Dean

Dean

Owner, Editor, and lead writer for Cryptorials.

Cryptocurrency writer and trader since 2014.

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Dean

I am writing this article just days after another major bitcoin exchange was hacked, resulting in a massive loss of coins. This time it was ‘Bitfinex’, and it has been confirmed that over 100k bitcoins were stolen in the attack – a figure which is shockingly close to 1% of all the bitcoins in existence at the time of the hack.

This is an horrific loss for the users of the Bitfinex exchange, who will most likely never see those coins again. Unfortunately, this is far from the first time that bitcoin traders have suffered such a loss and it probably won’t be the last time either.

The incident highlights the importance of choosing the best bitcoin exchange for security, and not just looking at trading volume of fancy features when choosing where to trade bitcoins. The Bitcoin protocol itself is incredibly safe and, in fact, has never been hacked. If you choose secure services to use when holding or trading your coins you should be totally safe, but if you don’t then you could lose everything.

The most secure bitcoin exchange is…

I could simply tell the reader what is the most secure bitcoin exchange right now, but this may be different by the time you actually read this article (I try to keep these articles up to date, but it can be difficult). So instead, I would like to try to explain how to assess exchange security before I get to that. You can then make the correct decision for yourself.

The most important factor to recognize is that most exchanges will take full control of your coins from you, but that there are some exchanges which don’t. When a service provider takes full control of their customers coins they are creating a giant honey pot for hackers – a single point of attack through which a hacker can gain access to 1% of all the bitcoins in existence. An external hacker needs only to compromise a single system, while employees within the company itself must be trusted with access to huge sums of money.

Hacking into a single system used to store the coins of tens of thousands of people is clearly a lot easier than finding and then hacking into tens of thousands of computers. For this reason, exchanges which allow their users to retain control of their coins while trading are much more secure. Sure, its still possible that a hacker could break into your own computer to steal your coins. But the effort and resources required to identify targets and then break into their computers is much less appealing compared to targeting that giant honey pot of a single exchange account holding everyone’s money.

Personally I think that the best exchange right now with this level of security is Bitsquare, a decentralized exchange that you use by downloading the app to your computer. When you deposit coins to your Bitsquare wallet they remain fully under your control, in a wallet stored on your own computer. You can exchange for a wide range of fiat currencies through various different methods, as well as trading bitcoin with other alternative digital currencies. Moderators provide escrow services to resolve any disputes, but cannot access your coins themselves. The flat fees mean that exchange costs can be expensive for very small amounts, but can also be very cheap for larger amounts.

Another option is Multisigna, which is not fully decentralized (and therefore I would suggest not quite as secure), but which can be used more easily from a web interface without needing to keep the app running on your computer the whole time that you have trades open.

When you trade bitcoin for your local currency on either of those site you are actually making an exchange, sending and receiving money from your bank or other accounts with each trade. If you are a regular trader and don’t need funds to hit your bank account with each trade, or if you are trading only digital coins and tokens, then there are also other options.

There are many blockchain projects today which include decentralized exchanges. Three of the most popular are Counterparty, Bitshares, and Omni. Each of these offers very secure trading between digital assets. Omni users are also able to trade Tether, a digital token tied to the US dollar, backed by and redeemable for full reserves held in bank accounts. In Bitshares, users can trade assets tied to everything from gold to USD to oil using a loose decentralized peg enforced by the market itself using game theory dynamics.

Additional Considerations

Nothing is perfect, of course, so there are some advantages to using less secure centralized exchanges. It is much easier for these less secure services to offer fast settlement, margin trading, and other exotic features. If you need to make use of these features then there are three things you really need to take into consideration.

Firstly, you should make certain that the exchange you choose uses cold storage. This simply means that they lock some of the coins they hold away in a secure vault and only keep enough for daily operations in their operational accounts.

Secondly, look for an exchange which has full insurance against theft of customer funds – some do, but many still don’t. Of course insurance companies always look for a way to avoid paying out, so 100% insurance isn’t a 100% guarantee of the security of your funds (for example they won’t cover fraud or theft by the exchange operators themselves), but its a hell of a lot better than nothing.

Finally, you should avoid holding all of your coins on a single exchange. Exchanges are not meant for storing coins, so any funds you have which aren’t actively tied up in offers at a given moment should be moved off the exchange. What’s more, it is probably best to spread your funds across multiple exchanges if you have any significant amount.

If you follow this advice, you should be able to trade to your heart’s content without having to worry about whether or not your funds are safe and secure.