Trading Cryptocurrency on an Exchange
What to look out for when choosing a cryptocurrency exchange
In our attempt to clear the air about cryptocurrency, we discussed cryptocurrency as a new form of payment. Like any other asset, cryptocurrency is also tradable in a similar way people trade stocks. While we discourage speculative investment, it is important to understand the role of a cryptocurrency exchange.
Also known as a digital currency exchange, it is essentially cryptocurrency’s version of a stock exchange. A cryptocurrency exchange is a business that allows you to trade cryptocurrencies or digital currencies for other assets, such as money or other digital currencies. With the rise in popularity of cryptocurrencies, it is unsurprising that there is now a multitude of cryptocurrency exchanges available.
When choosing a cryptocurrency exchange, there are numerous factors that should be considered. Reputation, exchange rates, fees, payment and verification methods as well as geographical restrictions should all weigh into your final decision. In this article, we will focus on security because we believe that’s the cornerstone of any good exchange.
At the heart of an exchange’s security is its wallet system. Cryptocurrencies are stored in their own corresponding wallets, like Bitcoin in a Bitcoin wallet and Ethereum in an Ethereum wallet. Similarly, exchanges have their own wallet system to hold customers’ private and public keys, which are needed to make transactions.
Essentially, there are two types of wallets — hot wallets and cold wallets (also known as cold storage). Hot wallets are online, software-based solutions that are connected to the Internet. This makes instant transactions possible but also opens up the possibility of hacking. In contrast, cold wallets are offline, hardware-based solutions that are isolated from the Internet. They are regarded as safer than hot wallets but the lack of connectivity makes it less convenient for customers to access.
From a security perspective, it’s quite clear which is the preferred wallet system but, in reality, exchanges have to weigh security with operational feasibility. Customers would not be pleased if there were an operational lag in executing their trades because the exchange needed time to pull out their keys from a cold wallet. A compromise that many exchanges are willing to accept is to hold a small portion in a hot wallet for daily use, while safekeeping the rest in a cold wallet. This minimise losses in case of a security breach but, for the customer, the risk is still very real.
IXX.com has recently unveiled a new approach. Billed as the world’s first digital asset community, the Singapore-headquartered cryptocurrency exchange says that it has achieved a 100% cold storage system with the operational efficiency of a hot wallet system. According to IXX.com, this breakthrough was achieved through an advanced combination of hardware and software to ensure full isolation of private keys without affecting the customer experience.
An IXX.com spokesperson has said that it is willing to share its solution with other cryptocurrency exchanges, so there is hope for increased security across the board in time to come.
