How to keep your cryptocurrency safe after the FTX collapse

How to keep your cryptocurrency safe after the FTX collapse

The collapse of cryptocurrency exchange FTX has forced many to reconsider their overall approach to investing, from self-custody to on-chain verification of funds. This shift in focus was largely due to investors’ lack of confidence in cryptocurrency, and business people after being duped by FTX CEO and co-founder Sam Bankman-Fried (SBF).

FTX collapsed after SBF, and its cronies were caught secretly reinvesting user funds, resulting in at least $1 billion in customer funds being lost. To regain investor confidence, competing cryptocurrency exchanges flaunted their proof of reserve to confirm the existence of user funds. Community members have since demanded that exchanges demonstrate their responsibility in protecting reserves.

Investors must take a defensive stance regarding safeguarding their investments because SBF, the self-described “most generous billionaire,” committed fraud in broad daylight with no obvious legal repercussions. Investors must take specific actions to maintain complete control over their assets to protect them from fraud, hacks, and misappropriation. These actions are frequently regarded as the best cryptocurrency investment practices.

Move your funds out of the crypto exchanges

Cryptocurrency exchanges are used to buy, sell, and trade cryptocurrencies for a small fee. While other methods, such as B. direct and peer-to-peer selling, are always options, increased exchange liquidity allows investors to match orders and ensures no money is lost during the transaction. 

The problem arises when investors keep their funds in wallets provided and owned by the exchanges. Unfortunately, this is where most investors learn the “not your keys, not your coins” lesson: the hard cryptocurrencies held in exchange-provided wallets are ultimately owned by the owner; in the case of FTX users, SBF and its employees abused this. Moving the money from the exchange to a wallet without shared private keys will help you avoid this risk. Private keys, safe encryptions that grant access to the money kept in crypto wallets, can be found using a backup phrase in the event of a loss.

Hardware wallet: The safest bet for storing cryptocurrencies

Hardware wallets grant complete control over a crypto wallet’s private keys, limiting access to the funds to the hardware wallet’s owner alone. Users must voluntarily transfer their assets to a hardware wallet after purchasing cryptocurrencies from an exchange.

Owners of the crypto exchange won’t be able to access the fund after the transaction is finished. As a result, investors who choose a hardware wallet won’t have to worry about losing money to scams or hacks over exchanges.

Hardware wallets increase the overall security of funds, but cryptocurrencies still risk temporary losses when a token’s value declines irreparably. Sales at hardware wallet vendors have sharply increased as investors gradually stop storing their assets on exchanges.

Don’t trust, Verify 

Breaking investors’ trust was a recurring and obvious theme in all the cryptocurrency crashes that took place this year, including those at 3AC, Terraform Labs, Celsius, Voyager, and FTX. As a result, both novice and experienced investors have begun to embrace the maxim “Don’t Trust, Verify.”

Popular cryptocurrency exchanges like Bitfinex, Binance, OKX, Bybit, Huobi, and have proactively taken steps to display their proof of reserves. Investors can self-verify the existence of their funds within the exchange by using the wallet information provided by the exchanges.

Although test reserve stocks provide a glimpse of an exchange’s reserves, they don’t provide a complete picture of its finances, as liability information is often not publicly available. On Nov. 26, Kraken CEO Jesse Powell called Binance’s reserve test “willful ignorance or misrepresentation” because the data did not include negative balances. However, Binance CEO Changpeng Zhao dismissed Powell’s claims, 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 to protect crypto assets from malicious actors. Some of the other popular ways to wrest control from crypto entrepreneurs include using decentralized exchanges (DEXs), self-custodial (non-custodial) wallets, and conducting extensive research (DYOR) on seemingly investable projects.

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