The collapse of the FTX crypto exchange compelled many investors to reevaluate their investment strategy, from self-custody to validating the on-chain existence of assets. The lack of trust primarily inspired this shift in approach among crypto investors in entrepreneurs after being fooled by the FTX CEO and co-founder Sam Bankman-Fried.
At least $1 billion in client assets were lost after SBF and his associates were caught secretly reinvesting user funds, causing FTX to collapse. To rebuild investor confidence, crypto exchanges had to publish their proof of reserves to authenticate the existence of users’ funds. However, community members have asked that exchanges disclose their obligations to protect the reserves.
Investors must take a defensive approach when it comes to safeguarding their capital. To protect funds against fraud, hacking, and misappropriation, they must take particular procedures to maintain complete control over their holdings.
Keep your funds from crypto exchanges.
Crypto exchanges are used to buy, sell, and trade cryptocurrencies for a nominal charge. While other techniques, such as peer-to-peer and direct selling, are always an option, rising exchange liquidity enables investors to match orders and ensure that no funds will be lost during the transaction.
The difficulty emerges when investors store their assets in exchange-provided and-owned wallets. Sadly, this is where most investors learn the lesson “not your keys, not your coins.” Cryptocurrencies kept on exchange-issued wallets ultimately belong to the owner, who, in the case of FTX customers, was exploited by SBF and its partners.
This risk can be avoided by transferring the funds from the exchange to a wallet with no shared private keys. Private keys are secure ciphers that grant access to the funds saved in crypto wallets and can be recovered via a recovery phrase in the event of a loss.
Hardware wallets are the best to store crypto.
Hardware wallets provide complete control over the private keys, limiting access to the funds to the owner of the hardware wallet. After acquiring bitcoins from an exchange, investors should transfer their assets to a hardware waller.
Once the transaction is finalised, the crypto exchange’s owners will no longer have access to the funds. As a result, investors who opt for a hardware wallet will no longer be susceptible to exchange-based fraud or hacking.
Although hardware wallets increase the overall security of assets, cryptocurrencies remain susceptible to irrecoverable losses when a token’s value plummets. As investors gradually shift away from holding their assets on exchanges, hardware wallet providers have seen a significant surge in sales.
Don’t trust. Verify
This year’s crypto market crashes, including those of 3AC, Terraform Labs, Celsius, Voyager, and FTX, were all characterised by a breach of investor confidence. Thus, “Don’t Trust, Verify” finally resonated with novice and seasoned investors.
Popular crypto exchanges, including Binance, OKX, Bitfinex, Huobi, Bybit and Gate.io, have taken measures to demonstrate their reserves. The exchanges offered wallet information for investors to verify the existence of their funds on the exchange independently.
While proof-of-reserve provides a view into an exchange’s reserves, it does not provide a complete financial picture because information relating to liabilities is typically not made public. As the data did not cover negative balances, Kraken CEO Jesse Powell criticised Binance’s proof of reserves as either ignorance or purposeful distortion on November 26.
However, the CEO of Binance, Changpeng Zhao, refuted Powell’s claims by stating that the exchange has no negative balances, which an upcoming audit will confirm.
The three factors above are a good starting point for protecting crypto assets from malicious actors. Using decentralised exchanges (DEX), self-custody (noncustodial) wallets, and conducting in-depth research on ostensibly investable projects are additional popular strategies for removing control from crypto entrepreneurs.