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Don't keep all your eggs... on one crypto exchange

19 September 2017 21:00, UTC

Paul GRAPES

It's known that every cryptocurrency owner at least once in his life used the services of crypto exchanges – simply because it is a place where digital coins can be bought! Of course, after this the funds can be withdrawn to the personal wallet, if they are treated as a long-term investment. But the ultra-high volatility of the exchange rate encourages people to engage in trade. And, of course, there is a reasonable question: can all these exchanges "burst" and turn the savings into nothing? In short, the answer would be yes. But still it is better to consider this topic in more detail.

The phenomenon of cryptocurrency is distinguished by its novelty and instability. Some random people earn billions of dollars – sometimes to lose them with freedom. The most striking example is MtGox, once the largest crypto exchange. There was a time when it operated up to 70% of all bitcoins transactions. Its creators paid attention to bitcoin earlier than others, by having reoriented their website from the sale of virtual cards for the game Magic: the Gathering (hence the name) to bitcoin.

The popularity of cryptocurrency had increased which led to the growth of exchange rate – and, consequently, the income of the MtGox owners. It turned upside down in 2014 – the trade stopped, the exchange website was closed, and the company filed for bankruptcy. It was explained as a "hacker attack" – but investigation showed that money was withdrawn from MtGox accounts as early as 2011... The documented amount of damage alone is 850,000 bitcoins – more than three and a half billion dollars at the rate on the day of writing this article.

In 2015 Japanese law enforcement officers arrested France's Mark Karpels, CEO of the infamous exchange. At the moment he is accused of stealing exchange users' funds and artificial increase of data. The defendant himself pleads not guilty: "I swear to Christ that I am innocent! I sincerely apologize for the fact that the bankruptcy of MtGox caused such serious problems to many investors," he said on the first day of the trial.

Not long ago, one of the most popular exchange within Russian-speaking community BTC-e shared the fate of MtGox. On July 26, the site stopped working. Initially, the failure of the platform was due to protracted technical maintenance – but it was the moment when users suspected that something was wrong. There were some transactions registered registered on blockchain, similar to the withdrawal of funds, let alone that declared "technical maintenance" was taking place for too long. And soon it became known that Alexander Vinnik, named "co-owner of BTC-e", was arrested on July 25 in Greece on charges of money laundering. Media reported that the sums amounted to about four billion dollars.

Vinnik's lawyers report that their client does not plead guilty, and that his extradition is being sought by the US authorities. Which is not surprising, since the arrest of Vinnik and US-based servers of the exchange was requested by the FBI, and the US Department of Justice imposed a fine of $110 million on the BTC-e. In addition, the company WizSec claimed that the Russian was the main suspect in stealing the funds with MtGox. However, there is a possibility that it is only about laundering the stolen cryptocurrency. Which, however, is also a crime.

Meanwhile, the administration of BTC-e denies its connection with the suspect. Moreover, after having recognized the loss of access to the servers and seizure of deposits, the heads of the exchange nevertheless announced their intention to return depositors their funds – at a ratio of 55 out of 100 in the cryptocurrency. The remaining 45% will be returned in BTC-e tokens, which can be bought back by the exchange at par, or sold on the market, probably at a lower price. A bid will be launched on September 15, and 5 days earlier a support portal had been opened.

The most outstanding high-profile incidents were listed above. But there were many others: exchanges such as Bitcoinica, BitMarket.eu, BitFloor, MintPal were closed for various reasons. In all cases, holders of funds suffered serious damage amounting to thousands or even tens of thousands of coins.

It may seem that the only reasonable solution is the instant withdrawal of funds to your own wallet. However then it becomes impossible to trade – as it was already mentioned, fluctuations in the cryptocurrency exchange rate can be so sudden and rapid that profitable deal very often is a matter of a few minutes. Therefore, diversification of risks seems to be a right strategy. Check the reputation of the trading platforms that you plan to deal with – this will help to avoid scammers. Pay special attention to user verification – the harder it is, the less likely it is that illegal funds are being laundered on this exchange. Divide the available crypto saving into several parts, store them on different wallets and stock exchanges – the proverb about keeping all the eggs in one basket is still relevant.