Should I Store my Crypto on the Coinbase Exchange?

Should I store my crypto on the Coinbase exchange?

Coinbase is one of the oldest and well known crypto exchanges in the world. It was founded in 2012 and is still very relevant to this day, despite having big competitors like Binance or FTX which were founded years later. This article will take a look at how safe exchanges are for storing cryptocurrencies and if you are safe doing it on Coinbase. But first, it should be clear what a wallet is and how it functions. 

What is a wallet?

If you want to do a cryptocurrency transaction, you need to have a wallet. To simplify things, we will talk about bitcoin transactions/wallets in this chapter. First of all, two things are needed to allow a transaction to take place: a public or “bitcoin” address and a private key. Both are generated by a so-called “wallet”, which allows you to participate in the bitcoin network and allows Bitcoins to be sent or received. The wallet can be compared to a bank account: Here you can see the account balance (for this example: the amount of bitcoins/altcoins) and money can be received or sent. The Bitcoin address is best imagined as the bank details of an account that are needed to send money to another person. Only with the difference that this is the only information, the public address. This address is randomly generated and consists of 27-34 randomly generated letters and numbers. That’s all you need to identify the recipient of the bitcoins. You don’t have to specify an account holder as with online banking, just this one piece of information is enough. A comparison can be made with PayPal, since only the e-mail address of the recipient is required to send the amount of money.

The private key can be compared to the PIN of a bank account: a numeric code that verifies you as the account holder and without which transfers would be impossible. Here, there are also strong differences between banks and Bitcoin. Like the address, the private key is randomly generated and also consists of letters and numbers. The word “private” is more than mandatory: As a beginner, it is extremely important to remember that a private key cannot be replaced or renewed! The key is mathematically linked to the respective address and its bitcoins. So if another person learns the private key, they have full access to the bitcoins without being able to change anything. If you lose your PIN and/or bank card, you can block your account at any time and have a new PIN sent to you, this is not possible in a blockchain! But don’t worry, there are plenty of ways to protect yourself from theft of the “private key“.

Is it safe to store your crypto on an exchange (Coinbase)?

It is definitely not the safest form of storing cryptocurrencies. Centralized exchanges keep the private keys of the users. What happens when an exchange is hacked has been observed more than once in the past, but we will get to that in the next part. Make sure to always only have the amount you want to trade on exchanges, but never the long-term investment! An exception are decentralized exchanges, which are linked to a web wallet in order to be able to trade.

If you leave your cryptocurrencies on an exchange, you always have to assume that they can be stolen. When this happens, you may end up chasing the stolen money forever. Therefore, only leave small amounts (everyone has to decide for themselves what “small” is) and store the majority on a hard wallet. Back then, hard wallets were not the standard, today every user can keep their currencies safe.

Important! Whether you’re using a web wallet or exchange: Make sure that you are always with the right provider by checking the URL in the browser. In the past it often happened that 1:1 copies with a slightly modified domain robbed users.

Famous exchange hacks in the past

Hacks on crypto exchanges happened a lot in the past, with the most famous one being Mt. Gox. The Japanese stock exchange was the largest platform for trading bitcoins until 2014, with 60% of the global BTC trading volume being traded via the stock exchange. A sudden bankruptcy report from the trading platform hit many users out of nowhere. The exchange went bankrupt due to a hack attack in which 850,000 Bitcoins or more than 500 million USD are said to have been stolen. To this day, the affected users have not been compensated, because 650,000 bitcoins of the total amount stolen remain missing to this day. 200,000 were allegedly discovered in old wallets in the course of a court case, which only further infuriated the affected users and made the matter seem increasingly implausible. This case is special because it was the first to question crypto exchanges and their security. While every crypto owner is protected from thieves by owning their private key, exchanges keep them. If a hack attack is successful, thieves can steal it from the database and empty wallets. The effects of the Mt. Gox hack were enormous, the price could not recover for a long time. While more and more people are learning about Bitcoin and trusting the system, they are suspicious of online exchanges and the dangers they pose. After all, they are the only way to trade bitcoin & altcoins. To date, class action lawsuits have been filed, and it has been found that the owner tampered with computer data relating to some invoices and that the exchange lacked the necessary licenses. Despite obvious legal problems, the angry users remained empty until today. Another well-known hack was that of Hong Kong-based crypto exchange Bitfinex in 2016/2017. The exchange is still one of the largest to trade cryptocurrencies on, which suffered a successful hack attack losing a total of 119,756 bitcoins back then. Unlike Mt. Gox, the company did not have to file for bankruptcy, it was able to compensate users.

To this day, Coinbase was in fact hacked once. In 2021, hackers exploited a flaw in the companies SMS system, the recovery system to be clear. Thanks this method, hackers gained access to accounts of at least 6000 users to transfer the user funds to other wallets. The Coinbase team quickly noticed this, removed the flaw from the system and reimbursed users for their stolen funds.

Although the users got refunded, it is still the best idea to keep your coins and tokens on a hardware wallet.