The crash of crypto exchange FTX forced many to reconsider their overall approach to investing, from self-custody to verification of on-chain funds. This shift in focus was primarily driven by the lack of trust crypto investors have in entrepreneurs after being misled by the CEO and co-founder of FTX. Sam Bankman-Fried (SBF).
FTX collapsed after SBF and its accomplices were caught secretly reinvesting user funds, resulting in the loss of at least $1 billion of customer funds. Efforts to regain investor confidence saw competing crypto exchanges proactively flaunt their reserve tests to confirm the existence of user funds. However, community members have since demanded that the exchanges show their responsibilities in safeguarding the reserves.
With SBF, the self-proclaimed โmost generous billionaireโ, committing 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, hacking, and misappropriation, investors must take certain steps to maintain full control of their assets, which is often considered best cryptocurrency investment practice.
Move your funds off of crypto exchanges
Cryptocurrency exchanges are widely used to buy, sell, and trade cryptocurrencies for a small fee. While other methods, such as direct and peer-to-peer selling, are always an option, increased exchange liquidity allows investors to match orders and ensure no funds are lost during the transaction.
The problem arises when investors decide to keep their funds in wallets provided and owned by exchanges. Unfortunately, this is where most investors learn the โnot your keys, not your coinsโ lesson the hard way. Cryptocurrencies that are stored in wallets provided by the exchange are ultimately in the possession of the owner, which in the case of FTX users, SBF and their associates misused.
Avoiding this risk is as simple as moving funds from the exchange to a wallet without shared private keys. Private keys are secure encryptions that allow access to funds stored in crypto wallets, which can be recovered using a backup phrase if lost.
Hardware wallet: the safest bet for storing cryptocurrencies
Hardware wallets offer full ownership over the private keys of a crypto wallet, limiting access to funds to the owner of the hardware wallet only. After acquiring cryptocurrency from an exchange, users must voluntarily transfer their assets to a hardware wallet.
Once the transaction is complete, the owners of the crypto exchange will no longer be able to access the fund. As a result, investors who opt for a hardware wallet will no longer be at risk of losing funds due to fraud or attacks that occur on exchanges.
Related: What is a Bitcoin wallet? A Beginner's Guide to Storing BTC
However, while hardware wallets add to the overall security of funds, cryptocurrencies remain at risk of temporary losses when the value of a token falls beyond recovery. Hardware wallet providers have witnessed a sharp rise in sales as investors slowly move away from storing their assets on exchanges.
Don't trust, verify
In all the crypto crashes that happened this year, including 3AC, Terraform Laboratories, Celsius, Traveler Y FTX โ the breakdown of investor confidence was a common and obvious theme. As a result, the motto of 'Don't trust, verify' finally resonated with both new and seasoned investors.
Popular crypto exchanges including Bitfinex, Binance, okay, bybit, Huobi and Gate.io, have taken proactive approaches to showcasing their proof of reserve. The exchanges provided wallet information that allows investors to self-audit the existence of their funds within the exchange.
While the reserve test offers a glimpse into an exchange's reserves, it does not give a complete picture of its finances, as information related to liabilities is often not made publicly available. On November 26, Kraken CEO Jesse Powell called Binance's Proof of Reserve as "Intentional Ignorance or Misrepresentation" since the data did not include negative balances.
Nevertheless, Binance CEO Changpeng Zhao rebutted Powell's claims by stating that the exchange has no negative balances and will be verified in an upcoming audit.
The three considerations above are a good starting point for protecting crypto assets against bad actors. Some of the other popular methods to take control away from crypto entrepreneurs are using decentralized exchanges (DEX), self-custodial (non-custodial) wallets and doing extensive research (DYOR) on apparently investable projects.
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