Can your crypto really be safe?

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The past year has been tough for crypto investors, and 2023 isn’t looking much better.

Confidence in the industry took a huge hit after the highly publicized implosion of FTX, which was one of the largest crypto exchanges in the world. The collapse of stablecoin Terra along with the bankruptcy filings of crypto lenders Voyager and BlockFi and crypto hedge fund Three Arrows Capital have rattled investors and weighed on crypto prices.

High inflation and interest rate hikes have also put pressure on cryptocurrency and traditional financial assets like stocks and bonds, which have plunged over the past year. The Bitcoin price started the year at around $47,000 per coin and is now close to $17,000 per coin.

The outlook for crypto prices remains uncertain.

“We won’t know where the bottom is [for crypto] is until we get past it, and there’s no indication of a thaw yet,” Morningstar senior research analyst Madeline Hume told Money in December. Meanwhile, David Marcus, a former PayPal and Meta executive who now runs a Bitcoin-focused company, recently predicted that the ongoing “crypto winter” could last well into 2024 and beyond.

After crypto’s rocky year — and an extreme erosion of trust — investors may wonder if their investments in assets like bitcoin and ether are actually safe. With the potential for even more upheaval to come, here’s what you need to know.

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Cryptocurrency is a volatile and unpredictable asset. Bitcoin, for example, hit an all-time high of around $68,000 per coin in November 2021 before dropping to below $19,000 seven months later.

If you buy and sell bitcoin, ether, or another digital asset, you bear the risk of these extreme price fluctuations. Financial advisors tend to say that you should never invest in crypto that you are not prepared to lose.

Regulations are also a concern. Crypto trading platforms are not regulated in the same way as more traditional exchanges, and security measures can vary widely between exchanges, which is why investors should be very careful to prevention of theft and loss and willing to take additional security measures themselves. More on that below.

But the regulatory landscape is also changing, which means investors need to keep up with new rules as they come into effect. Following the collapse of FTX, experts say the crypto industry will come under even greater scrutiny.

“It’s true that now regulation is probably going to be stricter than it otherwise would have been,” Sarit Markovich, professor of clinical strategy at Northwestern, recently told Kellogg Insight, adding that “regulation that helps stop fraudulent activities and Ponzi schemes” is good for the industry in general.

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Investing in Gold The Risks of Storing Your Crypto on an Exchange

Volatility aside, a lot of the security issues with cryptocurrency have to do with how it is stored.

When you store your crypto on a crypto exchange, you use what is called a “custodial wallet”. This means that the exchange holds your account keys on your behalf and you can easily trade with your account assets.

But as investors witnessed in 2022, exchanges like FTX aren’t completely safe. When an exchange goes bankrupt, it’s unclear what individual investors can do to get their money back if the exchange doesn’t have the money to pay them.

Right now, for example, it’s estimated that FTX may owe money to over a million creditors, many of whom are retail investors. It’s not yet clear how or when these individual investors will be able to get their money back — if at all.

Crypto deposits on exchanges like Coinbase – or anywhere else, for that matter – are not federally protected like cash is protected in banks. This is because cryptocurrency is not considered legal tender and is not regulated by any central authority. Many crypto enthusiasts are drawn to the space due to this lack of regulation, but it is also the source of some of the greatest risks associated with investing in digital assets.

The safest way to store crypto

Rather than keeping your cryptocurrency in a custodial wallet with an exchange, Ahmed Ismail, president and CEO of digital asset cash aggregator FLUID, recommends keeping it in hardware wallets that only you can. to access.

These crypto wallets store your cryptocurrency offline, greatly reducing the risk of hacking. If you want to exchange these assets, you can put them back on an exchange for the transaction and then put them back in your hardware wallet. Hardware wallets are considered one of the safest ways to hold crypto assets.

Using a hardware wallet requires keeping track of both the device and its password: if you lose either, you could lose access to your assets. Ismail says you should be comfortable with these types of wallets and able to implement good cybersecurity practices if you plan to hold digital assets.

Using a hardware wallet ensures that you are the one managing your assets, not a third party like an exchange, he says. “Whoever has the keys to the wallet controls the crypto.”

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