Do centralized exchanges play a role in Bitcoin [BTC]’s failure to live up to its potential?

Exchanges are the crux of any currency, stock. Exchanges play a major role in a currency’s lifetime, they help recognize the value of a currency and further help transact the currency in the market.

The US economy is highly dependent on its stock market exchanges. It is how men belonging to every economic class make money over their primary income. Millions of Americans are dependent on the stock market as their primary wealth-building tool. Without it, the ‘American dream’ would be even more unachievable than it is today.

Exchanges offer people a chance to invest in products, technology, and currencies that they believe in, it is how individuals, companies, and the economy grows financially. It connects the economy and allows people to grow at a higher pace with access to more capital.

Considering the importance of exchanges and the amount of money that exchanges host one believes its safety is of at most importance. The security must be well wrapped around an exchange so that the investment, the dream does not collapse.

The Cryptocurrency exchanges have not been as successful as the stock market exchanges in maintaining the digital security as required by an exchange considering it has developed in a time of decentralization, a more secure technological era. Before the readers start arguing in defense of Cryptocurrency exchanges, let’s look at some facts.

The stock market exchanges in the past have been hacked through the modes of phishing, the stock market exchanges run on a private network and the only available hacking tool is phishing. It allows hackers to access the data of the internal server. In the past, the US SEC has reported that their EDGAR was compromised multiple times.

In a statement, Clayton, the chairman of SEC said:

“The system that was breached, known as EDGAR, is a popular way for investors to access the detailed financial reports companies that sell stock to the public must periodically release. It had a ‘software vulnerability’ that was exploited and resulted in access to nonpublic information.”

At the time, Clayton further added:

“The breach didn’t lead to the release of personally identifiable information but may have provided the basis for illicit gain through trading. An investigation into the matter is ongoing.”

Such a type of hack in simple terms allows users to access non-public information prior to it becoming public and also allows them to generate fake information, giving them an advantage over the market.

The cybersecurity has been updated multiple times after such attacks and has become more secure but the point to notice here is that the government allows bailout on certain hacks and also that the security breach is fixed in a matter of hours.

Cryptocurrency exchanges have also been under attack multiple times, Bitfinex lost $72 million in 2016, Bitstamp reported that $5 million was stolen from the exchange in 2015, and Mt. Gox was also hacked. The thing common between these exchanges is that all of them operate on the same structure as stock market exchanges. They all utilize an internal server and third-party servers to host exchanges. They are centralized.

Hacking a cryptocurrency exchange is easy for many reasons. Firstly, they do not really hack the entire exchange but access the wallets of users and then utilize the stored fiat currency to purchase cryptocurrency and transfer it out. Next, the complicated process of storing cryptocurrency over a wide range of wallets which seem complicated to an everyday layman investor to differentiate between makes it easier for the hackers to make use of their vulnerability.

Bitcoin evangelists recommend steering clear of centralized exchanges, arguing that the whole point of decentralized currencies was to not hand over control to third parties, such as central banks, commercial banks, and exchanges, which raises the risk of mismanagement, scams or hacking.

Experts say only money needed for upcoming transactions should be kept in hot wallets. Even then, trading one cryptocurrency for another can be done over decentralized exchanges, such as Shapeshift, Changelly or Waves Dex, directly from the holder’s wallet and not from a wallet controlled by an exchange in their name.

Risks of fraud or hacking then only occur when a holder wants to exchange crypto assets for fiat currencies, but these can be minimized. Transactions can be done peer-to-peer in a safe, public place amongst members of the local crypto community rated by reputation on websites such as or via a centralized exchange, with the risk of hacking limited to the amount of time spent online to perform the transaction.

Recently an investor, Kevin Pham reported,

“Mt. Gox Hack, 750,000 BTC lost, No Bailout Bitstamp Hack, 19,000 BTC lost, No Bailout Bitfinex Hack, 120,000 BTC lost, No Bailout”

Such losses are of a huge concern because the entire argument of the crypto world is that it provides a safer, decentralized form of currency.

Yet another investor suggested the following precautions,

“Never lose control of your seeds. Never input them into a close sourced wallet. Never reuse them after inputting them. Always move coins before attempting to split a fork. Never keep all your coins in one wallet.”

Notably, he lost his Bitcoins while attempting to collect a fork. He tried all his old seeds, nothing happened and he forgot to move his BTC first and input his latest seed.

By now if you are new to cryptocurrency, you would have lost your way and be highly confused. That’s exactly why the crypto exchanges are more vulnerable than other traditional exchanges as the jargons and the complicated process causes people to make mistakes, these mistakes leave them wide open to hacks.

In January, Fortune reported instances where people were vulnerable and lost money as they did not understand the difference between hot wallet which is connected to the internet and cold wallet which is offline.

Besides the point that the exchanges must be decentralized as a centralized exchange beats the point of a decentralized currency, it needs to be more easy to use and understand.

There lies an ideological difference between a centralized crypto exchange and a traditional exchange market. The government interference turns the light on the little, ordinary guy in traditional exchange markets, enabling a certain amount of security. The governments across the globe are trying to regulate the cryptocurrency exchanges to ensure little guy’s security.

For example, Japan’s government recognized bitcoin as a legally accepted means of payment and required exchange operators to register with the financial regulator.

The move which came in the wake of the 2014 collapse of Tokyo-based Mt. Gox, the then largest bitcoin exchange was designed to protect consumers and clamp down on illegal use of cryptocurrencies. It also formed part of Prime Minister Shinzo Abe’s push to stimulate growth via the fintech sector.

The Financial Services Authority’s requirements for would-be exchanges include robust computer systems and segregation of cash and cryptocurrency accounts, checks on traders’ identities and risk management systems.

In addition to this, the cryptocurrency community is also putting its best foot forward to make cryptocurrency more accessible and easy to use through its revolutionary wallets and crypto debit cards.

In a recent interview with CNBC, Nick Colas, a wall street analyst said that any new technology requires new money to flow in to cross its saturation point in reference to Bitcoin. He asked investors to be cautious as the rate at which new investors are coming in has reduced over the period of time.

The above issues and the comments of Nick Colas help us draw a parallel between the two issues. If cryptocurrencies manage to make transactions, exchanges and investments as easy as say, mutual funds, fiat currency exchange, stock market exchange and provide the public with the ultimate security of a decentralized platform that it was set out to give it will see a lot more investment from the various economic classes across the globe.

[Author’s Opinion]

Given the nature of cryptocurrency being in between a security and a mode of payment.

The day a common man working 9-5 who does not have much understanding of technology and just wants to utilize his savings can invest without the need of going through jargons and also perform cryptocurrency transactions without worrying about how and where should he store it with the security that a decentralized currency promises, Cryptocurrency will enter the mainstream. This will, in turn, bring in new money that Nick Colas talks about into the cryptocurrency market.

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