Centralized Bitcoin exchange holdings worrying in a cybersec context


How centralized is Bitcoin asset activity in exchanges?

A new report from Token Analyst shows that 7% of all Bitcoin is now held in wallets in just eight cryptocurrency exchanges.

This centralization is troubling for two reasons.

First, there’s the inherent decentralization that was planned by Satoshi when the first Bitcoin was mined just a few years ago.

Mining activity is supposed to be decentralized, and ideally, exchange activity would be decentralized as well.

But here’s the more troubling issue – large exchanges with hot wallets become massive honeypots for hackers and those attempting to steal Bitcoin. Not honeypots, exactly, but actual sensitive targets.

Stealing Bitcoin is not like stealing money – if hackers can get entrance into a sensitive network, stealing Bitcoin can be like taking candy from a baby. The unique vulnerability of hot wallets has spawned spates of articles like this one at The Verge (How to Steal Bitcoin in Three Easy Steps) and exposes like this one at the New York Post showing how “Bitcoin thieves are stealing millions and living large.”

With that in mind, centralizing exchanges makes the targets all the more appealing to hordes of malware operators and cyberattackers all over the globe.

In light of the new tracking of exchange centralization and recent developments like a new Binance USA exchange (or Coinbase and Kraken’s effort to create a crypto counsel,) it may be very helpful to some investors to restate what experts have been saying all along about hot and cold wallets.

The key is to do a transaction and get out, as in tutorials like this one from Alexandr Nellson on Medium.

Another way to say this is that to make Bitcoin assets safer, traders who are participating in an exchange should get the transaction done, and then immediately move the assets to a cold wallet disconnected from the global Internet

Savvy users still understand that anytime you disconnect a device from the Internet, you’re creating a physical standard of protection much greater than anything that the cutting-edge security firms of today’s industry can provide.

As a disclaimer, there is the danger of losing Bitcoin assets (by misplacing a flash drive) but that pales in comparison to the dangers of leaving these valuable digital coins attached to a hot wallet that can be crept into and pilfered in any number of ways. Keep an eye on how Bitcoin security is innovating in the face of cyberthreats.