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How To Avoid Risk When Choosing a Cryptocurrency Exchange (Update)

A high-profile cryptocurrency exchange made international news in 2018 when the founder of the exchange passed away in India during a trip. Dying is bad, but what made it worse, was that nobody else could access the exchange’s private keys to wallets holding its customers’ cryptocurrencies.

Quadriga filed for bankruptcy with 115,000 clients, and according to some reports, up to $250 million in cryptocurrency and cash held on their behalf. In early 2019, Ernst and Young reported that there might only be $28 million left.

As of March 2020, those traders and clients remain in legal and financial limbo as forensic auditors scour the globe for answers on what the deceased CEO did or did not do with the funds.

Then came the sudden closure of the Einstein Exchange by the British Columbia Securities Commission (BCSC).

While these failures may have been a necessary part of the winnowing out process in the crypto space, they are terrible experiences for clients. So what do you need to consider to protect your financial health when using an exchange? How do you choose an exchange to trade on while minimizing your exposure?

The Evolution of Cryptocurrency Exchange Security

In the early days, cryptocurrency exchanges were often run by digital asset and cryptography hobbyists. They may have been technical experts, but they were also amateurs at handling and protecting other people’s financial assets. The world’s largest cryptocurrency exchange between 2010 and 2014, for example, was Mt. Gox, a converted website formerly dedicated to the exchange of cards for a game called “Magic: The Gathering.”

Given the hobbyist nature of these exchanges, the rapid accumulation of value and the cutting edge technology involved, it is no surprise that security breaches plagued early users. Many of these early operations lacked the capacity and expertise to scale while safeguarding users’ assets under these conditions.

Several leading digital currency exchanges have become professionally run operations in recent years. Entrepreneurs with financial backgrounds have joined leading tech developers to enhance the regulatory standards that were largely absent in earlier iterations.

The entry of The NYSE Group’s Bakkt Exchange, Fidelity with custody solutions, and many other prominent firms signals that the era of professional exchange management is here. And with it comes more confidence in the crypto exchange system. However, where there is money, even digital money, there are risks.

Fortunately, by following some smart practices, you can minimize those risks and ensure that your assets remain secure.

How to minimize your exposure

One of the most effective ways to manage your trading risk is by evaluating your exposure on an exchange in the first place. When choosing an exchange to do business with, there are several questions you should be asking.

Take a look at the founders and executives.

  • >  Who are the founders and executive team and what are their backgrounds?
  • >  Are they transparent about their backgrounds and experience?
  • >  Does at least one member of the team have experience and a solid track record of working with other people’s money in a regulated environment?

What about security?

  • >  Do they use air-gapped cold storage?
  • >  Do they get annual security audits by 3rd party security specialists?
  • >  Do they have multiple signatories to avoid the problems of Quadriga?
  • >  How does the exchange take care of your crypto assets, and how quickly are they delivered to your wallet?
  • >  What is their KYC/AML policy?

Access to your fiat and digital assets

  • >  Do they have a full reserve basis so that your funds are always your funds?
  • >  What procedures do they have to help you access your funds in a timely way after you trade back to fiat?
  • >  Do they have the backing of and or access to a regulated financial institution?
  • >  Do they offer a cash card of some kind to increase your financial flexibility?

While crypto can be anonymous by nature, when using an exchange, you should also consider the level of customer support. Because when something comes up, you should have the ability to get it taken care of promptly.

Why customer support is vitally important for crypto exchanges

Digital exchanges can differ considerably in terms of speed, fee structure, security measures and other variables, including customer support. By choosing a cryptocurrency exchange with a strong commitment to providing excellent support, traders can operate with more confidence.

Modern digital currency traders should expect comprehensive and professional customer support at the exchanges they use for trading.

For new traders in the digital space, it can take some time to fully understand various assets, trading systems and exchange policies. Having access to a reliable, easy to access support team makes it easier to focus on learning.

And because digital currencies are an evolving asset class based on rapidly-changing technology, strong technical support is essential. When you have questions about storage, withdrawals and other transactions, qualified professionals should always be available to help you.

After all, when it comes to money, you should be able to trust the people you are working with.

The Bitvo Guarantee

At Bitvo, we bring a wealth of financial experience to the digital exchange business. With demonstrated records of working with other people’s money, our team of entrepreneurs is committed to helping you access and participate in the digital markets.

With air-gapped cold storage, multiple signatories and regulatory best practices, Bitvo’s digital currency exchange platform is secure, fast and easy to use. Our industry-leading customer service team also provides you with direct 24/7 support.

All of Bitvo’s clients also get exclusive access to the Bitvo Cash Card and the Bitvo Same Day Guarantee. Together, these give you more options to use, spend and manage your assets the way you want to.

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