If you want to get your hands on some cryptocurrency then unless you’re given some by a friend or have tokens airdropped into your wallet then you’ll need to buy it on an exchange. Cryptocurrency exchanges are the best way to get some coins, but many persons who use these exchanges make a mistake after they’ve gotten their tokens. They keep them on their exchange wallets instead of transferring them to a private wallet.
Storing tokens on exchange wallets can be dangerous for a number of reasons.
1) Lack of Ownership
While you can store any coins or tokens you purchase on your exchange wallet, you don’t really own that wallet. Exchange wallets are different from personal wallets in that exchange wallets are ideally just “hot wallets” for trading. If something happens on the exchange then you don’t have any control over your coins because they aren’t in your custody, they belong to the exchange. This is one of the reasons why ICOs tell their participants to not use exchange wallets to receive tokens. ICO participants don’t have access to the private keys on exchanges and as such if tokens are sent to those exchange addresses, they cannot be accessed by the participant. One of the ICO projects I participated in stressed this point constantly.
Cryptocurrency exchanges are the cross between decentralization and centralization. The whole purpose behind blockchain and cryptocurrency is to promote decentralization. However, exchanges are in fact centralized, which creates a number of issues. Currently, the cryptocurrency world is a bit like the wild west, no one is in charge and there aren’t many rules. This means that in situations like the recent investigation of a cryptocurrency exchange in South Korea, assets can become frozen. While owners of exchanges can tell their customers that their crypto assets would remain safe, they can’t guarantee this. Also, due to the nature of cryptocurrencies, the exchange would have no responsibility to return money to their customers. There is no regulating body holding exchanges responsible for returning lost money to customers, nor is there any insurance in case something happens.
3) Hacking Risk
In addition to the lack of regulation and inability to guarantee the safety of assets, there is also the threat of an exchange getting hacked. Exchange hacks are relatively common, and due to the lack of regulation, once the coins get lost, that’s it. The owners of the coins can’t get them back from the exchange. While blockchain itself is very secure and essentially unhackable, the centralized nature of an exchange makes them vulnerable.
In conclusion, it’s not the smartest thing to do to keep your coins on an exchange. While they may be convenient, it’s much better to get a wallet of your own to store any crypto coins you own.