How to keep your cryptocurrency safe after the FTX collapse

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The fall of the FTX cryp­to exchange forced many to recon­sid­er their over­all approach to invest­ments — start­ing from self-cus­tody to ver­i­fy­ing the on-chain exis­tence of funds. This shift in approach was dri­ven pri­mar­i­ly by the lack of trust cryp­to investors have in the entre­pre­neurs after being duped by FTX CEO and co-founder Sam Bankman-Fried (SBF).

FTX crashed after SBF and his accom­plices were caught secret­ly rein­vest­ing users’ funds, result­ing in the mis­place­ment of at least $1 bil­lion of client funds. Efforts to regain investor trust saw com­pet­ing cryp­to exchanges proac­tive­ly flaunt­ing their proof-of-reserves to con­firm users’ funds’ exis­tence. How­ev­er, com­mu­ni­ty mem­bers have since demand­ed that the exchanges show their lia­bil­i­ties to safe­guard the reserves.

With SBF, the self-pro­claimed “most gen­er­ous bil­lion­aire,” com­mit­ing fraud in broad day­light with no vis­i­ble legal impli­ca­tions, investors must main­tain a defen­sive stance when it comes to pro­tect­ing their invest­ments. To safe­guard assets from fraud, hacks and mis­ap­pro­pri­a­tion, investors must take cer­tain mea­sures to keep total con­trol of their assets — often con­sid­ered as best cryp­to invest­ment practices.

Move your funds out of the crypto exchanges

Cryp­to exchanges are wide­ly used to pur­chase, sell and trade cryp­tocur­ren­cies in exchange for a small fee. While oth­er meth­ods, includ­ing peer-to-peer and direct sell­ing, are always an option, high­er exchange liq­uid­i­ty allows investors to match orders and guar­an­tee no loss of funds dur­ing the transaction.

The prob­lem aris­es when investors decide to keep their funds in wal­lets pro­vid­ed and owned by the exchanges. Unfor­tu­nate­ly, this is where most investors learn the les­son “not your keys, not your coins” the hard way. Cryp­tocur­ren­cies being stored on exchange-pro­vid­ed wal­lets are ulti­mate­ly in pos­ses­sion of the own­er, which in the case of FTX users, was mis­used by SBF and associates.

Evad­ing this risk is as sim­ple as mov­ing the funds out of the exchange to a wal­let with no shared pri­vate keys. Pri­vate keys are secure encryp­tions that allow access to the funds stored in cryp­to wal­lets, which can be recov­ered using a back­up phrase in case of misplacement. 

Hardware wallet: The safest bet for storing cryptocurrencies

Hard­ware wal­lets offer total own­er­ship over the pri­vate keys of a cryp­to wal­let, thus lim­it­ing the funds’ access only to the own­er of the hard­ware wal­let. After procur­ing cryp­tocur­ren­cies from an exchange, users must vol­un­tar­i­ly trans­fer their assets to a hard­ware wal­let.

Once the trans­ac­tion is com­plet­ed, own­ers of the cryp­to exchange will no longer be able to access the fund. As a result, investors opt­ing for a hard­ware wal­let will no longer risk los­ing funds to frauds or hacks hap­pen­ing over the exchanges.

Relat­ed: What is a Bit­coin Wal­let? A begin­ner’s guide to stor­ing BTC

How­ev­er, while hard­ware wal­lets add to the over­all safe­ty of funds, cryp­tocur­ren­cies remain at risk of imper­ma­nent loss­es when a token’s val­ue goes down unre­cov­er­ably. Hard­ware wal­let providers have wit­nessed a sharp increase in sales as investors slow­ly move away from stor­ing their assets over exchanges.

Don’t trust, Verify

In all the cryp­to crash­es that hap­pened this year — includ­ing 3AC, Ter­raform Labs, Cel­sius, Voy­ager and FTX — break­ing of investors’ trust was a com­mon and evi­dent theme. As a result, the mot­to of ‘Don’t Trust, Ver­i­fy’ has final­ly res­onat­ed with both new and sea­soned investors.

Pop­u­lar cryp­to exchanges, includ­ing Bitfinex, Binance, OKX, Bybit, Huo­bi and Gate.io, have tak­en proac­tive approach­es to show­case their proof-of-reserves. The exchanges pro­vid­ed wal­let infor­ma­tion that allows investors to self-audit the exis­tence of their funds with­in the exchange.

While proof-of-reserve shares a glimpse into an exchange’s reserves, it fails to pro­vide the com­plete pic­ture of its finances as infor­ma­tion relat­ed to lia­bil­i­ties are often not made pub­licly avail­able. On Nov. 26, Krak­en CEO Jesse Pow­ell called out Binance’s proof-of-reserve as “either igno­rance or inten­tion­al mis­rep­re­sen­ta­tion” as the data did not include neg­a­tive balances. 

How­ev­er, Binance CEO Chang­peng Zhao refut­ed Powell’s claims by stat­ing that the exchange has no neg­a­tive bal­ances and will be ver­i­fied in an upcom­ing audit.

The above three con­sid­er­a­tions are a good start­ing point for safe­guard­ing cryp­to assets against bad actors. Some of the oth­er pop­u­lar meth­ods to take away con­trol from the cryp­to entre­pre­neurs are using decen­tral­ized exchanges (DEX), self-cus­tody (non-cus­to­di­al) wal­lets and doing exten­sive research (DYOR) on seem­ing­ly investible projects.

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