The last few weeks have been among the craziest that the crypto markets have ever seen. The once-trusted exchange FTX (and all the FTX associated companies), led by founder Sam Bankman-Fried, has filed bankruptcy after the exchange was discovered to be insolvent.
For the crypto investor, it is important to note these failures and astronomical losses are due to fraud, mismanagement of client funds and incompetence – not the failure of the software or blockchains themselves. As the fallout from these corporate failures continues, it is important for advisors to understand best practices for themselves and their clients who continue to invest in cryptocurrencies.
There’s a popular saying in crypto, “Not your keys, not your coins.” Cryptocurrency is a bearer asset. Meaning, the person or entity who controls the private keys to a crypto wallet essentially owns the coins held in that wallet.
The safest way for anyone to hold cryptocurrency is in a wallet that they control. This can be done with a hardware wallet, such as a ledger, a paper wallet or in their own software wallet. This is called “self-custody” of assets. As long as the user does not share the private keys with anyone, no one can steal or misuse the assets without accessing the private keys. It is important to note that the cryptographic foundation that cryptocurrencies use is nearly impossible to hack, creating tremendous security for assets held in a private wallet.
While the last few weeks have been difficult for many in the crypto space, it is important to note that these frauds and catastrophes are due to human and corporate failures, not a failure of the technology that powers cryptocurrencies. Blockchains including Bitcoin and Ethereum are still fully operational and secure, and they offer opportunities for those that believe in the future disruption the technology offers.
It is important for all investors to understand the risk they take when they outsource custody and it is worth learning how to self-custody assets and interact directly with DeFi protocols in order to protect their crypto investments.
