Understanding the Risks Associated with Exchanges in Crypto

Did you know that there are more than 200 cryptocurrency exchanges and over 7,000 cryptocurrencies?

A quick search on the biggest ‘crypto exchange scandals of all time’ and you’ll soon discover a slew of cases including:

· The 2017 AsicBoost Controversy

· The 2016 Bitfinex Exchange Hack

· The 2015 MyCoin Pyramid Scheme

· The 2015 Bitstamp Exchange Hack

· The 2014 Mt Gox Bitcoin Theft Case

If you intend to trade on a crypto bourse, it’s important that you know the implicit threats. So, in this post, we’re going to discuss the main cryptocurrency exchange risks.

Risk #1 Volatile intangible assets

Have you ever wondered where cryptocurrencies get their value from?

The truth is that inherently crypto has no value. Its merit comes from demand, perceived utility, and scarcity.

This is probably why crypto has such high volatility. The fact that it’s also an intangible asset with no physical presence only compounds the risk factor.

Risk #2 Uninsured and unregulated crypto exchanges

Not every crypto exchange is insured and regulated.

In order to make sure your investments are covered and protected from fraud and bad practices, regulation and insurance are a must.

Regulated crypto exchanges are monitored by authorities such as the Securities Investor Protection Corporation (SIPC), the Financial Industry Regulatory Authority (FINRA), and the Securities and Exchange Commission (SEC).

And speaking of bad financial practice, these regulatory bodies can help protect you from the following…

Risk #3 Crypto pump and dump

We cannot talk about cryptocurrency exchange risks without mentioning the classic rug pull: pump and dump schemes.

Pump and dumps are a common fraud tactic that’s unfortunately found its way into the world of crypto.

Criminals behind the crypto pump and dump scheme encourage investors to purchase crypto by providing them with misleading information.

As more people get wind of this ‘opportunity’ and start buying the said digital asset, the value of the crypto goes up. And it’s precisely at this moment that the originators of the plan begin to sell (dump their stock) and profit from the sales. By the time investors realize they’ve been duped it’s too late.

On regulated crypto exchanges pumping and dumping is illegal. But on unregulated exchanges, investors open themselves up to such unscrupulous practices.

Here’s another ill practice to watch out for…

Risk #4 Money laundering (Smurfing)

The non-regulated 24-hour trading nature of crypto exchanges plus the cloak of anonymity shrouding transactions are functions that lend themselves well to money launderers.

Unregulated crypto exchanges allow smurfing — a money-laundering tactic involving the placement, layering, and integration of illegal funds into financial systems — to occur unabated as funds flow through with no regulation.

Unsuspecting investors may find themselves unwittingly part of transactions that involve money laundering.

Risk #5 Fake crypto exchanges

If anyone knows about fake crypto exchanges it’s the folks over at Gemini.

As a regulated cryptocurrency exchange, Gemini is working hard to safeguard the industry by pointing out fake cryptocurrency exchanges.

Thorough due diligence is a must if you intend to trade virtual currency. Failure to do sufficient background checks and you might find yourself on a scam crypto exchange website.

Associated dangers of such sites include being denied access to your account, difficulties liquidating your assets, and high extortion transaction fees.

The bottom line

Risk is inevitable but it can be mitigated.

Being aware of these cryptocurrency exchange risks and continuously educating yourself on developments in the world of crypto can help safeguard your investments.

To learn more about crypto exchanges be sure to check out my blog 3 Key Differences Between Centralized Exchanges and Decentralized Exchanges in Crypto




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David Streltsoff

David Streltsoff

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