How safe is it to keep your money in a crypto exchange?


The crypto world was rocked today amid news that FTX, the second-largest and fastest-growing crypto exchange, essentially collapsed overnight amid a takeover. control by its rival Binance.

This isn’t the first time a major crypto firm has pulled back abruptly. Celsius and Voyager provide two similar examples, both of which failed last spring. And on the way out, they dove into accounts receivable to try to stay afloat. As the full ramifications of FTX’s insolvency and collapse become clear, it raises questions about the safety of holding tokens on exchanges or with brokerages.

The Significance of the FTX Collapse

For those who don’t follow all the twists and turns in the crypto industry, the collapse of FTX is a big deal by any measure.

As the second largest crypto exchange, FTX and its CEO Sam Bankman-Fried, who goes by the name SBF, were rising stars in the crypto world. Last August, SBF appeared on the cover of Fortune, and even before that he was a very public and well-respected figure, says Josh Fraser, co-founder of Original Protocola company that created Origin Dollar, a yield stablecoin, and Origin Story, an NFT platform.

“It’s absolutely massive,” Fraser said in an interview. “SBF has been very visible in the industry – from sponsoring stadiums and appearing on the cover of magazines to being in Washington D.C. talking to regulators and calling for more crypto regulations – he has really worked to stand up. make a name and was a very trustworthy person, many people respected him and considered him a good actor.

Ultimately, however, it appears that FTX wasn’t all it seemed and didn’t deliver on its promises to its customers, Fraser says. This includes promises not to lend client deposits and that client assets were safe with FTX. “Obviously it wasn’t. The assets weren’t safe. So it’s absolutely huge and unfortunately a lot of innocent people are suffering from it,” Fraser added.

While it remains to be seen how much damage the FTX implosion will cause, there are a few lessons crypto investors can learn from this affair. Chief among them – holding coins in crypto exchanges or brokers, especially during volatile or downturns, is not the safest decision.

Should you keep crypto in brokerages and exchanges?

It’s important to make a distinction between investing in general crypto – which experts say remains safe when you follow a few key best practices – and keeping your coins at brokerages or exchanges such as FTX.

There is often a lack of transparency with brokerages and exchanges which can be problematic, you also authorize someone else to hold your assets and you trust that they will do so responsibly.

1. Not your keys, not your coins

There is a well-known expression or golden rule in the crypto industry: “Not your keys, not your coins”. And it basically boils down to the fact that when you entrust your coins to someone else to hold them and keep them safe, you relinquish control of them.

“When you leave your crypto on an exchange, whether centralized or decentralized, you have given up control. You deliver on their promise that your bitcoins are actually there,” says Peter Eberle, president and chief information officer for Castle fundsan investment company that has managed funds invested in Bitcoin and other digital currencies since 2017.

This is concerning because, as the FTX case clearly shows, there continues to be a lack of transparency between exchanges, which leaves room for mismanagement. “In the stock market, you let your actions with a custodian, and it is safe because they are more regulated and they are audited. These exchanges operate in this black hole where you can’t see into it,” Eberle continues. “Even today there were several announcements about how they are going to have to provide more transparency.”

Fraser offers similar advice, pointing out that holding coins in an exchange is almost always a bad idea, no matter what’s happening in the broader market.

“FDX is not the first exchange to fail,” says Fraser. “The beauty of crypto is that you don’t have to trust other people anymore. Crypto was designed to save us from that exact problem: those opaque systems where you don’t know what’s done with your money.

2. Keep your own assets

Regarding the points just made, rather than holding coins on exchanges or with brokerages, it is much safer to hold your own assets. This means keeping them in a physical hardware wallet similar to a USB drive or, alternatively, in an online software wallet. In either case, you are in control of the coins and access to them is protected by private key cryptography.

“Private key cryptography is the same technology that allows us to visit a website and enter our credit card information securely online,” Fraser explains. “It’s the same technology as that. These keys are what secures your assets, your digital assets.

When you opt for a hardware wallet, such as a Ledger device, only when you are moving cryptocurrency are you putting your coins on the internet. The rest of the time, they can be kept in your hardware wallet in a safe or vault, says Eberle.

3. Invest in professionally managed accounts

For wealthy crypto investors, another measure of security can be achieved by investing through professionally managed accounts. This is what Eberle’s own company, Castle Funds, does. It specializes in working with accredited and high net worth investors and when managing crypto investments, the firm uses offline custody tools for client assets.

“The vast majority of the time, our tokens are held offline, which eliminates risk, such as currency risk,” Eberle explains. “The only reason to leave tokens on an exchange is laziness or a lack of understanding of how to put crypto in your wallet.”

If you are new to crypto investing, it is important to have someone experienced guide you through the process of investing crypto in your own portfolio.

The bottom line, says Fraser, is that crypto investing as a whole remains safe. But exchanges and brokers continue to lack transparency.

“Don’t confuse what’s happening on these exchanges with crypto itself,” Fraser says. “Absolutely do not leave money on exchanges. Remove it. But it’s true all the time. For people who are too scared to handle self-custody, consider regulated platforms like Coinbase, which is transparent and publishes its reservations. By using platforms like Coinbase, people can see that there are no fun deals and that their money is safe.


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