to buy and trade digital currencies, but it is important to be aware of the risks that come with this type of investment. Crypto exchange crashes can cause serious losses for investors, so it is important to always trade with risk management in mind. Risk management strategies such as diversifying funds and using stop-loss orders can help investors mitigate their risks, as well as monitoring the market regularly and understanding how to handle a crypto crash if it were to happen.
5: Keep Your Funds Secure
Crypto exchanges have been known to crash, leaving crypto investors in a precarious position with their funds. To avoid such a situation, crypto investors should take measures to ensure the safety of their funds. This includes regularly monitoring their crypto exchange accounts, using two-factor authentication for additional security, and keeping a close eye on the exchange’s performance and reputation. Additionally, investors should diversify their investments across multiple exchanges to reduce the risk of a major loss in case one exchange does crash. By following these simple tips, crypto investors minimize losses during crashes.
1: Keep your passwords secure and use different passwords across different platforms.
2: Your crypto accounts should not be your savings, spending, or checking accounts. They operate as places to trade or earn income only.
3: Diversify investments across different crypto platforms.
4: Do not connect your Crypto accounts with your savings or retirement accounts. Use burner accounts to move and transition money between crypto platforms and US dollar accounts.
5: If you know little about a platform or NFT, be especially diligent to not connect that account with any wallets or accounts with significant funds.
6: Use a strong firewall and antivirus software to protect your computer from malware and virus attacks.
7: Shred personal documents before disposing of them.
8: Regularly review accounts for accuracy and fraudulent activity.
6: Only Invest What You Are Willing To Lose
Investors in the crypto market should always approach their investments with caution and be aware of the potential risks. Although many investors have made large profits with cryptocurrencies, it is important to remember that these assets are extremely volatile and can crash just as quickly as they can rise. Therefore, it is wise to only invest what you are willing to lose, as you may not be able to recover your initial investment. Investors should also be mindful of their risk tolerance and do their own research before investing in any cryptocurrency.
7: Always Do Your Research Before Trading
When trading any cryptocurrency, it is essential to do proper research beforehand. Not doing so can result in disastrous consequences, as evidenced by the recent crash of a major cryptocurrency exchange. Many users of the exchange suffered major losses due to their lack of research and understanding of the risks associated with trading cryptocurrency. It is always important to read up on the news, regulations, and other relevant information before investing in any kind of asset. Doing your research on an exchange before you begin trading is essential to protect your assets and avoid costly mistakes.
What To Do If Your Crypto Exchange Crashes
If your crypto exchange crashes, there are a few things to consider. First, make sure your funds are safe and secure by checking the status of the exchange. If it appears that your funds are still on the exchange, contact customer service for the exchange to see what options you have for recovering them. You may also need to contact any other exchanges or wallets you have used in order to recover any lost funds. Additionally, it is important to monitor any updates from the exchange and follow any recommended steps they provide. Taking these steps can help ensure that your investment is protected if a crypto exchange ever crashes.
Unfortunately, if an exchange becomes frozen or runs out of funds, there is little you can do to recover you money until the exchange works through the issue. In the case of FTX, account holders are not able to withdraw their funds and are in a long line behind other debts the company owes before they get any of their money back. If this happens to you, be sure to stay on top of the news about the exchange and always be pro-active to follow any steps to claim your funds. Depending on your balance of locked funds, you may want to consult legal advice for the best steps to take.
Lastly you should always file a complaint to SEC and other authorities. Sites like donotpay provide lots of resources regarding steps to take for lost or stolen funds.
Conclusion
While there is no perfect way to protect your funds in the Crypto world, there are best practices you can take to help you trade successfully and protect more of your funds from Crypto Exchange Crashes. Until there are FDIC insured Crypto accounts, any money you place on an exchange outside of your control will be at risk. Keep informed, diversify, and secure your accounts. Those simple steps are the best you can do to minimize losses and fraud.
Happy Trading!
