Disclaimer: My views. Not advice.
The events of the past year (Terra, 3AC, Voyager, BlockFi, Genesis, FTX) have put a black eye on the crypto industry.
They have left a bad taste in the mouths of many investors.
They highlight the problems with centralized entities, human greed, excess, waste, fraud, lack of regulatory clarity, irresponsibility, and corruption.
They highlight the importance of having rigid and robust risk management practices in place.
The industry has been set back for years, many investors affected, and it will have to work hard to regain the public trust before even beginning to go mainstream. Institutional investors are more wary of the space.
The industry will recover, but it will be a long road ahead.
The underlying blockchain technology, protocols, and platforms are not inherently good or bad. It’s how they are used. When centralized entities such as governments, banks, bad actors, scam artists, con men, and hackers get a hold of the technology and use it for their personal gains at the expense of everyone else, they mess it up for everyone.
This is why we should be wary of overnight successes, and avoid hero worship — by the media, press, celebrities, influencers, and athletes.
The events of the past year highlight the need for education, clear regulatory processes, and community surveillance.
Traditional and centralized finance are fallible. The only difference between Trad-CeFi and crypto is that the former has the backing of the Federal Reserve, central banks, and the government, while the latter does not.
This is why many outside the United States do not trust banks and governments. They have seen their life savings disappear overnight many times.
Billions and fortunes can be wiped out overnight. This is capitalism at work. Killing off the weak and bad actors. Extremely efficient. No bailouts. This is how the free markets should work.
The other positive out of this will highlight the role and importance of decentralized finance. A financial system and structure such as decentralized exchanges, protocol, wallets, that are based on protocols and code as opposed to centralized human-controlled entities.
This will also force the regulators in the United States to take a close and hard look at crypto and force the industry to grow up and clean up its act.
The topic of custody comes up quite frequently:
What is custody? — custody is who-what is overseeing the safeguarding and safekeeping of assets.
What are the different types of custody? — in the crypto world, there is self-custody, which means that a sole individual is responsible for safeguarding his-her own crypto assets. There’s also custody involving third parties or custody solutions requiring other solutions due to the sophisticated nature of the clients (family offices, high net worth, institutions), or large amounts of assets.
Why self custody in crypto? — if you have been following or in the space since 2009, there are countless stories of hacks, scams, rug pulls, bad actors, fraud — Mt. Gox, QuadrigaCX, and FTX are some of the more prominent examples. But the key is that crypto is largely unregulated and not insured so there is a close to 100% failure rate if you are not taking possession-control of your digital assets. You have to take possession of your assets if you are in crypto. Anything else, you are risking losing it all.
There is a saying, “Not your keys, not your crypto”.
If you are in crypto, there are best practices to safeguard and protect your digital assets.
- All digital assets should be stored on a hardware wallet. A hardware wallet is a physical device that acts as a conduit between you and your crypto that is stored on a private blockchain wallet address. It has safeguards such as requiring your physical presence to approve transactions, multiple points where a passcode, authorization is needed. It is hard to hack. It is not a USB drive. It is not full proof but it is close to being as safe a best practice as there is. Ledger and Trezor are some of the most trusted names when it comes to hardware wallets and cold storage. Under no circumstances should you be storing your crypto on centralized exchanges. These exchanges are mostly unregulated except for Coinbase, Kraken, and others. However, because they are centralized, they can get hacked, regulated, scammed, or go down. There is extreme counterparty risk when placing your crypto on centralized exchanges. We have seen over the last decade colossal failures including — Mt. Gox, QuadrigaCX, and most recently FTX. My view is that centralized exchanges will be on-off ramps where you can convert your fiat dollars into crypto, and as soon as you are in possession of the crypto, you should be sending it to a hardware wallet and keeping them safe in cold storage . Cold storage means offline storage and not on any centralized entity. You should hold multiple hardware wallets with varying levels of usage and security. Also, you should be constantly vigilant that you do not leave your hardware wallet anywhere it should not be, lose it, or lose the passcode(s) to access them. There have been stories where individuals had sigificant assets and either could not access the funds or lost altogether. This is one of the downfalls of self-custody—being the fact that you the end user are solely responsible. This takes a significant amount of education around UI-UX. This is a significant barrier to crypto adoption for institutions since retail cold storage solutions don’t make sense for large institutions requiring a trusted third party to custody large amounts of clients’ cryptocurrency assets.
- Never, under any circumstance reveal your private keys to anyone. These should be recorded in an offline manner, and stored securely. They should not be stored on your email, DropBox, iCloud, or iPhone as these can get hacked and your private keys can get stolen. Private keys are like the keys to your house. You would never share your keys with anyone. Do the same with your digital assets.
- Be aware of suspicious actors on social media. Oftentimes, these are people, touting scams, get-rich-quick schemes on LinkedIn, Twitter, Discord, Instagram, email, and Facebook. They pretend to be experts and will try and impersonate others. It is easy to recognize these losers. Block them and their DM’s. Do not click on any unknown links. Always be wary. Do a quick search before engaging with anyone. Often times, they will try to get on podcasts and interviews, and attempt to scam the influencer’s audience. This is low-value behavior attempting to suck value off of others for their own personal gain at the expense of others. They eventually get discovered.
- Beware of hero worship. Oftentimes, the media, politicians want to find a “savior”, a “white knight”, someone to put on a pedestal and use as a scapegoat. This was what happened with FTX. These are often endorsed by VC’s, hedge funds, prominent celebrities, actors, politicians. Be very wary of these as the fame can mask fraud, manipulation, and allow bad actors to take advantage of unsuspecting people. Do your due diligence.
At the end, the events of the past week will force the United States and regulators to get along with the program, establish clear rules and guidelines and stop procrastinating. Hopefully strong legislation will benefit the “good guys” and kill-off the bad actors.