- Keeping funds on crypto exchanges is more risky than many new to crypto suspect
- The use of OTC desks carries its own risk due to wait times
It happens fairly frequently that an exchange makes the news for being hacked and having users’ funds stolen. This was the case with Cryptopia, for example. After this occurs, there is typically several weeks or even months before the exchange is cleared to resume activities, if at all. In some cases, the funds are never recovered at all and the exchange never reopens.
A majority of the users who find themselves on the receiving end of these bad situations are those who make a crucial error, which is leaving funds on crypto exchanges or over-the-counter trading desks.
Where’s the money?
The short answer is that your money will be put in a pooled fund along with that of all the other users of the exchange and you lose ownership of it in a sense, instead, getting an IOU.
When you upload funds onto an exchange, it is pooled into an omnibus account depending on the currency that you purchased. If you exchanged fiat for bitcoin, for example, the funds are converted to bitcoin and pooled into an omnibus account that is designated for bitcoin. While you have an account balance on the site, you technically no longer have ownership of the money and should the site be compromised, there is no guarantee that your funds will be returned to you.
In the case of OTC desks, it is a bit different as they operate in a similar way to the bond market. When Funds are sent to OTC desks, there is a waiting period between when buyers and sellers are matched and are able to converse regarding the deal at hand and this is sometimes a source of frustration for buyers and sellers.
Lightning Network to the rescue?
This annoying wait, however, might be coming to an end soon as Wall Street veteran Caitlin Long has stated that the industry is close to ending this problem by making use of the Lightning Network which will settle the transactions off-chain but will still be connected to the Bitcoin blockchain:
“A Lightning layer for exchange trades would be better than the off-chain trading happening on [crypto] exchanges today.”
For many, the way to mitigate the risks is to create a system of trading that is connected to the chain and not reliant on third parties.