Op-ed: How investors should safeguard crypto assets after FTX collapse

Following the collapse of the FTX crypto exchange, many investors have had to reconsider their investment strategy in order to protect themselves from fraud, hacking, or misappropriation.

In November 2022, the world witnessed the abrupt demise of one of the largest crypto exchanges. FTX was primarily affected by a liquidity crisis, and its founder and former CEO, Sam Bankman-Fried (SBF), was implicated in the chaos.

As a result, the incident that occurred in a matter of days impacted the overall volatility of the crypto market, causing its value to fall below $1 trillion. Above all, FTX investors and customers felt duped, and many others in the crypto space are wary of crypto investments and fear similar consequences.

However, this is not the first time that a crypto giant has followed a similar path, from halting customer withdrawals and filing for Chapter 11 bankruptcy to mishandling their customers’ funds. So, should users keep their cryptocurrency in exchange wallets? I believe investors/users should reconsider the security of their digital assets.

As previously stated, the demise of the FTX crypto exchange has caused many investors to reconsider their overall investment strategy. They are now concerned about taking the necessary steps to maintain control of their assets and protect them from fraud, hacking, or misappropriation, as seen previously. Among these measures are:

The phrase “Not your keys, not your coins” is frequently heard in the crypto community. It simply means that one has no control over their coins if they are held and secured on their behalf by another party. If an investor decides to store their digital assets in an exchange-hosted wallet, the exchange will have control over their private keys. What is a viable and safer option?

I strongly advise users to move their assets to hardware wallets. It gives investors complete control over the keys to their crypto wallets. As a result, only the owner has access to the wallet’s assets. Furthermore, there is little risk of losing money due to fraud or hacking.

However, it’s important to remember that a hardware wallet is only as secure as its owner. As a result, the fewer people who know about your wallet, the more secure it is.

Using custodial wallets is a user-friendly solution because individual users do not have to worry about managing their private keys: a crypto exchange does. However, if the exchange is hacked, it poses some risk to the same users. Furthermore, an exchange could deny its users access to their tokens, as several crypto firms did in 2022.

A user has control of assets with a non-custodial wallet because they have full custody at all times. As a result, unlike with custodial wallets, users are not subject to restrictions.

While self-custody is an excellent way to protect digital assets, it imposes significant responsibility on users in terms of managing private keys. You lose your assets if your wallet’s private keys are lost. As a result, while using a non-custodial wallet, I would be mindful of proper password management and safe online security practices.

“Don’t Trust, Verify” is a popular phrase among crypto enthusiasts and the community on Bitcoin Twitter. As a cryptocurrency supporter, I believe this phrase is still one of the cryptocurrency’s core mantras. It follows that trust is essential even when dealing with cryptocurrency exchanges.

As evidenced by recent crypto crashes linked to players such as FTX, Celsius, Terraform Labs, and Voyager, the exchanges’ breach of investor trust was a common occurrence. It is past time for investors to conduct thorough research on an exchange’s proof of reserve (PoR) to ensure that a specific firm has sufficient assets to cover its clients’ balances.

As a result, popular cryptocurrency exchanges have recognized the need for PoR: it is now more of an emerging trust standard. As a result, we’ve recently seen various exchanges publish PoR to assist their respective customers/users in verifying the status of their funds and deposits.

As evidenced by recent events in the crypto industry, one must exercise caution when storing digital assets. Some of the best ways to protect crypto assets are to keep them in a hardware or non-custodial wallet and to conduct proper research on an exchange’s POR. While these practices may not always protect an asset’s value, they do provide protection against potential restrictions and complete ownership of one’s assets.

However, suppose a user believes that using a hardware wallet or self-custody as an alternative for safeguarding crypto assets is too expensive or complicated. In that case, they should consider using regulated cryptocurrency exchanges with a high level of transparency and a good industry reputation.