Many new traders find the accessibility of an exchange particularly warming and may be tempted to keep their coin stored wherever they bought it. An experienced trader will laugh at the idea but it must be kept in mind that cryptocurrencies aren’t the easiest thing to understand nor is the idea of having a “wallet” on your computer hardware particularly comfortable.
So, with that being said: should you store your Ethereum in an exchange?
Exchanges are websites where you can buy, sell and trade cryptocurrencies. Examples include CoinBase, Bittrex, Kraken, BitFinex and many more. If you can buy, sell and store Ethereum on a site as well as other coins then it is an exchange.
Why you should
Ease of trade
Most exchanges charge a fee when you withdraw or deposit a currency. This is how they make the majority of their money (remember that an exchange is a business as well as a utility). Withdrawing and depositing currency every time you want to make a trade will end up costing more than the trade in question might be worth and confirming the transaction may take so long that the opportunity to buy or sell whichever currency it was you were after may be long gone.
Understanding the full value of your portfolio
Apps such as Blockfolio are fantastic at providing an in depth look at your portfolio, but what if you don’t have a smartphone capable of running the app or what if you struggle with setting it up?
Your portfolio is the name given to your collection of currencies. For example, if you have 11 ETH and 0.02 BTC then this is your portfolio.
Exchanges such as CoinBase offer a full overview of your portfolio along with the total fiat value of your coins.
Fiat is currency that is legal tender but that doesn’t represent a physical item. For example the British Pound Sterling or the US Dollar are fiat currencies.
To a new trader it might make sense to buy your coins on a website and keep it stored on a website. Having to learn about the blockchain and wallets can be particularly overwhelming for someone who is brand new to the world of cryptocurrencies. A single mistake when withdrawing your funds and all of your Ethereum is gone: a terrifying thought! But…
Why you shouldn’t
It defeats the purpose of cryptocurrencies
Cryptocurrencies are decentralised by design, and this is what makes them so good: you own your coins rather than the banks or government. The government cannot declare your Ether not legal tender and they cannot impose taxes or restrictions on the way that you use it online. Storing crypto in an exchange means that you don’t really own the coins, the exchange does. There have been multiple cases of exchanges shutting down accounts without giving a real reason and with the account holders losing all of their stored currencies.
Mt Gox: the day £1.7bn Bitcoin was lost
This one is a real horror story. Mt. Gox was a Japanese Bitcoin exchange that handled over 70% of all bitcoin transactions worldwide. In February of 2014 it ceased trading, shut down its website and filed for bankruptcy. It announced that around 850,000 bitcoins were missing or stolen and a year later it was found that the majority of these had been taken out of the Mt Gox hot wallet. At today’s Bitcoin price of £2,010 those 850k coins are worth a total of £1,708,500,000.
Since then the community has learned a lot, most notably: do not trust exchanges to keep a hold of your money. A lot of money is moved around minute by minute on exchanges and it’d be much too easy for anyone working at an exchange to steal coin. In this instance one of cryptocurrency’s greatest advantage is also a weakness: wallet addresses are untraceable and scammers may never be caught.
The price of Ethereum has increased by over 1000% in the last 6 months. More recently it has been seen to double in value overnight. This has lead to a huge number of new aspiring investors. Coinbase reported last week that they’d received 400,000 new members in the space of one week and as a result their services became completely overwhelmed during an Ethereum price drop and they were forced to enter maintenance mode on and off for several days whilst their servers could be upgraded. In these instances no-one with money stored on the site was able to buy or sell Ethereum, Bitcoin or Litecoin. If this price drop was evident of a larger crash throughout the day then all of that money would’ve been lost without the chance of selling.
Meanwhile sites such as Bittrex and BitFinex kept their doors open and had no such problems. Had members of Coinbase kept their coins in their own wallet then they could’ve transferred to an exchange that wasn’t currently having server issues and continue to trade there.
Coinbase has since been fantastic at keeping up even during heavy load but with continued mainstream media coverage of Ethereum a similar scenario could very easily happen again.
It’s really up to you whether or not you keep your currency in an exchange, but the professional standard is that you shouldn’t. It’s too risky and too limited and it’s definitely worth learning more about the technology you’ve invested in so that you figure out how to use a wallet.
Check out the Ledger Wallet for an example of a good offline wallet as a secure place to store your coins.