6 Ways You Can Lose Your Money Using Crypto Exchanges and How to Avoid Them

Most cryptocurrency exchanges are secure, but if you’re not careful, there are a few ways you could lose your money.

Key Lessons

Cryptocurrency exchanges frequently have hacks and security breaches, so it’s critical to select reliable platforms and follow industry-standard security procedures.Always do your research before putting your cryptocurrency on any site and be on the lookout for crypto scams like phony ICOs and Ponzi schemes.Before using an exchange, make sure you are in compliance with any standards and are aware of any regulatory concerns that may affect your access to crypto exchanges.

More individuals are flocking to cryptocurrency exchanges that make it simple to trade, invest in, and store their digital assets as a result of how well-known and widely used cryptocurrencies like Bitcoin have become.

You’ve undoubtedly used or seen advertisements for several of these platforms, but you probably aren’t aware of all the risks involved. Here are six ways people lose money on cryptocurrency exchanges, along with advice on how to stay clear of them.

1. Hacks and Security Breaches

Because cryptocurrencies are digital, there are frequently hacks and security lapses in the crypto business. Naturally, bitcoin exchanges also experience this. Hackers may target the entire platform, a specific account or wallet on the platform, a transaction, or a storage facility for the exchange.

CNN Business claims that hackers stole cryptocurrency worth $3.8 billion in only 2022, including protocols for decentralized finance (DeFi) and crypto exchanges. Even yet, in 2022, crypto platform hacks were frequent. For instance, in 2022, just hours after the exchange filed for bankruptcy, hackers stole almost $600 million from FTX’s wallet.

2. Crypto Scams

Scams demand your participation, as contrast to hacks, which do not require investor engagement for loss.

Numerous scams Scams are being carried out via cryptocurrency exchanges in a variety of ways, such as false initial coin offers (ICOs), Ponzi schemes, pump-and-dump schemes, and dishonest customer assistance. These frauds sometimes contain threats, deceit, high-return guarantees, and exclusive offers. In the end, these exchangers either grab your cryptocurrency and manipulate the market or simply vanish.

The OneCoin fraud is a well-known illustration. Many people invested over $4 billion as a result of the team’s aggressive marketing and the promises of enormous profits. Ruja Ignatova, the con artist, disappeared in 2017, but the swindle started to take shape then.

Always do your research before making a bitcoin deposit on any platform.Read the whitepapers on cryptocurrencies, investigate the team, customer service, and management, and look at reliable client testimonials. If you encounter any unsolicited offers that appear too good to be true, turn away immediately.

3. Regulatory Issues

The rules governing cryptocurrencies differ from nation to nation and are often updated. Trading in cryptocurrencies is prohibited in some nations, such as China and Saudi Arabia, while it is taxed in others, such as the United Kingdom and the United States, and it is mandated in others, such as Malta and Germany, that KYC (know your customer) or AML (anti-money laundering) compliance be met.

These rules may have an impact on how you use and access cryptocurrency exchanges. They may also lead to penalties like fines or asset forfeiture. Additionally, a nation’s regulatory framework affects what happens to your assets in the event of bankruptcy or hacking.

Check the applicable regulations before utilizing any crypto exchange in a country or region to prevent losses due to regulatory concerns. Make sure you adhere to any conditions or duties that apply to you as a user or trader of cryptocurrencies. Then, before continuing, confirm that the exchange complies with all applicable laws, including know-your-customer (KYC) and anti-money-laundering (AML) standards.

4. Technical Glitches on the Platform

Hardware, software, protocols, and services related to crypto exchanges may experience issues due to bugs, mistakes, updates, overloading, or a number of other factors.

These faults, although brief, may result in transaction delays or errors. Technical errors can occasionally prevent access to cash or leave funds vulnerable to hackers.

Again, only use trusted exchangers with strong security mechanisms; stay away from those who are often in the press for having unresolved technical issues. Test the exchange you choose to use for trading with tiny transactions. Jumping in with large trades right away might not be a good idea.

When utilizing the exchange, be on the lookout for delays or error messages, especially when checking in or going back a page. You should also routinely check your balance and transaction history, back up your data, and notify the exchange’s support team of any odd problems or errors.

5. Market Volatility and Poor Trading Decisions

The prices of cryptocurrencies change substantially and unexpectedly as a result of the crypto markets’ extreme volatility. In the crypto world, it’s conceivable to buy a token around midday, and by midnight, its price and volume are drastically different!

These erratic changes in price, volume, and liquidity can have an impact on gains and losses. If you purchase or sell cryptocurrency without a wise trading or investment strategy, you run the risk of suffering greater losses.

You should have a precise and realistic trading or investment plan that fits your objectives, spending limit, and risk tolerance if you want to prevent losses. Strategies like only putting 1% to 2% of your capital at risk per trade should be part of this approach. However, keep your trading to a minimum to avoid accruing transaction costs.

It’s also a good idea to educate yourself on the trends and indications in the cryptocurrency market. In order to prevent irrational trading and safeguard your earnings, you can also invest in artificial intelligence (AI) based cryptocurrency trading solutions.

6. High Transaction or Gas Fees

Transaction fees apply whenever you transmit or receive cryptocurrency. Similar to this, gas costs apply when you carry out transactions or smart contracts on the Ethereum network.

Depending on network congestion, transaction complexity, and demand, transaction and gas fees vary between exchanges; occasionally, the fees may be greater than the amount you send or receive. Over time, these costs may reduce your trading gains and savings.

Examine the exchange’s expenses prior to deciding. Consider your holdings and trading assets as well; some networks, such as Ethereum, have very high gas costs. Platforms with cheap fees or discounts, such as Layer 2 solutions (such as Polygon), decentralized exchanges (such as Uniswap), or aggregators (such as 1inch), can be used.

Additionally, you can plan your trades to avoid times when the network is busy and demand is strong.

Keep Your Assets Secure on Crypto Exchanges

Because they are practical and simple to use, cryptocurrency exchanges are excellent places to store and sell cryptocurrencies. However, they come with significant dangers that could cause you to lose your cryptocurrency.

Making more informed decisions to protect your investments begins with understanding how you can lose money on cryptocurrency exchanges. Use best practices, such as trading securely, adhering to regulations, and utilizing recognized exchanges. These exchanges can help you with your cryptocurrency investing if you’re careful.

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