As FTX Fallout continues, here’s how to protect your crypto assets from platform failures

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Follow these steps to ensure your fortune isn’t gobbled up if your crypto exchange fails.


Important points

  • The failure of a crypto platform can be stressful and costly for retail investors.
  • Using a non-custodial crypto wallet puts you in control of your wealth.
  • Keep detailed records so you can prove what you bought and sold.

Get ready. When a crypto giant like FTX collapses, it can shake the entire system and cause aftershocks that will be felt for some time to come. The problem is that many crypto platforms are financially linked in different ways. If one fails, it can have a domino effect. Right now, many investors are wondering what they can do to protect themselves. Here are three routes to explore.

1. Consider a wallet with no custody

“Not your keys, not your crypto” has long been a rallying cry from crypto veterans. Crypto keys are essentially the codes that allow you to manage your crypto. Think of a crypto wallet as a kind of keychain – it’s a place to keep your keys. Crypto wallets come in different forms and it is good to understand how they work.

If you leave your cryptocurrency on the exchange where you bought it, you use what is called a custodial wallet. The exchange controls the keys to your crypto. If something happens, the exchange can freeze your account and prevent you from accessing your assets. This can be the result of a variety of things including a platform hack, liquidity issues, or security concerns related to your activity.

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But when you move your funds to an uncustodial wallet, you are in control. If the platform collapses, your funds cannot be dragged into bankruptcy proceedings because you hold the keys. Because of this, it is one of the best safeguards against platform failures. The main types are hot wallets, which are connected to the internet, and cold wallets, which are mostly kept offline. Cold wallets are more secure but not as easy to use.

Crypto wallets have some disadvantages compared to crypto exchanges:

  • They’re not as user-friendly as they could be and they require a certain level of technical know-how.
  • If you lose your wallet password and security phrase, you could lose access to your crypto entirely.
  • You are entirely responsible for the security of your crypto. If your computer is infected with a virus or malware, your crypto assets could be at risk.

One of the issues with what emerges from FTX is an issue of trust. Crypto is still a relatively unregulated industry and as such we don’t always know what centralized exchanges are doing with our money. But part of the appeal of crypto is that it’s decentralized. With a little effort, you can be your own bank and not rely on central offices or middlemen.

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2. Keep detailed records

When the FTX website went down, many customers also lost access to their transaction histories and activity reports. Don’t rely on a crypto exchange to store this information for you. Set a calendar reminder to log in every month and download your latest activity. Or, of course, keep records of every transaction.

There are two reasons. First, many countries require you to report your crypto transactions on your tax return. If there’s even a chance your crypto exchange won’t be there on tax day, you must have your own records so you can complete this filing.

The other reason is that in the worst case and if your exchange fails, you may need proof of your holdings in order to be able to claim at least some of your funds back. The FTX website is now down and there is no indication that it will come back online, which may further add to the concerns of some of its customers.

3. Don’t take their word for it

The picture emerging from FTX is deeply disturbing. A first court filing by the new CEO highlighted a lack of funds, serious mismanagement and internal system failures, among other things. FTX Founder and CEO Sam Bankman-Fried has been a rising star in the crypto world, and up until the last few weeks few people had reason to distrust him.

However, it would be wrong to assume that all crypto exchanges are untrustworthy. The challenge is that since there is so little regulation in this area, it can be difficult for retail investors to spot shady deals. Here are some signs to look out for when comparing crypto platforms:

  • Third Party Audits of Assets
  • Liability insurance against crime
  • FDIC Insurance on Dollar Deposits
  • How platforms use leverage

FDIC insurance was created to give consumers more protection from bank failures after some major bank failures during the Great Depression. It does not cover cryptocurrency assets. However, some platforms (like Coinbase and Gemini Exchange) hold US customers’ dollar deposits in FDIC-insured bank accounts, at least protecting that money.

Several top crypto exchanges have released or promise to have verified proof of reserves, which in some ways shows that there are no holes in their balance sheets and customers’ assets are fully secured. CoinMarketCap has released a new reserve tracker tool that can help investors in this regard.

bottom line

Learning how to protect your crypto assets is a core part of crypto investing. We talk a lot about volatility and the potential for individual coins to drop in value dramatically, but the failure of a single crypto platform can be just as damaging, if not worse. Be sure to follow the golden rule of crypto investing and only invest money you can afford to lose. That way, if your platform goes down, your finances won’t be destroyed.

If you don’t want to manage your own crypto wallet, that’s understandable. But you might want to prioritize security and transparency when choosing a crypto exchange. You may even opt for safer investments with established institutions such as banks or brokerage firms instead. Until there is tighter regulation in the crypto space, you would be forgiven for making comparisons to the Wild West.

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